UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31,
2009
Commission File
No. 001-33881
MEDASSETS, INC.
(Exact Name Of Registrant As
Specified In Its Charter)
|
|
|
DELAWARE
|
|
51-0391128
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification Number)
|
100 North Point Center East, Suite 200
Alpharetta, Georgia 30022
(Address of Principal Executive
Offices)
(678) 323-2500
(Registrants telephone
number)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
Common Stock, par value $0.01
|
|
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
|
Securities registered pursuant to Section 12(g) of the
Act: Not Applicable
Indicate by check mark if the registrant is a well-known
seasoned issuer (as defined in Rule 405 of the Securities
Act). Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Securities
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller reporting
company o
|
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of Common Stock held by
non-affiliates of the registrant on June 30, 2009, the last
business day of the registrants most recently completed
second fiscal quarter, was $774,523,235 based on the closing
sale price of the Common Shares on the Nasdaq Global Select
Market on that date. For purposes of the foregoing calculation
only, the registrant has assumed that all officers and directors
of the registrant are affiliates.
The number of shares of Common Stock outstanding at
February 18, 2010 was 56,787,823.
Documents
incorporated by reference
Portions of the Registrants Proxy Statement (to be filed
pursuant to Regulation 14A within 120 days after the
Registrants fiscal year-end of December 31, 2009),
for the annual meeting of shareholders, are incorporated by
reference in Part III.
MEDASSETS,
INC.
TABLE OF
CONTENTS
PART I
Unless the context indicates otherwise, references in this
Annual Report to MedAssets, the Company,
we, our and us mean
MedAssets, Inc., and its subsidiaries and predecessor
entities.
NOTE ON
FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
contains certain forward-looking statements (as
defined in Section 27A of the U.S. Securities Act of
1933, as amended, or the Securities Act, and
Section 21E of the U.S. Securities Exchange Act of
1934, as amended, or the Exchange Act) that reflect
our expectations regarding our future growth, results of
operations, performance and business prospects and
opportunities. Words such as anticipates,
believes, plans, expects,
intends, estimates,
projects, targets, can,
could, may, should,
will, would, and similar expressions
have been used to identify these forward-looking statements, but
are not the exclusive means of identifying these statements. For
purposes of this Annual Report on
Form 10-K,
any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements.
These statements reflect our current beliefs and expectations
and are based on information currently available to us. As such,
no assurance can be given that our future growth, results of
operations, performance and business prospects and opportunities
covered by such forward-looking statements will be achieved. We
have no intention or obligation to update or revise these
forward-looking statements to reflect new events, information or
circumstances.
A number of important factors could cause our actual results to
differ materially from those indicated by such forward-looking
statements, including those described under the heading
Risk Factors in Part I, Item 1A. herein
and elsewhere in this Annual Report on
Form 10-K.
Overview
The Company, headquartered in Alpharetta, Georgia, was
incorporated in 1999. MedAssets provides technology-enabled
products and services which together help mitigate the
increasing financial pressures faced by hospitals and health
systems. These include the increasing complexity of healthcare
reimbursement, rising levels of bad debt and uncompensated care
and significant increases in supply utilization and operating
costs. Our solutions are designed to improve operating margin
and cash flow for hospitals and health systems. We believe
implementation of our full suite of solutions has the potential
to improve customer operating margins by 1.5% to 5.0% of
revenues by increasing revenue capture and decreasing supply
costs. The sustainable financial improvements provided by our
solutions occur in a matter of months and can be quantified and
confirmed by our customers. Our solutions integrate with our
customers existing operations and enterprise software
systems and require minimal upfront costs or capital
expenditures.
According to the American Hospital Association, average
community hospital operating margins were 4.3% in 2007, and
approximately 34% of community hospitals had negative total
margins during the first half of 2009. We believe that hospital
and health system operating margins will remain under long-term
and continual financial pressure due to shortfalls in available
government reimbursement, managed care pricing leverage, and
continued escalation of supply utilization and operating costs.
Our technology-enabled solutions are delivered primarily through
company-hosted software, or software as a service
(SaaS), supported by enterprise-wide sales, account
management, implementation services and consulting. We employ an
integrated, customer-centric approach to delivering our
solutions which, when combined with the ability to deliver
measurable financial improvement, has resulted in high retention
of our large health system customers, and, in turn, a
predictable base of stable, recurring revenue. Our ability to
expand the breadth and value of our solutions over time has
allowed us to develop strong relationships with our
customers senior management teams.
Our success in improving our customers ability to increase
revenue and manage supply expense has driven substantial growth
in our customer base and has allowed us to expand sales of our
products and services to existing customers. These factors have
contributed to our compounded annual net revenue growth rate of
1
approximately 36.4% over our last five fiscal years. Our
customer base currently includes over 125 health systems and,
including those that are part of our health system customers,
more than 3,300 acute care hospitals and more than 40,000
ancillary or non-acute provider locations. Our Revenue Cycle
Management segment currently has more than 2,200 hospital
customers, which makes us one of the largest providers of
revenue cycle management solutions to hospitals. Our Spend
Management segment manages approximately $24 billion of
annual supply spend by healthcare providers, has more than 1,700
hospital customers and includes the third largest group
purchasing organization, or GPO, in the United States.
We deliver our solutions through two business segments, Revenue
Cycle Management (RCM) and Spend Management
(SM):
|
|
|
|
|
Revenue Cycle Management. Our RCM
segment provides a comprehensive suite of products and services
spanning the hospital revenue cycle workflow from
patient access and financial responsibility, charge capture and
integrity, pricing analysis, claims processing and denials
management, payor contract management, revenue recovery and
accounts receivable services. Our workflow solutions, together
with our data management, decision support, performance
analytics, and compliance and audit tools, increase revenue
capture and cash collections, reduce accounts receivable
balances and increase regulatory compliance. Based on our
analysis of certain customers that have implemented a portion of
our products and services, we estimate that implementation of
our full suite of revenue cycle management solutions has the
potential to increase a typical health systems net patient
revenue by 1.0% to 3.0%.
|
|
|
|
Spend Management. Our SM segment
provides a comprehensive suite of technology-enabled services
that help our customers manage their non-labor expense
categories. Our solutions lower supply and medical device costs
and utilization by managing the procurement process through our
group purchasing organizations portfolio of contracts,
consulting services and business analytics and intelligence
tools. Based on our analysis of certain customers that have
implemented a portion of our products and services, we estimate
that implementation of our full suite of spend management
solutions has the potential to decrease a typical health
systems supply expenses by 3% to 10%, which equates to an
increase in operating margin of 0.5% to 2.0% of revenue.
|
We believe that we are uniquely positioned to identify, analyze,
implement and maintain customer-specific solutions for hospitals
and health systems as they continue to face the financial
pressures that are endemic and long-term to the healthcare
industry and particularly acute in todays economic
climate. We have leveraged the scale and scope of our revenue
cycle management and spend management businesses to develop a
strong understanding and unique base of content regarding the
industry in which hospitals and health systems operate. The
solutions that we develop with the benefit of this insight are
designed to strengthen the discrete financial and operational
weaknesses across revenue cycle management and spend management
operations.
Industry
According to the U.S. Centers for Medicare &
Medicaid Services, or CMS, spending on healthcare in the United
States was estimated to be $2.4 trillion in 2008, or 16.6% of
United States Gross Domestic Product, or GDP. Healthcare
spending is projected to grow at a rate of approximately 6.2%
per annum, and reach almost $4.4 trillion by 2018, or 20.3% of
GDP. In 2008, spending on hospital care was estimated to be
$747 billion, representing the single largest component.
According to the American Hospital Association, the
U.S. healthcare market has approximately 5,800 acute care
hospitals, of which nearly 2,900 are part of health systems. A
health system is a healthcare provider with a range of
facilities and services designed to deliver care more
efficiently and to compete more effectively to increase market
share. In addition to the acute care hospital market, our
solutions can also improve operating margin and cash flow for
non-acute care providers. The non-acute care market consists of
nearly 550,000 healthcare facilities and providers, including
outpatient medical centers and surgery centers, medical and
diagnostic laboratories, imaging and diagnostic centers, home
healthcare service providers, long term care providers, and
physician practices.
We believe that ongoing strains on government agencies
ability to pay for healthcare will have the effect of limiting
available reimbursement for hospitals. Reimbursement by federal
programs often does not cover a
2
hospitals cost of providing care. In 2008, community
hospitals had a shortfall of more than $36 billion relative
to the cost of providing care to Medicare and Medicaid
beneficiaries, up from $3.9 billion in 2000, according to
the American Hospital Association. The growing Medicare eligible
population, combined with a declining number of workers per
Medicare beneficiary, is expected to result in significant
Medicare budgetary pressures leading to increasing reimbursement
shortfalls for hospitals relative to the cost of providing care.
We believe ongoing efforts by employers to manage healthcare
costs will also have the effect of limiting available
reimbursement for hospitals. In order to address rising
healthcare costs, employers have pressured managed care
companies to contain healthcare insurance premium increases, and
reduced the healthcare benefits offered to employees.
The introduction of consumer-directed or high-deductible health
plans by managed care companies, as well as the overall decline
in healthcare coverage by employers, has forced private
individuals to assume greater financial responsibility for their
healthcare expenditures. Consumer-directed health plans, and
their associated high deductibles, increase the complexity and
change the nature of billing procedures for hospitals and health
systems. In cases where individuals cannot pay or hospitals are
unable to get an individual to pay for care, hospitals forego
reimbursement and classify the associated care expenses as
uncompensated care.
Hospitals in particular continue to deal with intense financial
pressures that are creating even greater cash flow challenges
and bad debt risk. The slowdown in the U.S. economy has
resulted in and may continue to result in increased costs of
capital and decreased liquidity for hospitals. The macroeconomic
environment is also forcing higher unemployment rates and adding
to the rolls of the uninsured, which could lead to lower levels
of reimbursement and a greater percentage of uncompensated care.
In addition, supply cost increases forced by rising raw material
costs in food production and the manufacture of medical products
over the long term may result in hospital net revenues
increasing at a slower rate than supply cost growth.
Hospital
and Health System Reimbursement
Hospitals typically submit multiple invoices to a large number
of different payors, including government agencies, managed care
companies and private individuals, in order to collect payment
for the care they provide. The delivery of an individual
patients care depends on the provision of a large number
and wide range of different products and services, which are
tracked through numerous clinical and financial information
systems across various hospital departments, resulting in
invoices that are usually highly detailed and complex. For
example, a hospital invoice for a common surgical procedure can
reflect over 200 unique charges or supply items and other
expenses. A fundamental component of a hospitals ability
to bill for these items is the maintenance of an
up-to-date,
accurate chargemaster file, which can consist of over 40,000
individual charge items.
In addition to requiring intricate operational processes to
compile appropriate charges and claims for reimbursement,
hospitals must also submit these claims in a manner that adheres
to numerous payor claim formats and properly reflects
individually contracted payor reimbursement rates. For example,
some hospitals rely on accurate billing adjudication and payment
from over 50 contracted payors that are linked to thousands of
independent insurance plans, inclusive of private individuals,
in order to be compensated for the patient care they provide.
Upon receipt of the claim from a hospital, a payor proceeds to
verify the accuracy and completeness of, or adjudicate the claim
to determine the appropriateness and accuracy of the payment to
the hospital. If a payor denies payment for any or all of the
amount of the claim, the hospital is then responsible for
determining the reason for the denial, amending
and/or
resubmitting the claim to the payor.
Hospital
and Health System Supply Expenses
We estimate that the supplies and non-labor services used in
conjunction with the delivery of hospital care account for
approximately 30% of overall hospital expenses. These expenses
include commodity-type medical-surgical supplies, medical
devices, prescription and over the counter pharmaceuticals,
laboratory supplies, food and nutritional products and purchased
services. Hospitals are required to purchase many different
types of supplies and services as a result of the wide range of
medical care that they administer to patients. For example, it
is common for hospitals to maintain supply cost and pricing
information on over
3
35,000 different product types and models in their internal
supply record-keeping systems, or master item files.
Hospitals often rely on GPOs, which aggregate hospitals
purchasing volumes, to manage supply and service costs. The
Health Industry Group Purchasing Association, or HIGPA,
estimates that GPOs save hospitals and health systems between
10-15% on
these purchases by negotiating discounted prices with
manufacturers, distributors and other vendors. These discounts
have driven widespread adoption of the group-purchasing model.
GPOs contract with suppliers directly for the benefit of their
customers, but they do not take title or possession of the
products for which they contract; nor do GPOs make any payments
to the vendors for the products purchased by their customers.
GPOs primarily derive their revenues from administrative fees
earned from vendors based on a percentage of dollars spent by
their hospital and health system customers. Vendors discount
prices and pay administrative fees to GPOs because GPOs provide
access to a large customer base, thus reducing sales and
marketing costs and overhead associated with managing contract
terms with a highly-fragmented provider market.
Market
Opportunity
We believe that the endemic, persistent and growing industry
pressures provide us substantial opportunities to assist
hospitals and health systems to increase net revenue and reduce
supply expense. We estimate the total addressable market for our
revenue cycle management and spend management solutions in the
United States to be $6.9 billion.
Reimbursement
Complexities and Pressures
Hospitals and health systems are faced with complex and changing
reimbursement rules across the government agency and managed
care payor categories, as well as the challenge of collecting an
increasing percentage of revenue directly from individual
patients.
|
|
|
|
|
Government agency reimbursement. In
2007, the U.S. government increased the number of billable
codes for medical procedures in an effort to increase the
accuracy of Medicare reimbursement, mandating the implementation
of 745 new medical severity-based, diagnosis-related groups, or
DRGs, to replace the 538 current DRGs. In addition, U.S.
healthcare providers will be required to move from the ICD-9
(International Statistical Classification of Diseases and
Related Health Problems) system to ICD-10, a much more complex
scheme of classifying diseases, in order to comply with World
Health Organization standards by as early as 2013. These recent
and future coding changes require hospitals to change their
systems and processes to implement these new codes in order to
submit compliant Medicare invoices required for payment, thereby
straining existing information technology.
|
The Centers for Medicare and Medicaid Services (CMS)
has multiple initiatives to prevent improper payments before a
claim is paid, and to identify and recover improper payments
after a claim has been paid. With the passage of the Deficit
Reduction Act of 2005, the Department of Health and Human
Services established a Medicaid Integrity Program to provide CMS
with the resources necessary to combat fraud, waste and abuse in
Medicaid. For example, in 2006, CMS entered into contracts with
Medicaid Integrity Contractors to review healthcare provider
actions, audit provider claims, as well as identify and work to
recoup overpayments made by Medicaid to these providers. The
Medicare Recovery Audit Contractor (or RAC) program
under CMS seeks to identify and recover Medicare overpayments to
hospitals. The RAC program began in California, Florida and New
York in 2005, expanded to Arizona, Massachusetts and South
Carolina in July 2007, and is expected to achieve full
nationwide implementation in 2010.
|
|
|
|
|
HITECH Act. In February 2009 the
United States Congress enacted the Health Information Technology
for Economic and Clinical Health Act, or HITECH Act, as part of
the American Recovery and Reinvestment Act of 2009. The HITECH
Act requires that hospitals and health systems make investments
in their clinical information systems. Financial incentives
under the HITECH Act may not be sufficient to fund the
government mandated clinical system improvements. This may
necessitate that healthcare providers direct their limited
capital dollars toward the implementation of clinical
|
4
|
|
|
|
|
information systems, which could affect opportunities for the
Company to offer its financial improvement-focused products and
services to help offset the additional financial pressures being
placed on these institutions.
|
|
|
|
|
|
Managed care reimbursement. Employers
typically provide medical benefits to their employees through
managed care plans that can offer a variety of indemnity,
preferred provider organization, or PPO, health maintenance
organization, or HMO,
point-of-service,
or POS, and consumer-directed health plans. Each of these plans
has individual network designs and pre-authorization
requirements, as well as co-payment, co-insurance and deductible
profiles. These varying profiles are difficult to monitor and
frequently result in the submission of invoices that do not
comply with applicable payor requirements.
|
|
|
|
Individual payors. According to CMS,
consumer
out-of-pocket
payments for health expenditures increased to $279 billion
in 2008 from $200 billion in 2001. Furthermore, many
employer-sponsored plans have benefit designs that require large
out-of-pocket
expenses for individual employees. Traditionally, hospitals and
health systems have developed billing and collection processes
to interact with government agency and managed care payors on a
high-volume, scheduled basis. The advent of consumer-directed
healthcare, or high-deductible health insurance plans, requires
hospitals and health systems to invoice patients on an
individual basis. Many hospitals and health systems do not have
the operational or technological infrastructure required to
successfully manage a high volume of invoices to individual
payors.
|
Supply
Cost Complexities and Pressures
Hospitals and health systems face increasing supply costs due to
upward pressure on pricing caused by technological innovation
and complexities inherent in procuring the vast number and
quantity of supplies and medical devices required for the
delivery of care.
|
|
|
|
|
Pricing pressure due to technological
innovation. Historically, advances in
specific therapies and technologies have resulted in higher
priced supplies for hospitals, which have significantly
decreased the profitability associated with a number of the
medical procedures that hospitals perform. For implantable
medical devices in particular, hospitals often have a limited
ability to mitigate high unit costs because practicing
physicians, who are usually not employed by the hospital, often
prefer to choose the specific devices that will be used in the
delivery of care. Furthermore, device vendors frequently market
directly to the physicians, which reinforce physician preference
for specific devices. Although hospitals are required to procure
and pay for these devices, their ability to manage the costs is
limited because the hospitals cannot influence the purchasing
decision in the same way they are able to with other medical
supplies.
|
|
|
|
Supply chain complexities. Despite the
use of GPOs to obtain discounts on supplies, hospitals and
health systems often do not optimally manage their supply costs
due to decentralized purchasing decisions and varying clinical
preferences. In addition, hospital supply procurement is highly
complex given the vast number of supplies purchased subject to
frequently changing contract terms. As a result, supplies are
often purchased without a manufacturer contract, or
off-contract, which results in higher prices. Furthermore,
hospitals often fail to aggregate purchases of commodity-type
supplies to take advantage of discounts based on purchase
volume, or to recognize when they have qualified for these
discounts.
|
|
|
|
Hospitals focus on clinical care. As
organizations, hospitals have historically devoted the majority
of their financial and operational resources to investing in
people, technologies and infrastructure that improve the level
and quantities of clinical care that they can provide. In part,
this focus has been driven by hospitals historical ability
to capture higher reimbursement for innovative, more
sophisticated medical procedures and therapeutic specialties.
Since hospitals overall financial and operational
resources are limited, investments in higher quality clinical
care have often come at the expense of investment in other
infrastructure systems, including revenue capture, billing, and
materials management. As a result, existing hospital operations
and financial and information systems are often ill-suited
|
5
|
|
|
|
|
to manage the increasing complexity and ongoing change that are
inherent to the current reimbursement environment and supply
procurement process.
|
MedAssets
Solutions
Our technology-enabled products and services enable hospitals
and health systems to reverse the trend of supply expense
increasing at a greater rate than revenue. Our revenue cycle
management products and services increase revenue capture and
collection rates for hospitals and health systems by analyzing
complex information sets, such as chargemasters and payor rules,
to facilitate compliance with regulatory and payor requirements
and the accurate and timely submission and tracking of invoices
or claims. Our spend management products and services reduce
supply expense through data management and spending analysis,
such as master item files and hospital purchasing data. This
enables us to assist hospitals in negotiating discounts on
specific high-cost physician preference items and
pharmaceuticals and allows our customers to optimize purchasing
to further leverage the benefits of the vendor discounts
negotiated by our group purchasing organization.
Our
Competitive Strengths
Key elements of our competitive strengths include:
|
|
|
|
|
Comprehensive and flexible suite of
solutions. Our proprietary applications are
primarily delivered through SaaS-based software and are designed
to integrate with our customers existing systems and work
processes, rather than replacing enterprise software systems. As
a result, our solutions are scalable and generally require
minimal or no upfront investment by our customers. In addition,
our products have been recognized as industry leaders, with our
claims management and payor contract management software tools
ranked #1 for the fourth consecutive year by KLAS
Enterprises LLC, an independent organization that measures and
reports on healthcare technology vendor performance. Moreover,
we can offer our customers an opportunity to leverage our
comprehensive and flexible set of product and service
capabilities in order to help transform their operations through
fundamental and sustainable process change and to ensure cost
savings, revenue capture and/or cash flows.
|
|
|
|
Superior proprietary data. Our
solutions are supported by proprietary databases compiled by
leveraging the breadth of our customer base and product and
service offerings over a period of years. We believe our
databases are the industrys most comprehensive, including
our proprietary master item file containing approximately two
million different product types and models, our chargemaster
containing over 180,000 distinct charges, and our databases of
governmental and other third-party payor rules and comprehensive
pricing data. In addition, we integrate a hospitals
revenue cycle and spend management data sets to ensure that all
chargeable supplies are accurately represented in the
hospitals chargemaster, resulting in increased revenue
capture and enhanced regulatory compliance. This content also
enables us to provide our customers with spend management
decision support and analytical services, including the ability
to effectively manage and control their contract portfolios and
monitor pricing, tiers and market share. The breadth of our
customer base and product and service offerings allows us to
continually update our proprietary databases, ensuring that our
data remains current and comprehensive.
|
|
|
|
Large and experienced sales force. We
employ a highly-trained and focused sales team of approximately
130 people. Our sales force provides national coverage for
establishing and managing customer relationships and maintains
close relationships with senior management of hospitals and
health systems, as well as other operationally-focused
executives involved in areas of revenue cycle management and
spend management. The size of our sales team allows us to have
personnel that focus on enterprise sales, which we define as
selling a comprehensive solution to healthcare providers, and on
technical sales, which we define as sales of individual products
and services. We utilize a highly-consultative sales process
during which we gather extensive customer financial and
operating data that we use to demonstrate that our solutions can
yield significant near-term financial improvement. Our sales
teams compensation is highly variable and designed to
drive profitable growth in sales to both current customers and
new prospects, and to support customer satisfaction and
retention efforts.
|
6
|
|
|
|
|
Long-term and expanding customer
relationships. We collaborate with our
customers throughout the duration of our relationship to ensure
anticipated financial improvement is realized and to identify
additional solutions that can yield incremental financial
improvement. Our ability to provide measurable financial
improvement and expand the value of our solutions over time has
allowed us to develop strong relationships with our
customers senior management teams. Our collaborative
approach and ability to deliver measurable financial improvement
has resulted in high retention of our large health system
customers and, in turn, a predictable base of stable, recurring
revenue.
|
|
|
|
Leading market position. We believe we
hold a top three market share position in the two segments in
which we operate. This relative market share advantage enables
us to invest, at a greater level, in areas of our business to
enhance our competitiveness through product innovation and
development, sales and customer support, as well as employee
training and development.
|
|
|
|
Proven management team and dynamic
culture. Our senior management team has an
average of 20 years experience in the healthcare industry,
an average of seven years of service with us and a proven track
record of delivering measurable financial improvement for
healthcare providers. We believe that our current management
team has the expertise and experience to continue to grow our
business by executing our strategy without significant
additional headcount in senior management positions. Our
management team has established a customer-driven culture that
encourages employees at all levels to focus on identifying and
addressing the evolving needs of healthcare providers and has
facilitated the integration of acquired companies.
|
|
|
|
Successful history of growing our business and integrating
acquired businesses. Since inception, we have
successfully acquired and integrated multiple companies across
the healthcare revenue cycle and spend management sectors. For
example, in 2003, we extended our spend management solutions by
acquiring Aspen Healthcare Metrics LLC, a performance
improvement consulting firm, and created a platform for our
revenue cycle management solutions by acquiring OSI Systems,
Inc. (part of our Revenue Cycle Management segment). We have
enhanced the breadth of our solutions by acquiring XactiMed,
Inc. (or XactiMed) and MD-X Solutions Inc. (or
MD-X) in 2007, and Accuro Healthcare Solutions, Inc.
(or Accuro) in 2008, with products and services that
are complementary to our own, and supporting these acquired
products and services with our enterprise-wide sales, account
management, consulting and implementation services, which has
contributed to increases in our revenue.
|
Our
Strategy
Our mission is to partner with hospitals and health systems to
enhance their financial strength through improved operating
margins and cash flows. Key elements of our strategy include:
|
|
|
|
|
Continually improving and expanding our suite of
solutions. We intend to continue to leverage
our research and development team, proprietary databases and
industry knowledge to further integrate our products and
services and develop new financial improvement solutions for
hospitals and healthcare providers. In addition to our internal
research and development, we also intend to expand our portfolio
of solutions through strategic partnerships and acquisitions
that will allow us to offer incremental financial improvement to
healthcare providers. Research and development of new products
and successful execution and integration of future acquisitions
are integral to our overall strategy as we continue to expand
our portfolio of products.
|
|
|
|
Further penetrating our existing customer
base. We intend to leverage our long-standing
customer relationships and large and experienced sales team to
increase the penetration rate for our comprehensive suite of
solutions with our existing hospital and health system
customers. We estimate the addressable market for existing
customers to be a $4.1 billion revenue opportunity for our
existing products and services. Within our large and diverse
customer base, many of our hospital and health system customers
utilize solutions from only one of our segments. The vast
majority of our customers use less than the full suite of our
solutions.
|
7
|
|
|
|
|
Attracting new customers. We intend to
utilize our large and experienced sales team to aggressively
seek new customers. We estimate that the addressable market for
new customers for our revenue cycle management and spend
management solutions represents a $2.8 billion revenue
opportunity for our existing products and services. We believe
that our comprehensive and flexible suite of solutions and
ability to demonstrate financial improvement opportunities
through our highly-consultative sales process will continue to
allow us to successfully differentiate our solutions from those
of our competitors.
|
|
|
|
Leveraging operating efficiencies and economies of scale
and scope. The design, scalability and scope
of our solutions enable us to efficiently deploy a
customer-specific solution for our customers principally through
web-based SaaS technologies. As we add new solutions to our
portfolio and new customers, we expect to leverage our current
capabilities to reduce the average cost of providing our
solutions to our customers.
|
|
|
|
Maintaining an internal environment that fosters a strong
and dynamic culture. Our management team
strives to maintain an organization with individuals who possess
a strong work ethic and high integrity, and who are recognized
by their dependability and commitment to excellence. We believe
that this results in attracting employees who are driven to
achieve our long-term mission of being the recognized leader in
the markets in which we compete. We believe that dynamic,
customer-centric thinking will be a catalyst for our continued
growth and success.
|
Business
Segments
We deliver our solutions through two business segments, Revenue
Cycle Management and Spend Management. Information about our
business segments should be read together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
Revenue
Cycle Management Segment
Our Revenue Cycle Management segment provides a comprehensive
suite of products and services that span what has traditionally
been viewed as the hospital revenue cycle. Progressing from a
traditional revenue cycle solution, we have expanded the scope
of revenue cycle to include products and services that may help
to enhance the effectiveness of certain clinical and
administrative functions performed within a hospital. We combine
our revenue cycle workflow solutions with sophisticated decision
support and business intelligence tools to increase financial
improvement opportunities and regulatory compliance for our
customers. Our suite of solutions provides us with significant
flexibility in meeting customer needs. Some customers choose to
actively manage their revenue cycle using internal resources
that are supplemented with our solutions. Other customers have
chosen
end-to-end
solutions that utilize our full suite of products and services
spanning the entire revenue cycle workflow. Regardless of the
client approach, we create timely, actionable information from
the vast amount of data that exists in underlying customer
information systems. In so doing, we enable financial
improvement through successful process improvement, informed
decision making, and implementation.
Revenue
Cycle Technology and Services
Hospitals face unique content, data management, business process
and claims processing challenges and can utilize our solutions
to address these issues in the following stages of the revenue
cycle workflow:
|
|
|
|
|
Patient access and financial
responsibility. The initial point of patient
contact and data collection during the admissions process is
critical for efficient and effective claim adjudication. Our
patient bill estimation, patient access workflow manager and
process improvement tools and services promote accurate
information and data capture, facilitate communication across
revenue cycle operations and assist the hospital in the
identification and collection of the patients ability to
pay.
|
|
|
|
Charge capture and revenue
integrity. Many hospitals need to have
processes that ensure implementation of a defensible pricing
strategy and compliance with third-party and government payor
rules. Our charge integrity solutions help establish and sustain
revenue integrity by identifying missed charges on
|
8
|
|
|
|
|
billed claims. Our chargemaster and pricing solutions and
workflow capabilities help hospitals accurately capture services
rendered and present those services for billing with appropriate
and compliant coding consistent with the hospitals pricing
methodology and payor rules.
|
|
|
|
|
|
Strategic pricing. We maintain a
proprietary charge benchmark database that we estimate covers
services resulting in over 95% of a hospitals departmental
gross revenues. Through our tools, hospitals are able to
establish defensible pricing based on comparative charging
benchmarks as well as hospital-specific costs to increase
revenue while providing transparency to pricing strategies.
|
|
|
|
Case management, coding and
documentation. Many hospitals need to have
tools and processes to ensure accurate documentation and coding
that adheres to complex and changing regulatory and payor
requirements. For example, reimbursement mechanisms deployed by
payors that shift length of stay cost risk to providers
necessitate tools and processes to manage ongoing payor
authorization and concurrent denials management while the
patient is being treated. Our solutions help hospitals improve
workflow and management of covered days and length of stay to
prevent denied days and reduced reimbursement in order to
negotiate the complexities of documentation and coding and
streamline the payor authorization communication channel.
|
|
|
|
Claims processing. Following
aggregation of all necessary claim data by a hospitals
patient accounting system, a hospital must deliver claims to
payors electronically. Our claims processing tools enhance the
process with comprehensive edits and workflow technology to
correct non-compliant invoices prior to submission. The
efficiency that this tool provides expedites processing and, by
extension, receipt of cash while reducing the resources required
to adjudicate claims.
|
|
|
|
Denials management and reimbursement
integrity. The collection of reimbursable
dollars requires successful payor management and communication,
and a proactive approach to managing the accuracy of payor
reimbursement of claims. Our contract payor management and
denial management solutions identify and account for all payor
underpayments, full or partial denials and target problem areas
that affect the bottom line to improve collection of receivables
due from payors. We have coupled this workflow with reporting
that provides transparency into the reimbursable dollars
management process.
|
|
|
|
Revenue recovery and accounts receivable
management. Our solutions help to ensure
appropriate payment is received for the services provided. We
help manage accounts receivable (A/R) performance to
accelerate payments and to increase net revenues. Our revenue
recovery services collect additional cash by detecting
inappropriate discounting and inaccurate payments by payors,
including silent PPOs, recovering revenue from denied claims and
providing Medicare RAC audit review and appeal services.
|
|
|
|
Revenue cycle and supply chain
integration. Our CrossWalk solution,
utilizing our proprietary master item file containing
approximately four million different product types and models
and our proprietary chargemaster containing over 180,000
distinct charges, integrates a hospitals supply chain and
revenue cycle to provide
side-by-side
visibility into supply charge and cost data and the
corresponding charges in the hospitals chargemaster to
ensure that all chargeable supplies are accurately represented
in the chargemaster.
|
Decision
Support and Performance Analytics
Our decision support software provides customers with an
integrated suite of business intelligence tools designed to
facilitate hospital decision-making by integrating clinical,
financial and operational information into a common data set for
accuracy and ease of use across the organization. A new,
upgraded version of our decision support software solution suite
was introduced in October 2008. Key components include:
|
|
|
|
|
Budgeting. A paperless workflow
management tool that streamlines the
set-up of
multiple forecasts and spread methods, deploys the budget to
multiple end-users and monitors the completion of the budget.
|
|
|
|
Cost accounting. An application that
guides the process of developing cost standards, calculating
case costs, and allocating overhead; includes microcosting, open
charge codes, relative value unit measurements, and markup.
|
9
|
|
|
|
|
Cost management. A costing application
that enables customers to obtain and maintain detailed costs of
goods and services, including accounting for resources to
perform procedures, to help establish the relative cost of
providing services.
|
|
|
|
Contract analytics. A comprehensive
tool that supports all aspects of the contracting process,
including contract modeling, negotiation, expected payment
calculation, compliance and monitoring.
|
|
|
|
Clinical analytics. A tool that
integrates clinical data with financial and administrative data
to help assess the quality and cost of services, including the
evaluation of service lines, physician treatment protocols and
quality outcomes.
|
|
|
|
Key indicators. A dashboard application
that provides access to customer-defined business intelligence
data to identify emerging trends and monitor key financial and
performance indicators on stated business objectives, including
profitability per referring physician and per procedure.
|
Spend
Management Segment
Our Spend Management segment helps our customers manage their
non-labor expense categories through a combination of group
purchasing, performance improvement consulting, including
implantable physician preference items, or PPI, cost and
utilization management and service line consulting, and business
intelligence tools.
Group
Purchasing
Our group purchasing organization utilizes a national contract
portfolio consisting of over 1,700 contracts with approximately
1,150 manufacturers, distributors and other vendors, a custom
and local contracting function and aggregated group buys, to
efficiently connect manufacturers, distributors and other
vendors with our healthcare provider customers. We use the
aggregate purchasing power of our healthcare provider customers
to negotiate pricing discounts and improved contract terms with
vendors. Contracted vendors pay us administrative fees based on
the purchase price of goods and services sold to our healthcare
provider customers purchasing under the contracts we have
negotiated.
|
|
|
|
|
Flexible contracting. Our national
portfolio of contracts provides access to a wide range of
products and services that we offer through the following
programs: medical/surgical supplies; pharmaceuticals; laboratory
supplies; capital equipment; information technology; food and
nutritional products; and purchased non-labor services. Our
national portfolio of contracts is designed to provide our
healthcare provider customers with a flexible solution,
including pricing tiers based on purchase volume and multiple
sources for many products and services. We have adopted this
strategy because of the diverse nature of our healthcare
provider customers and the significant number of factors,
including overall size, service mix, for-profit versus
not-for-profit
status, and the degree of integration between hospitals in a
health system, that influence and dictate their needs. Utilizing
the market information we obtain through providing our spend
management solutions, we constantly evaluate the depth, breadth
and competitiveness of our contract portfolio.
|
|
|
|
Custom and local contracting. Our
national portfolio of contracts is customer-driven and designed
for maximum flexibility; however, contracts designed to meet the
needs of numerous healthcare providers will not always deliver
savings for individual healthcare providers. To address this
challenge, we have developed a custom contracting capability
that enables us to negotiate custom contracts on behalf of our
group purchasing organization customers.
|
|
|
|
Aggregated purchasing for capital
equipment. We have also developed a program
for aggregating customer purchases for capital intensive medical
equipment. After our in-house market research team identifies
customer needs within defined capital product or service
categories, such as diagnostic imaging, cardiac catheterization
laboratory and design and construction, we manage a competitive
bidding process for the combined volume of customer purchasers
to identify the vendors that provide the greatest level of
value, as defined by both clinical effectiveness and cost of
ownership across the equipment lifecycle.
|
10
Performance
Improvement Consulting and Analytics
Our management consulting services use a combination of data and
performance analysis, demonstrated best practices and
experienced consultants to reduce clinical costs and increase
operational efficiency. Our focus is on delivering significant
and sustainable financial and operational improvement in the
following areas:
|
|
|
|
|
PPI Cost and Utilization
Management. Implantable medical device
(PPI) costs represent approximately 40% of the total
supply expense of a typical hospital. PPI includes expensive
medical devices and implantables (e.g., stents, catheters, heart
valves, pacemakers, leads, total joint implants, spine implants
and bone products) in the areas of cardiology, orthopedics,
neurology, and other highly advanced and innovative service
lines, as well as branded pharmaceuticals. We assist healthcare
providers with PPI cost reduction by providing data and
utilization analyses and pricing targets, and by facilitating
the implementation and request for proposal processes for PPI in
the following areas: cardiac rhythm management, cardiovascular
surgery, orthopedic surgery, spine surgery and interventional
procedures.
|
|
|
|
Service Line Improvement. We assist
providers in evaluating their service lines and identifying
areas for clinical resource improvement through a rigorous
process that includes advanced data analysis of utilization,
profitability and other operational metrics. Specific areas of
our service line expertise include cardiac and vascular surgery,
invasive cardiology and rhythm management, medical cardiology,
orthopedic surgery, spine and neurology, and general surgery.
|
|
|
|
Service Line Analytics. We offer a SaaS
or web-based business intelligence solution, supported by
consulting services, for the ongoing control and management of
supply costs. Using data from a hospitals information
systems, including clinical, financial and supply-cost data
reported by service lines and DRGs, we identify opportunities
for cost reduction and develop a management plan to achieve
improved financial results.
|
Data
Management and Business Intelligence
Our data management and business intelligence tools are an
integral part of our spend management solutions. These tools
provide transparency into expenses, identify performance
deficiencies and areas for operational improvement, and allow
for monitoring and measuring results. Key components include:
Strategic information. We provide our
customers with spend management decision support and analytical
services to enable them to effectively manage pricing and
pricing tiers, monitor market share and identify cost-saving
alternatives.
Customer master item file services. We
believe our proprietary supply item database is one of the
industrys most comprehensive. We provide master item file
services utilizing our proprietary master item file containing
approximately two million items, which allows us to identify and
standardize customer supply data at an exceptionally high rate
for timely and accurate spend management reporting.
Electronic contract portfolio
catalog. We establish and maintain a
web-based contract warehouse that provides visibility,
management and control of our customers entire contract
portfolio.
Other
Information About the Business
Customers
As of December 31, 2009, our customer base included over
125 health systems and, including those that are part of our
health system customers, more than 3,300 acute care hospitals
and approximately 40,000 ancillary or non-acute provider
locations. Our group purchasing organization has contracts with
approximately 1,150 manufacturers, distributors and other
vendors that pay us administrative fees based on purchase volume
by our healthcare provider customers. The diversity of our large
customer base ensures that our success is not tied to a single
healthcare provider or GPO vendor. No single customer or GPO
supplier accounts for more than four percent of our total net
revenue for any period included in this annual report on
Form 10-K.
Additionally, our customers are located primarily throughout the
United States and to a lesser extent, Canada.
11
Strategic
Business Alliances
We complement our existing products and services and R&D
activities by entering into strategic business relationships
with companies whose products and services complement our
solutions. For example, we maintain a strategic relationship
with Foodbuy LLC, which is the nations largest GPO that is
focused exclusively on the foodservice marketplace and manages
more than $5 billion in food and food-related purchasing.
Through this relationship, customers of our group purchasing
organization have access to Foodbuys contract portfolio
and related suite of procurement services. Under our arrangement
with Foodbuy, we receive a portion of the administrative fees
paid to Foodbuy on sales of goods and services to our healthcare
provider customers. We also have co-marketing arrangements with
entities whose products and services complement our solutions,
such as accounts payable purchasing as well as financial
eligibility qualification and registration quality for patients
at the point of admission.
In addition to our employed sales force, we maintain business
relationships with a wide range of group purchasing
organizations and other marketing affiliates that market or
support our products or services. We refer to these individuals
and organizations as affiliates or affiliate partners. These
affiliate partners, which typically provide a limited number of
services on a regional basis, are responsible for the
recruitment and direct management of healthcare providers in
both the acute care and alternate site markets. Through our
relationship with these affiliate partners, we are able to offer
a range of solutions to these providers, including both spend
management and revenue cycle management products and services,
with minimal investment in additional time and resources. Our
affiliate relationships provide a cost-effective way to serve
the fragmented market comprised of ancillary care institutions.
Competition
The market for our products and services is fragmented,
intensely competitive and characterized by the frequent
introduction of new products and services, and by rapidly
evolving industry standards, technology and customer needs. We
have experienced and expect to continue to experience intense
competition from a number of companies.
Our revenue cycle management solutions compete with products and
services provided by large, well-financed and
technologically-sophisticated entities, including: information
technology providers such as Eclipsys Corporation, McKesson
Corporation and Siemens Corporation, Inc.; consulting firms such
as Accenture Ltd., Accretive Health, Inc., Deloitte &
Touche LLP, Ernst & Young LLP, Huron Consulting, Inc.,
Navigant Consulting, Inc. and The Advisory Board Company; and
providers of niche products and services such as Concuity Inc.,
Craneware Inc., Ingenix (formerly CareMedic Systems, Inc.),
Emdeon Inc., Passport Health Communications, Inc. and The SSI
Group, Inc. We also compete with hundreds of smaller niche
companies.
Within our Spend Management segment, in addition to a number of
the consulting firms listed above, our primary competitors are
GPOs. There are more than 600 GPOs in the United States, of
which approximately 30 negotiate sizeable contracts for their
customers, while the remaining GPOs negotiate minor agreements
with regional vendors for services. Six GPOs, including us,
account for approximately 85 percent of the market. We
primarily compete with Amerinet Inc., Broadlane, HealthTrust
LLC, Novation LLC and Premier, Inc.
We compete on the basis of several factors, including:
|
|
|
|
|
ability to deliver financial improvement and return on
investment through the use of products and services;
|
|
|
|
breadth, depth and quality of product and service offerings;
|
|
|
|
quality and reliability of services, including customer support;
|
|
|
|
ease of use and convenience;
|
|
|
|
ability to integrate services with existing technology;
|
12
|
|
|
|
|
price; and
|
|
|
|
brand recognition.
|
We believe that our ability to deliver measurable financial
improvement and the breadth of our full suite of solutions give
us a competitive advantage in the marketplace.
Employees
As of December 31, 2009, we had approximately 2,200 full
time employees.
Government
Regulation
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new federal and state laws and
regulations affecting the healthcare industry could create
unexpected liabilities for us, could cause us or our customers
to incur additional costs and could restrict our or our
customers operations. Many healthcare laws are complex,
and their application to us, our customers or the specific
services and relationships we have with our customers are not
always clear. In particular, many existing healthcare laws and
regulations, when enacted, did not anticipate the comprehensive
products and revenue cycle management and spend management
solutions that we provide, and these laws and regulations may be
applied to our products and services in ways that we do not
anticipate. Our failure to accurately anticipate the application
of these laws and regulations, or our other failure to comply,
could create liability for us, result in adverse publicity and
negatively affect our business. See the Risk Factors
section herein for more information regarding the impact of
government regulation on our Company.
Intellectual
Property
Our success as a company depends upon our ability to protect our
core technology and intellectual property. To accomplish this,
we rely on a combination of intellectual property rights, trade
secrets, copyrights and trademarks, as well as customary
contractual protections.
We generally control access to, and the use of, our proprietary
software and other confidential information. This protection is
accomplished through a combination of internal and external
controls, including contractual protections with employees,
contractors, customers, and partners, and through a combination
of U.S. and international copyright laws. We license some
of our software pursuant to agreements that impose restrictions
on our customers ability to use such software, such as
prohibiting reverse engineering and limiting the use of copies.
We also seek to avoid disclosure of our intellectual property by
relying on non-disclosure and assignment of intellectual
property agreements with our employees and consultants that
acknowledge our exclusive ownership of all intellectual property
developed by the individual during the course of his or her work
with us. The agreements also require that each person maintain
the confidentiality of all proprietary information disclosed to
them.
We incorporate a number of third party software programs into
certain of our software and information technology platforms
pursuant to license agreements. Some of this software is
proprietary and some is open source. We use third-party software
to, among other things, maintain and enhance content generation
and delivery, and support our technology infrastructure.
We have registered, or have pending applications for the
registration of, certain of our trademarks. We actively manage
our trademark portfolio, maintain long standing trademarks that
are in use, and file applications for trademark registrations
for new brands in all relevant jurisdictions.
Research
and Development
Our research and development, or R&D, expenditures
primarily consist of our investment in internally developed
software. We incurred $35.4 million, $27.5 million and
$14.6 million for R&D activities in 2009, 2008 and
2007, respectively, and we capitalized 46.3%, 40.4% and 46.7% of
these expenses, respectively. As of December 31, 2009, our
software development, product management and quality assurance
activities
13
involved approximately 380 employees. We expect to incur
significant research and development costs in the future due to
our continuing investment in internally developed software as we
intend to release new features and functionality, expand our
content offerings, upgrade and extend our service offerings, and
develop new technologies.
Information
Availability
Our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the Exchange Act), as amended, are available
free of charge on our website (www.medassets.com under the
Investor Relations caption) as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission
(SEC or the Commission). The content on
any website referred to in this Annual Report on
Form 10-K
is not incorporated by reference into this report, unless
expressly noted otherwise.
Although it is not possible to predict or identify all risks and
uncertainties that could cause actual results to differ
materially from those anticipated, projected or implied in any
forward-looking statement, you should carefully consider the
risk factors discussed below which constitute material risks and
uncertainties known to us that we believe could affect our
future growth, results of operations, performance and business
prospects and opportunities. You should not consider this list
to be a complete statement of all the potential risks and
uncertainties regarding our business and the trading price of
our securities. Additional risks not presently known to us, or
which we currently consider immaterial, may adversely impact our
business and the trading price of our securities.
Risks
Related to Our Business
We
face intense competition, which could limit our ability to
maintain or expand market share within our industry, and if we
do not maintain or expand our market share, our business and
operating results will be harmed.
The market for our products and services is fragmented,
intensely competitive and characterized by the frequent
introduction of new products and services and by rapidly
evolving industry standards, technology and customer needs. Our
revenue cycle management products and services compete with
products and services provided by large, well-financed and
technologically-sophisticated entities, including: information
technology providers such as Eclipsys Corporation, McKesson
Corporation, and Siemens Corporation, Inc.; consulting firms
such as Accenture Ltd., Accretive Health, Inc.,
Deloitte & Touche LLP, Ernst & Young LLP,
Huron Consulting, Inc., Navigant Consulting, Inc. and The
Advisory Board Company; and providers of niche products and
services such as Concuity Inc., Craneware Inc., Ingenix
(formerly CareMedic Systems, Inc.), Emdeon Inc., Passport Health
Communications, Inc. and The SSI Group, Inc. The primary
competitors to our spend management products and services are
other large GPOs, such as Amerinet, Broadlane, HealthTrust LLC,
Novation LLC and Premier, Inc., as well as a number of the
consulting firms named above. In addition, some large health
systems may choose to contract directly with vendors for some of
their larger categories of supply expenses.
With respect to both our revenue cycle management and spend
management products and services, we compete on the basis of
several factors, including breadth, depth and quality of product
and service offerings, ability to deliver financial improvement
through the use of products and services, quality and
reliability of services, ease of use and convenience, brand
recognition, ability to integrate services with existing
technology and price. Many of our competitors are more
established, benefit from greater name recognition, have larger
customer bases and have substantially greater financial,
technical and marketing resources. Other of our competitors have
proprietary technology that differentiates their product and
service offerings from ours. As a result of these competitive
advantages, our competitors and potential competitors may be
able to respond more quickly to market forces, undertake more
extensive marketing campaigns for their brands, products and
14
services and make more attractive offers to customers. In
addition, many GPOs are owned by the provider-customers of the
GPO, which enables our competitors to distinguish themselves on
that basis.
We cannot be certain that we will be able to retain our current
customers or expand our customer base in this competitive
environment. If we do not retain current customers or expand our
customer base, our business and results of operations will be
harmed. Additionally, as a result of larger agreements that we
have entered into in the recent past with certain of our
customers, a larger portion of our revenue is now attributable
to a smaller group of customers. Although no single customer
accounts for more than four percent of our total net revenue as
of December 31, 2009, any significant loss of business from
these large customers could have a material adverse effect on
our business, results of operations and financial condition.
Moreover, we expect that competition will continue to increase
as a result of consolidation in both the information technology
and healthcare industries. If one or more of our competitors or
potential competitors were to merge or partner with another of
our competitors, the change in the competitive landscape could
also adversely affect our ability to compete effectively and
could harm our business. Many healthcare providers are
consolidating to create integrated healthcare delivery systems
with greater market power and economic conditions may force
additional consolidation. As the healthcare industry
consolidates, competition to provide services to industry
participants will become more intense and the importance of
existing relationships with industry participants will become
greater.
We may
face pricing pressures that could limit our ability to maintain
or increase prices for our products and services.
We may be subject to pricing pressures with respect to our
future sales arising from various sources, including, without
limitation, competition within the industry, consolidation of
healthcare industry participants, practices of managed care
organizations, government action affecting reimbursement and
certain of our customers who experience significant financial
stress. If our competitors are able to offer products and
services that result, or that are perceived to result, in
customer financial improvement that is substantially similar to
or better than the financial improvement generated by our
products and services, we may be forced to compete on the basis
of additional attributes, such as price, to remain competitive.
In addition, as healthcare providers consolidate to create
integrated healthcare delivery systems with greater market
power, these providers may try to use their market power to
negotiate fee reductions for our products and services. Our
customers and the other entities with which we have a business
relationship are affected by changes in regulations and
limitations in governmental spending for Medicare and Medicaid
programs. Government actions could limit government spending for
the Medicare and Medicaid programs, limit payments to healthcare
providers, and increase emphasis on competition and other
programs that could have an adverse effect on our customers and
the other entities with which we have a business relationship.
Additionally, if our current and prospective customers do not
benefit from any broader economic recovery, this may exacerbate
pricing pressure.
If our pricing experiences significant downward pressure, our
business will be less profitable and our results of operations
will be adversely affected. In addition, because cash flow from
operations funds our working capital requirements, reduced
profitability could require us to raise additional capital
sooner than we would otherwise need.
If we
are not able to offer new and valuable products and services, we
may not remain competitive and our revenue and results of
operations may suffer.
Our success depends on providing products and services that
healthcare providers use to improve financial performance. Our
competitors are constantly developing products and services that
may become more efficient or appealing to our customers. In
addition, certain of our existing products may become obsolete
in light of rapidly evolving industry standards, technology and
customer needs, including changing regulations and provider
reimbursement policies. As a result, we must continue to invest
significant resources in research and development in order to
enhance our existing products and services and introduce new
high-quality products and services that customers and potential
customers will want. Many of our customer relationships are
nonexclusive or terminable on short notice, or otherwise
terminable after a specified term. If our new or modified
product and service innovations are not responsive to user
preferences or industry or regulatory
15
changes, are not appropriately timed with market opportunity, or
are not effectively brought to market, we may lose existing
customers and be unable to obtain new customers and our results
of operations may suffer.
We may
experience significant delays in generating, or an inability to
generate, revenues if potential customers take a long time to
evaluate our products and services.
A key element of our strategy is to market our products and
services directly to large healthcare providers, such as health
systems and acute care hospitals and to increase the number of
our products and services utilized by existing health system and
acute care hospital customers. The evaluation process is often
lengthy and involves significant technical evaluation and
commitment of personnel by these organizations. The use of our
products and services may also be delayed due to an inability or
reluctance to change or modify existing procedures. If we are
unable to sell additional products and services to existing
health system and hospital customers, or enter into and maintain
favorable relationships with other large healthcare providers,
our revenue could grow at a slower rate or even decrease.
Unsuccessful
implementation of our products and services with our customers
may harm our future financial success.
Some of our new-customer projects are complex and require
lengthy and significant work to implement our products and
services. Each customers situation may be different, and
unanticipated difficulties and delays may arise as a result of
failure by us or by the customer to meet respective
implementation responsibilities. If the customer implementation
process is not executed successfully or if execution is delayed,
our relationships with some of our customers may be adversely
impacted and our results of operations will be impacted
negatively. In addition, cancellation of any implementation of
our products and services after it has begun may involve loss to
us of time, effort and resources invested in the cancelled
implementation as well as lost opportunity for acquiring other
customers over that same period of time. These factors may
contribute to substantial fluctuations in our quarterly
operating results, particularly in the near term and during any
period in which our sales volume is relatively low.
If we
are unable to maintain our third party providers, strategic
alliances or enter into new alliances, we may be unable to grow
our current base business.
Our business strategy includes entering into strategic alliances
and affiliations with leading healthcare service providers. We
work closely with our strategic partners to either expand our
penetration in certain areas or classes of trade, or expand our
market capabilities. We may not achieve our objectives through
these alliances. Many of these companies have multiple
relationships and they may not regard us as significant to their
business. These companies may pursue relationships with our
competitors or develop or acquire products and services that
compete with our products and services. In addition, in many
cases, these companies may terminate their relationships with us
with little or no notice. If existing alliances are terminated
or we are unable to enter into alliances with leading healthcare
service providers, we may be unable to maintain or increase our
market presence.
If the
protection of our intellectual property is inadequate, our
competitors may gain access to our technology or confidential
information and we may lose our competitive
advantage.
Our success as a company depends in part upon our ability to
protect our core technology and intellectual property. To
accomplish this, we rely on a combination of intellectual
property rights, including trade secrets, copyrights and
trademarks, as well as customary contractual protections.
We utilize a combination of internal and external measures to
protect our proprietary software and confidential information.
Such measures include contractual protections with employees,
contractors, customers, and partners, as well as
U.S. copyright laws.
We protect the intellectual property in our software pursuant to
customary contractual protections in our agreements that impose
restrictions on our customers ability to use such
software, such as prohibiting reverse engineering and limiting
the use of copies. We also seek to avoid disclosure of our
intellectual property by
16
relying on non-disclosure and intellectual property assignment
agreements with our employees and consultants that acknowledge
our ownership of all intellectual property developed by the
individual during the course of his or her work with us. The
agreements also require each person to maintain the
confidentiality of all proprietary information disclosed to
them. Other parties may not comply with the terms of their
agreements with us, and we may not be able to enforce our rights
adequately against these parties. The disclosure to, or
independent development by, a competitor of any trade secret,
know-how or other technology not protected by a patent could
materially adversely affect any competitive advantage we may
have over any such competitor.
We cannot assure you that the steps we have taken to protect our
intellectual property rights will be adequate to deter
misappropriation of our rights or that we will be able to detect
unauthorized uses and take timely and effective steps to enforce
our rights. If unauthorized uses of our proprietary products and
services were to occur, we might be required to engage in costly
and time-consuming litigation to enforce our rights. We cannot
assure you that we would prevail in any such litigation. If
others were able to use our intellectual property, our business
could be subject to greater pricing pressure.
If we
are alleged to have infringed on the rights of others, we could
incur unanticipated costs and be prevented from providing our
products and services.
We could be subject to intellectual property infringement claims
as the number of our competitors grows and our
applications functionality overlaps with competitor
products. While we do not believe that we have infringed or are
infringing on any proprietary rights of third parties, we cannot
assure you that infringement claims will not be asserted against
us or that those claims will be unsuccessful. Any intellectual
property rights claim against us or our customers, with or
without merit, could be expensive to litigate, cause us to incur
substantial costs and divert management resources and attention
in defending the claim. Furthermore, a party making a claim
against us could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief that could
effectively block our ability to provide products or services.
In addition, we cannot assure you that licenses for any
intellectual property of third parties that might be required
for our products or services will be available on commercially
reasonable terms, or at all. As a result, we may also be
required to develop alternative non-infringing technology, which
could require significant effort and expense.
In addition, a number of our contracts with our customers
contain indemnity provisions whereby we indemnify them against
certain losses that may arise from third-party claims that are
brought in connection with the use of our products.
Our exposure to risks associated with the use of intellectual
property may be increased as a result of acquisitions, as we
have a lower level of visibility into the development process
with respect to such technology or the care taken to safeguard
against infringement risks. In addition, third parties may make
infringement and similar or related claims after we have
acquired technology that had not been asserted prior to our
acquisition.
Our
sources of data might restrict our use of or refuse to license
data, which could adversely impact our ability to provide
certain products or services.
A portion of the data that we use is either purchased or
licensed from third parties or is obtained from our customers
for specific customer engagements. We also obtain a portion of
the data that we use from public records. We believe that we
have all rights necessary to use the data that is incorporated
into our products and services. However, in the future, data
providers could withdraw their data from us if there is a
competitive reason to do so; if legislation is passed
restricting the use of the data; or if judicial interpretations
are issued restricting use of the data that we currently use in
our products and services. If a substantial number of data
providers were to withdraw their data, our ability to provide
products and services to our clients could be materially
adversely impacted.
17
Our
use of open source software could adversely affect
our ability to sell our products and subject us to possible
litigation.
A significant portion of the products or technologies acquired,
licensed or developed by us may incorporate so-called open
source software, and we may incorporate open source
software into other products in the future. Such open source
software is generally licensed by its authors or other third
parties under open source licenses, including, for example, the
GNU General Public License, the GNU Lesser General Public
License, Apache-style licenses, Berkeley
Software Distribution, BSD-style licenses and
other open source licenses. We attempt to monitor our use of
open source software in an effort to avoid subjecting our
products to conditions we do not intend; however, there can be
no assurance that our efforts have been or will be successful.
There is little or no legal precedent governing the
interpretation of many of the terms of certain of these
licenses, and therefore the potential impact of these terms on
our business is somewhat unknown and may result in unanticipated
obligations regarding our products and technologies. For
example, we may be subjected to certain conditions, including
requirements that we offer our products that use particular open
source software at no cost to the user; that we make available
the source code for modifications or derivative works we create
based upon, incorporating or using the open source software;
and/or that
we license such modifications or derivative works under the
terms of the particular open source license.
If an author or other party that distributes such open source
software were to allege that we had not complied with the
conditions of one or more of these licenses, we could be
required to incur significant legal costs defending ourselves
against such allegations. If our defenses were not successful,
we could be subject to significant damages; be enjoined from the
distribution of our products that contained the open source
software; and be required to comply with the foregoing
conditions, which could disrupt the distribution and sale of
some of our products. In addition, if we combine our proprietary
software with open source software in a certain manner, under
some open source licenses we could be required to release the
source code of our proprietary software, which could
substantially help our competitors develop products that are
similar to or better than ours.
Our
failure to license and integrate third-party technologies could
harm our business.
We depend upon licenses from third-party vendors for some of the
technology and data used in our applications, and for some of
the technology platforms upon which these applications operate,
including Microsoft and Oracle. We also use third-party software
to maintain and enhance, among other things, content generation
and delivery, and to support our technology infrastructure. Some
of this software is proprietary and some is open source. These
technologies might not continue to be available to us on
commercially reasonable terms or at all. Most of these licenses
can be renewed only by mutual consent and may be terminated if
we breach the terms of the license and fail to cure the breach
within a specified period of time. Our inability to obtain any
of these licenses could delay development until equivalent
technology can be identified, licensed and integrated, which
will harm our business, financial condition and results of
operations.
Most of our third-party licenses are non-exclusive and our
competitors may obtain the right to use any of the technology
covered by these licenses to compete directly with us. Our use
of third-party technologies exposes us to increased risks,
including, but not limited to, risks associated with the
integration of new technology into our solutions, the diversion
of our resources from development of our own proprietary
technology and our inability to generate revenue from licensed
technology sufficient to offset associated acquisition and
maintenance costs. In addition, if our vendors choose to
discontinue support of the licensed technology in the future, we
might not be able to modify or adapt our own solutions.
We
intend to continue to pursue acquisition opportunities, which
may subject us to considerable business and financial
risk.
We have grown through, and anticipate that we will continue to
grow through, acquisitions of competitive and complementary
businesses. We evaluate potential acquisitions on an ongoing
basis and regularly pursue acquisition opportunities. We may not
be successful in identifying acquisition opportunities,
assessing the
18
value, strengths and weaknesses of these opportunities and
consummating acquisitions on acceptable terms. Furthermore,
suitable acquisition opportunities may not even be made
available or known to us. In addition, we may compete for
certain acquisition targets with companies having greater
financial resources than we do. We anticipate that we may
finance acquisitions through cash provided by operating
activities, borrowings under our existing credit facility and
other indebtedness. Borrowings necessary to finance acquisitions
may not be available on terms acceptable to us, or at all.
Future acquisitions may also result in potentially dilutive
issuances of equity securities. Acquisitions may expose us to
particular business and financial risks that include, but are
not limited to:
|
|
|
|
|
diverting managements attention;
|
|
|
|
incurring additional indebtedness and assuming liabilities,
known and unknown;
|
|
|
|
incurring significant additional capital expenditures,
transaction and operating expenses and nonrecurring
acquisition-related charges;
|
|
|
|
experiencing an adverse impact on our earnings from the
amortization of acquired intangible assets, as well as from any
future impairment of goodwill and other acquired intangible
assets as a result of certain economic, competitive or
regulatory changes impacting the fair value of these assets;
|
|
|
|
failing to integrate the operations and personnel of the
acquired businesses;
|
|
|
|
entering new markets with which we are not familiar; and
|
|
|
|
failing to retain key personnel of, vendors to and customers of
the acquired businesses.
|
If we are unable to successfully implement our acquisition
strategy or address the risks associated with acquisitions, or
if we encounter unforeseen expenses, difficulties, complications
or delays frequently encountered in connection with the
integration of acquired entities and the expansion of
operations, our growth and ability to compete may be impaired,
we may fail to achieve acquisition synergies and we may be
required to focus resources on integration of operations rather
than on our primary product and service offerings.
Our
indebtedness could adversely affect our financial health and
reduce the funds available to us for other
purposes
We have and may continue to have a significant amount of
indebtedness. At December 31, 2009, we had total
indebtedness of $215.2 million. Our interest expense for
the year ended December 31, 2009 was $18.1 million. As
the rate at which interest is assessed on our outstanding
indebtedness is variable, a modest interest rate increase could
result in a substantial increase in interest expense. As a
method to mitigate this risk, during 2007, we entered into an
interest rate collar for $155.0 million of our indebtedness
and the terms of such hedging agreement expire June 30,
2010, prior to the maturity date of our indebtedness (the
interest rate collar sets a maximum interest rate of 6.0% and a
minimum interest rate of 2.85%). During 2009, we entered into a
London Inter-bank Offered Rate (or LIBOR) interest
rate swap with a notional amount of $138.3 million
beginning June 30, 2010, which effectively converts a
portion of our variable rate term loan credit facility to a
fixed rate debt. The notional amount subject to the swap has
pre-set quarterly step downs corresponding to our anticipated
principal reduction schedule. The interest rate swap converts
the three-month LIBOR rate on the corresponding notional amount
of debt to an effective fixed rate of 1.99% (exclusive of the
applicable bank margin charged by our lender).
Our substantial indebtedness could adversely affect our
financial health in the following ways:
|
|
|
|
|
a material portion of our cash flow from operations must be
dedicated to the payment of interest on and principal of our
outstanding indebtedness, thereby reducing the funds available
to us for other purposes, including working capital,
acquisitions and capital expenditures;
|
|
|
|
our substantial degree of leverage could make us more vulnerable
in the event of a downturn in general economic conditions or
other adverse events in our business or our industry;
|
19
|
|
|
|
|
our substantial degree of leverage could impair our ability to
obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes
limiting our ability to maintain the value of our assets and
operations; and
|
|
|
|
our revolving credit facility matures in October 2011 and our
term loan facility matures in October 2013. If cash flow from
operations is less than our debt service responsibilities, we
may face financial risk that could increase interest expense and
hinder our ability to refinance our debt obligations.
|
In addition, our existing credit facility contains, and future
indebtedness may contain, financial and other restrictive
covenants, ratios and tests that limit our ability to incur
additional debt and engage in other activities that may be in
our long-term best interests. For example, our existing credit
facility includes covenants restricting, among other things, our
ability to incur indebtedness, create liens on assets, engage in
certain lines of business, engage in certain mergers or
consolidations, dispose of assets, make certain investments or
acquisitions, engage in transactions with affiliates, enter into
sale leaseback transactions, enter into negative pledges or pay
dividends or make other restricted payments. Our existing credit
facility also includes financial covenants, including
requirements that we maintain compliance with a consolidated
leverage ratio and a consolidated fixed charge coverage ratio.
Our ability to comply with the covenants and ratios contained in
our existing credit facility or in the agreements governing our
future indebtedness may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. Our existing credit facility prohibits us from
making dividend payments on our common stock if we are not in
compliance with each of our financial covenants and our
restricted payment covenant. We are currently in compliance with
our existing covenants; however, any future event of default, if
not waived or cured, could result in the acceleration of the
maturity of our indebtedness under our existing credit facility.
If we were unable to repay those amounts, the lenders under our
existing credit facility could proceed against the security
granted to them to secure that indebtedness. If the lenders
accelerate the payment of our indebtedness, our assets may not
be sufficient to repay in full such indebtedness.
Due to
the challenging conditions of the financial markets and
uncertain economic environment, our lenders may not be able to
fund our borrowings under our revolving credit
facility.
Financial institutions that have extended commitments under our
revolving credit facility may be unable or unwilling to fund
borrowings under their existing commitments to us if they are
adversely affected by the conditions of the U.S. and
international capital and credit markets. Our financial
condition and results of operations could be adversely affected
if we are unable to borrow against a significant portion of the
commitments under our revolving credit facility because of
lender defaults.
We may
need to obtain additional financing which may not be available
or, if it is available, may result in a reduction in the
percentage ownership of our existing stockholders.
We may need to raise additional funds in order to:
|
|
|
|
|
finance unanticipated working capital requirements;
|
|
|
|
develop or enhance our technological infrastructure and our
existing products and services;
|
|
|
|
fund strategic relationships;
|
|
|
|
respond to competitive pressures; and
|
|
|
|
acquire complementary businesses, technologies, products or
services.
|
Additional financing may not be available on terms favorable to
us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities,
develop or enhance technology or services or otherwise respond
to competitive pressures would be significantly limited. If we
raise additional funds by issuing equity or convertible debt
20
securities, the percentage ownership of our then-existing
stockholders will be reduced, and these securities may have
rights, preferences or privileges senior to those of our
existing stockholders.
If we
are required to collect sales and use taxes on the solutions we
sell in certain jurisdictions, we may be subject to tax
liability for past sales and our future sales may
decrease.
Rules and regulations applicable to sales and use tax vary
significantly from state to state. In addition, the
applicability of these rules given the nature of our products
and services, is subject to change.
We may lose sales or incur significant costs should various tax
jurisdictions be successful in imposing sales and use taxes on a
broader range of products and services. A successful assertion
by one or more tax jurisdictions that we should collect sales or
other taxes on the sale of our solutions could result in
substantial tax liabilities for past sales, decrease our ability
to compete and otherwise harm our business.
If one or more taxing authorities determines that taxes should
have, but have not, been paid with respect to our services, we
may be liable for past taxes in addition to taxes going forward.
Liability for past taxes may also include very substantial
interest and penalty charges. If we are required to collect and
pay back taxes and the associated interest and penalties and if
our customers fail or refuse to reimburse us for all or a
portion of these amounts, we will have incurred unplanned costs
that may be substantial. Moreover, imposition of such taxes on
our services going forward will effectively increase the cost of
such services to our customers and may adversely affect our
ability to retain existing customers or to gain new customers in
the areas in which such taxes are imposed.
Any
significant increase in bad debt in excess of recorded estimates
would have a negative impact on our business, financial
condition and results of operations.
We initially evaluate the collectability of our accounts
receivable based on a number of factors, including a specific
clients ability to meet its financial obligations to us,
the length of time the receivables are past due and historical
collections experience. Based on these assessments, we record a
reserve for specific account balances as well as a general
reserve based on our historical experience for bad debt to
reduce the related receivables to the amount we expect to
collect from clients. Many of our customers are under intense
financial pressure whose operations are characterized by
declining or negative margins. If circumstances related to
specific clients change, especially those of our larger clients,
as a result of economic conditions or otherwise, such as a
limited ability to meet financial obligations due to bankruptcy,
or if conditions deteriorate such that our past collection
experience is no longer relevant, the amount of accounts
receivable that we are able to collect may be less than our
previous estimates as we experience bad debt in excess of
reserves previously recorded.
Our
quarterly results of operations have fluctuated in the past and
may continue to fluctuate in the future as a result of certain
factors, some of which may be outside of our
control.
Certain of our customer contracts contain terms that result in
revenue that is deferred and cannot be recognized until the
occurrence of certain events. For example, accounting principles
do not allow us to recognize revenue associated with the
implementation of products and services until the implementation
has been completed, at which time we begin to recognize revenue
over the life of the contract or the estimated customer
relationship period, whichever is longer. In addition,
subscription-based fees generally commence only upon completion
of implementation. As a result, the period of time between
contract signing and recognition of associated revenue may be
lengthy, and we are not able to predict with certainty the
period in which implementation will be completed.
Certain of our contracts provide that some portion or all of our
fees are at risk and refundable if our products and services do
not result in the achievement of certain financial performance
targets. To the extent that any revenue is subject to
contingency for the non-achievement of a performance target, we
only recognize revenue upon customer confirmation that the
financial performance targets have been achieved. If a customer
fails to provide such confirmation in a timely manner, our
ability to recognize revenue will be delayed.
21
Our Spend Management segment relies on participating vendors to
provide periodic reports of their sales volumes to our customers
and resulting administrative fees to us. If a vendor fails to
provide such reporting in a timely and accurate manner, our
ability to recognize administrative fee revenue will be delayed
or prevented.
Certain of our fees are based on timing and volume of customer
invoices processed and payments received, which are often
dependent upon factors outside of our control.
Other fluctuations in our quarterly results of operations may be
due to a number of other factors, some of which are not within
our control, including:
|
|
|
|
|
the extent to which our products and services achieve or
maintain market acceptance;
|
|
|
|
the purchasing and budgeting cycles of our customers;
|
|
|
|
the lengthy sales cycles for our products and services;
|
|
|
|
the impact of transaction fee and contingency fee arrangements
with customers;
|
|
|
|
changes in our or our competitors pricing policies or
sales terms;
|
|
|
|
the timing and success of our or our competitors new
product and service offerings;
|
|
|
|
client decisions regarding renewal or termination of their
contracts;
|
|
|
|
the amount and timing of operating costs related to the
maintenance and expansion of our business, operations and
infrastructure;
|
|
|
|
the amount and timing of costs related to the development or
acquisition of technologies or businesses;
|
|
|
|
the financial condition of our current and potential clients;
|
|
|
|
unforeseen legal expenses, including litigation and settlement
costs; and
|
|
|
|
general economic, industry and market conditions and those
conditions specific to the healthcare industry.
|
We base our expense levels in part upon our expectations
concerning future revenue, and these expense levels are
relatively fixed in the short term. If we have lower revenue
than expected, we may not be able to reduce our spending in the
short term in response. Any significant shortfall in revenue
would have a direct and material adverse impact on our results
of operations. We believe that our quarterly results of
operations may vary significantly in the future and that
period-to-period
comparisons of our results of operations may not be meaningful.
You should not rely on the results of one quarter as an
indication of future performance. If our quarterly results of
operations fall below the expectations of securities analysts or
investors, the price of our common stock could decline
substantially.
If we
lose key personnel or if we are unable to attract, hire,
integrate and retain key personnel, our business would be
harmed.
Our future success depends in part on our ability to attract,
hire, integrate and retain key personnel. Our future success
also depends on the continued contributions of our executive
officers and other key personnel, each of whom may be difficult
to replace. In particular, John A. Bardis, our chairman,
president and chief executive officer and Rand A. Ballard, our
chief operating officer and chief customer officer, are critical
to the management of our business and operations and the
development of our strategic direction. The loss of services of
Messrs. Bardis or Ballard or any of our other executive
officers or key personnel could have a material adverse effect
on our business. The replacement of any of these key individuals
would involve significant time and expense and may significantly
delay or prevent the achievement of our business objectives.
22
Risks
Related to Our Product and Service Offerings
If our
products fail to perform properly due to undetected errors or
similar problems, our business could suffer.
Because of the large amount of data that we collect and manage,
it is possible that hardware failures or errors in our systems
could result in data loss or corruption or cause the information
that we collect to be incomplete or contain inaccuracies that
our customers regard as significant. Complex software such as
ours may contain errors or failures that are not detected until
after the software is introduced or updates and new versions are
released. We continually introduce new software and updates and
enhancements to our software. Despite testing by us, from time
to time we have discovered defects or errors in our software,
and such defects or errors may appear in the future. Defects and
errors that are not timely detected and remedied could expose us
to risk of liability to customers and the government and could
cause delays in the introduction of new products and services,
result in increased costs and diversion of development
resources, require design modifications, decrease market
acceptance or customer satisfaction with our products and
services or cause harm to our reputation. If any of these events
occur, it could materially adversely affect our business,
financial condition or results of operations.
Furthermore, our customers might use our software together with
products from other companies. As a result, when problems occur,
it might be difficult to identify the source of the problem.
Even when our software does not cause these problems, the
existence of these errors might cause us to incur significant
costs, divert the attention of our technical personnel from our
product development efforts, impact our reputation and lead to
significant customer relations problems.
If our
products or services fail to provide accurate information, or if
our content or any other element of our products or services is
associated with incorrect, inaccurate or faulty coding, billing,
or claims submissions to Medicare or any other third-party
payor, we could be liable to customers or the government which
could adversely affect our business.
Our products and content were developed based on the laws,
regulations and third-party payor rules in existence at the time
such software and content was developed. If we interpret those
laws, regulations or rules incorrectly; the laws, regulations or
rules materially change at any point after the software and
content was developed; we fail to provide
up-to-date,
accurate information; or our products, or services are otherwise
associated with incorrect, inaccurate or faulty coding, billing
or claims submissions, then customers could assert claims
against us or the government or qui tam relators on
behalf of the government could assert claims against us under
the Federal False Claims Act or similar state laws. The
assertion of such claims and ensuing litigation, regardless of
its outcome, could result in substantial costs to us, divert
managements attention from operations, damage our
reputation and decrease market acceptance of our services. We
attempt to limit by contract our liability to customers for
damages. We cannot, however, limit liability the government
could seek to impose on us under the False Claims Act. Further,
the allocations of responsibility and limitations of liability
set forth in our contracts may not be enforceable or otherwise
protect us from liability for damages.
Factors
beyond our control could cause interruptions in our operations,
which may adversely affect our reputation in the marketplace and
our business, financial condition and results of
operations.
The timely development, implementation and continuous and
uninterrupted performance of our hardware, network,
applications, the Internet and other systems, including those
which may be provided by third parties, are important facets in
our delivery of products and services to our customers. Our
ability to protect these processes and systems against
unexpected adverse events is a key factor in continuing to offer
our customers our full complement of products and services on
time in an uninterrupted manner.
Our operations are vulnerable to interruption by damage from a
variety of sources, many of which are not within our control,
including without limitation: (1) power loss and
telecommunications failures; (2) software and hardware
errors, failures or crashes; (3) computer viruses and
similar disruptive problems; (4) fire, flood and other
natural disasters; and (5) attacks on our network or damage
to our software and systems carried out by hackers or Internet
criminals.
23
System failures that interrupt our ability to develop
applications or provide our products and services could affect
our customers perception of the value of our products and
services. Delays or interruptions in the delivery of our
products and services could result from unknown hardware
defects, insufficient capacity or the failure of our website
hosting and telecommunications providers to provide continuous
and uninterrupted service. We also depend on service providers
that provide customers with access to our products and services.
In addition, computer viruses may harm our systems causing us to
lose data, and the transmission of computer viruses could expose
us to litigation. In addition to potential liability, if we
supply inaccurate information or experience interruptions in our
ability to capture, store and supply information, our reputation
could be harmed and we could lose customers. Any significant
interruptions in our products and services could damage our
reputation in the marketplace and have a negative impact on our
business, financial condition and results of operations.
Unauthorized
disclosure of confidential information provided to us by our
customers or third parties, whether through breach of our secure
network by an unauthorized party, employee theft or misuse, or
otherwise, could harm our business.
The difficulty of securely transmitting confidential information
has been a significant issue when engaging in sensitive
communications over the Internet. Our business relies on using
the Internet to transmit confidential information. We believe
that any well-publicized compromise of Internet security may
deter companies from using the Internet for these purposes.
Our services present the potential for embezzlement, identity
theft, or other similar illegal behavior by our employees or
subcontractors with respect to third parties. If there was a
disclosure of confidential information, or if a third party were
to gain unauthorized access to the confidential information we
possess, our operations could be seriously disrupted, our
reputation could be harmed and we could be subject to claims
pursuant to our agreements with our customers or other
liabilities. In addition, if this were to occur, we could be
perceived to have facilitated or participated in illegal
misappropriation of funds, documents, or data and therefore be
subject to civil or criminal liability or regulatory action.
While we maintain professional liability insurance coverage in
an amount that we believe is sufficient for our business, we
cannot assure you that this coverage will prove to be adequate
or will continue to be available on acceptable terms, if at all.
A claim that is brought against us that is uninsured or
under-insured could harm our business, financial conditions and
results of operations. Even unsuccessful claims could result in
substantial costs and diversion of management resources.
Risks
Related to Government Regulation
Our
business and our industry are highly regulated, and if
government regulations are interpreted or enforced in a manner
adverse to us or our business, we may be subject to enforcement
actions, penalties, and other material limitations on our
business.
We and the healthcare manufacturers, distributors and providers
with whom we do business are extensively regulated by federal,
state and local governmental agencies. Most of the products
offered through our group purchasing contracts are subject to
direct regulation by federal and state governmental agencies. We
rely upon vendors who use our services to meet all quality
control, packaging, distribution, labeling, hazard and health
information notice, record keeping and licensing requirements.
In addition, we rely upon the carriers retained by our vendors
to comply with regulations regarding the shipment of any
hazardous materials.
We cannot guarantee that the vendors are in compliance with
applicable laws and regulations. If vendors or the providers
with whom we do business have failed, or fail in the future, to
adequately comply with any relevant laws or regulations, we
could become involved in governmental investigations or private
lawsuits concerning these regulations. If we were found to be
legally responsible in any way for such failure we could be
subject to injunctions, penalties or fines which could harm our
business. Furthermore, any such investigation or lawsuit could
cause us to expend significant resources and divert the
attention of our management team, regardless of the outcome, and
thus could harm our business.
24
In recent years, the group purchasing industry and some of its
largest purchasing customers have been reviewed by the Senate
Judiciary Subcommittee on Antitrust, Competition Policy and
Consumer Rights for possible conflict of interest and restraint
of trade violations. As a response to the Senate Subcommittee
inquiry, our company joined other GPOs to develop a set of
voluntary principles of ethics and business conduct designed to
address the Senates concerns regarding anti-competitive
practices. The voluntary code was presented to the Senate
Subcommittee in March 2006. In addition, we maintain our own
Standards of Business Conduct that provide guidelines for
conducting our business practices in a manner that is consistent
with antitrust and restraint of trade laws and regulations.
Although there has not been any further inquiry by the Senate
Subcommittee since March 2006, the Senate, the Department of
Justice, the Federal Trade Commission or other state or federal
governing entity could at any time develop new rules,
regulations or laws governing the group purchasing industry that
could adversely impact our ability to negotiate pricing
arrangements with vendors, increase reporting and documentation
requirements or otherwise require us to modify our pricing
arrangements in a manner that negatively impacts our business
and financial results. On August 11, 2009, we, and several
other GPOs, received a letter from Senators Charles Grassley,
Herb Kohl and Bill Nelson requesting information concerning the
different relationships between and among our GPO and its
clients, distributors, manufacturers and other vendors and
suppliers, and requesting certain information about the services
the GPO performs and the payments it receives. On
September 25, 2009, we and several other GPOs received a
request for information from the Government Accountability
Office (GAO), also concerning our GPOs services and
relationships with our clients. Subsequently, we, and other
GPOs, received
follow-up
requests for additional information. We have fully complied with
all of these requests.
If we
fail to comply with federal and state laws governing submission
of false or fraudulent claims to government healthcare programs
and financial relationships among healthcare providers, we may
be subject to civil and criminal penalties or loss of
eligibility to participate in government healthcare
programs.
We are subject to federal and state laws and regulations
designed to protect patients, governmental healthcare programs,
and private health plans from fraudulent and abusive activities.
These laws include anti-kickback restrictions and laws
prohibiting the submission of false or fraudulent claims. These
laws are complex and their application to our specific products,
services and relationships may not be clear and may be applied
to our business in ways that we do not anticipate. Federal and
state regulatory and law enforcement authorities have recently
increased enforcement activities with respect to Medicare and
Medicaid fraud and abuse regulations and other reimbursement
laws and rules. From time to time we and others in the
healthcare industry have received inquiries or subpoenas to
produce documents in connection with such activities. We could
be required to expend significant time and resources to comply
with these requests, and the attention of our management team
could be diverted to these efforts. Furthermore, if we are found
to be in violation of any federal or state fraud and abuse laws,
we could be subject to civil and criminal penalties, and we
could be excluded from participating in federal and state
healthcare programs such as Medicare and Medicaid. The
occurrence of any of these events could significantly harm our
business and financial condition.
Provisions in Title XI of the Social Security Act, commonly
referred to as the federal Anti-Kickback Statute, prohibit the
knowing and willful offer, payment, solicitation or receipt of
remuneration, directly or indirectly, in return for the referral
of patients or arranging for the referral of patients, or in
return for the recommendation, arrangement, purchase, lease or
order of items or services that are covered, in whole or in
part, by a federal healthcare program such as Medicare or
Medicaid. The definition of remuneration has been
broadly interpreted to include anything of value such as gifts,
discounts, rebates, waiver of payments or providing anything at
less than its fair market value. Many states have adopted
similar prohibitions against kickbacks and other practices that
are intended to induce referrals which are applicable to all
patients regardless of whether the patient is covered under a
governmental health program or private health plan. We attempt
to scrutinize our business relationships and activities to
comply with the federal anti-kickback statute and similar laws;
and we attempt to structure our sales and group purchasing
arrangements in a manner that is consistent with the
requirements of applicable safe harbors to these laws. We cannot
assure you, however, that our arrangements will be protected by
such safe harbors or that such increased enforcement activities
will not directly or indirectly have an adverse effect on our
business financial condition or results of operations. Any
25
determination by a state or federal agency that any of our
activities or those of our vendors or customers violate any of
these laws could subject us to civil or criminal penalties,
could require us to change or terminate some portions of or
operations or business, could disqualify us from providing
services to healthcare providers doing business with government
programs and, thus, could have an adverse effect on our business.
Our business, particularly our Revenue Cycle Management segment,
is also subject to numerous federal and state laws that forbid
the submission or causing the submission of false or
fraudulent information or the failure to disclose information in
connection with the submission and payment of claims for
reimbursement to Medicare, Medicaid, federal healthcare programs
or private health plans. These laws and regulations may change
rapidly, and it is frequently unclear how they apply to our
business. Errors created by our products or consulting services
that relate to entry, formatting, preparation or transmission of
claim or cost report information may be determined or alleged to
be in violation of these laws and regulations. Any failure of
our products or services to comply with these laws and
regulations could result in substantial civil or criminal
liability, could adversely affect demand for our services, could
invalidate all or portions of some of our customer contracts,
could require us to change or terminate some portions of our
business, could require us to refund portions of our services
fees, could cause us to be disqualified from serving customers
doing business with government payors and could have an adverse
effect on our business.
Any
material changes in the political, economic or regulatory
healthcare environment that affect the purchasing practices and
operations of healthcare organizations, or lead to consolidation
in the healthcare industry, could require us to modify our
services or reduce the funds available to purchase our products
and services.
Our business, financial condition and results of operations
depend upon conditions affecting the healthcare industry
generally and hospitals and health systems particularly. Our
ability to grow will depend upon the economic environment of the
healthcare industry generally as well as our ability to increase
the number of programs and services that we sell to our
customers. The healthcare industry is highly regulated and is
subject to changing political, economic and regulatory
influences. Factors such as changes in reimbursement policies
for healthcare expenses, consolidation in the healthcare
industry, regulation, litigation, and general economic
conditions affect the purchasing practices, operation and,
ultimately, the operating funds of healthcare organizations. In
particular, changes in regulations affecting the healthcare
industry, such as any increased regulation by governmental
agencies of the purchase and sale of medical products, or
restrictions on permissible discounts and other financial
arrangements, could require us to make unplanned modifications
of our products and services, or result in delays or
cancellations of orders or reduce funds and demand for our
products and services.
Because of current macro-economic conditions including continued
disruptions in the broader capital markets, the lingering effect
of the weakened economy coupled with small reserves and thin
operating margins, cash flow and access to credit can be
problematic for many healthcare delivery organizations. While we
believe we are well positioned through our product and service
offerings to assist hospitals and health systems who are dealing
with increasing and intense financial pressures, it is unclear
what long-term effects these conditions will have on the
healthcare industry and in turn on our business, financial
condition and results of operations.
In addition, in February 2009 the United States Congress enacted
the HITECH Act, as part of ARRA. The HITECH Act requires that
hospitals and health systems make investments in their clinical
information systems, including the adoption of electronic
medical records. While we believe that increased emphasis on
electronic medical records by hospitals and health systems will
also drive demand for SaaS-based tools, such as ours, to help
rationalize and standardize patient and clinical data for
efficient and accurate use, we cannot be certain that such
demand will materialize nor can we be certain that we will be
benefit from it.
Further, federal and state legislatures have periodically
considered programs to reform or amend the U.S. healthcare
system, including those recently initiated to counter the
effects of the current economic turmoil, as well as, the
healthcare reform legislation currently under consideration by
the U.S. Congress. These programs and plans may contain
proposals to increase governmental involvement in healthcare,
create a
26
universal healthcare system, lower reimbursement rates or
otherwise significantly change the environment in which
healthcare industry providers currently operate. We do not know
what effect, if any, such proposals may have on our business.
Our
customers are highly dependent on payments from third-party
healthcare payors, including Medicare, Medicaid and other
government-sponsored programs, and reductions or changes in
third-party reimbursement could adversely affect our customers
and consequently our business.
Our customers derive a substantial portion of their revenue from
third-party private and governmental payors including Medicare,
Medicaid and other government sponsored programs. Our sales and
profitability depend, in part, on the extent to which coverage
of and reimbursement for the products our customers purchase or
otherwise obtain through us is available from governmental
health programs, private health insurers, managed care plans and
other third-party payors. These third-party payors exercise
significant control over and increasingly use their enhanced
bargaining power to secure discounted reimbursement rates and
impose other requirements that may negatively impact our
customers ability to obtain adequate reimbursement for
products and services they purchase or otherwise obtain through
us as a group purchasing member.
If third-party payors do not approve products for reimbursement
or fail to reimburse for them adequately, our customers may
suffer adverse financial consequences which, in turn, may reduce
the demand for and ability to purchase our products or services.
In addition CMS, which administers the Medicare and federal
aspects of state Medicaid programs, has issued complex rules
requiring pharmaceutical manufacturers to calculate and report
drug pricing for multiple purposes, including the limiting of
reimbursement for certain drugs. These rules generally exclude
from the pricing calculation administrative fees paid by drug
manufacturers to GPOs such as the company if the fees meet
CMS bona fide service fee definition. There
can be no assurance that CMS will continue to allow exclusion of
GPO administrative fees from the pricing calculation, or that
other efforts by payors to limit reimbursement for certain drugs
will not have an adverse impact on our business. Further, we do
not know what effect, if any, the healthcare reform legislation
currently under consideration by the U.S. Congress will
have on third-party reimbursement.
Federal
and state privacy and security laws may increase the costs of
operation and expose us to civil and criminal
sanctions.
We must comply with extensive federal and state requirements
regarding the use, retention and security of patient healthcare
information. The Health Insurance Portability and Accountability
Act of 1996, as amended, and the regulations that have been
issued under it, which we refer to collectively as HIPAA,
contain substantial restrictions and requirements with respect
to the use and disclosure of individuals protected health
information. These restrictions and requirements are set forth
in the Privacy Rule and Security Rule portions of HIPAA. The
HIPAA Privacy Rule prohibits a covered entity from using or
disclosing an individuals protected health information
unless the use or disclosure is authorized by the individual or
is specifically required or permitted under the Privacy Rule.
The Privacy Rule imposes a complex system of requirements on
covered entities for complying with this basic standard. Under
the HIPAA Security Rule, covered entities must establish
administrative, physical and technical safeguards to protect the
confidentiality, integrity and availability of electronic
protected health information maintained or transmitted by them
or by others on their behalf.
The HIPAA Privacy and Security Rules have historically applied
directly to covered entities, such as our customers who are
healthcare providers that engage in HIPAA-defined standard
electronic transactions. Because some of our customers disclose
protected health information to us so that we may use that
information to provide certain consulting or other services to
those customers, we are a business associate of
those customers. In order to provide customers with services
that involve the use or disclosure of protected health
information, the HIPAA Privacy and Security Rules require us to
enter into business associate agreements with our customers.
Such agreements must, among other things, provide adequate
written assurances:
|
|
|
|
|
as to how we will use and disclose the protected health
information;
|
27
|
|
|
|
|
that we will implement reasonable administrative, physical and
technical safeguards to protect such information from misuse;
|
|
|
|
that we will enter into similar agreements with our agents and
subcontractors that have access to the information;
|
|
|
|
that we will report security incidents and other inappropriate
uses or disclosures of the information; and
|
|
|
|
that we will assist the covered entity with certain of its
duties under the Privacy Rule.
|
With the enactment of the HITECH Act, the privacy and security
requirements of HIPAA have been modified and expanded. The
HITECH Act applies certain of the HIPAA privacy and security
requirements directly to business associates of covered
entities. In other words, we must now directly comply with
certain aspects of the Privacy and Security Rules, and are also
subject to enforcement for a violation of HIPAA standards.
Significantly, the HITECH Act also establishes new mandatory
federal requirements for both covered entities and business
associates regarding notification of breaches of security
involving protected health information.
Any failure or perception of failure of our products or services
to meet HIPAA standards and related regulatory requirements
could expose us to certain notification, penalty
and/or
enforcement risks and could adversely affect demand for our
products and services, and force us to expend significant
capital, research and development and other resources to modify
our products or services to address the privacy and security
requirements of our customers and HIPAA.
In addition to our obligations under HIPAA, most states have
enacted patient confidentiality laws that protect against the
disclosure of confidential medical information, and many states
have adopted or are considering adopting further legislation in
this area, including privacy safeguards, security standards, and
data security breach notification requirements. These state
laws, if more stringent than HIPAA requirements, are not
preempted by the federal requirements, and we are required to
comply with them as well.
We are unable to predict what changes to HIPAA or other federal
or state laws or regulations might be made in the future or how
those changes could affect our business or the associated costs
of compliance. For example, the federal Office of the National
Coordinator for Health Information Technology, or ONCHIT, is
coordinating the development of national standards for creating
an interoperable health information technology infrastructure
based on the widespread adoption of electronic health records in
the healthcare sector. We are unable to predict what, if any,
impact the creation of such standards will have on our products,
services or compliance costs. Failure by us to comply with any
of the federal and state standards regarding patient privacy,
identity theft prevention and detection, and data security may
subject us to penalties, including civil monetary penalties and
in some circumstances, criminal penalties. In addition, such
failure may injure our reputation and adversely affect our
ability to retain customers and attract new customers.
If our
customers who operate as not-for profit entities lose their
tax-exempt status, those customers would suffer significant
adverse tax consequences which, in turn, could adversely impact
their ability to purchase products or services from
us.
There has been a trend across the United States among state tax
authorities to challenge the tax exempt status of hospitals and
other healthcare facilities claiming such status on the basis
that they are operating as charitable
and/or
religious organizations. The outcome of these cases has been
mixed with some facilities retaining their tax-exempt status
while others have been denied the ability to continue operating
under as not-for profit, tax-exempt entities under state law. In
addition, many states have removed sales tax exemptions
previously available to
not-for-profit
entities, and both the IRS and the United States Congress are
investigating the practices of non-for profit hospitals. Those
facilities denied tax exemptions could be subject to the
imposition of tax penalties and assessments which could have a
material adverse impact on their cash flow, financial strength
and possibly ongoing viability. If the tax exempt status of any
of our customers is revoked or compromised by new legislation or
interpretation of existing legislation, that customers
financial health could be adversely affected, which could
adversely impact our sales and revenue.
28
Risks
Related to Ownership in Our Common Stock
The
market price of our common stock may be volatile, and your
investment in our common stock could suffer a decline in
value.
There has been significant volatility in the market price and
trading volume of equity securities, which is often unrelated or
disproportionate to the financial performance of the companies
issuing the securities. These broad market fluctuations may
negatively affect the market price of our common stock. The
market price of our common stock could fluctuate significantly
in response to the factors described above and other factors,
many of which are beyond our control, including:
|
|
|
|
|
actual or anticipated changes in our or our competitors
growth rates;
|
|
|
|
the publics response to our press releases or other public
announcements, including our filings with the SEC and
announcements of technological innovations or new products or
services by us or by our competitors;
|
|
|
|
actions of our historical equity investors, including sales of
common stock by our directors and executive officers;
|
|
|
|
any major change in our senior management team;
|
|
|
|
legal and regulatory factors unrelated to our performance;
|
|
|
|
general economic, industry and market conditions and those
conditions specific to the healthcare industry; and
|
|
|
|
changes in stock market analyst recommendations regarding our
common stock, other comparable companies or our industry
generally.
|
You may not be able to resell your shares at or above the market
price you paid to purchase your shares due to fluctuations in
the market price of our common stock caused by changes in the
market as a whole or our operating performance or prospects.
A
limited number of stockholders have the ability to influence the
outcome of director elections and other matters requiring
stockholder approval.
Those affiliated with the Company beneficially own a substantial
amount of our outstanding common stock. The interests of our
executive officers, directors and their affiliated entities may
differ from the interests of the other stockholders. These
stockholders, if they act together, could exert substantial
influence over matters requiring approval by our stockholders,
including the election of directors, the amendment of our
certificate of incorporation and by-laws and the approval of
mergers or other business combination transactions. These
transactions might include proxy contests, tender offers,
mergers or other purchases of common stock that could give you
the opportunity to realize a premium over the then-prevailing
market price for shares of our common stock. As to these matters
and in similar situations, you may disagree with these
stockholders as to whether the action opposed or supported by
them is in the best interest of our stockholders. This
concentration of ownership may discourage, delay or prevent a
change in control of our company, which could deprive our
stockholders of an opportunity to receive a premium for their
stock as part of a sale of our company and may negatively affect
the market price of our common stock.
Provisions
in our certificate of incorporation and by-laws or Delaware law
might discourage, delay or prevent a change of control of our
company or changes in our management and, therefore, depress the
trading price of our common stock.
Provisions of our certificate of incorporation and by-laws and
Delaware law may discourage, delay or prevent a merger,
acquisition or other change in control that stockholders may
consider favorable, including transactions in which you might
otherwise receive a premium for your shares of our common stock.
These provisions may also prevent or frustrate attempts by our
stockholders to replace or remove our management.
29
For example, our amended and restated certificate of
incorporation provides for a staggered board of directors,
whereby directors serve for three-year terms, with approximately
a third of the directors coming up for re-election each year.
Having a staggered board could make it more difficult for a
third party to acquire us through a proxy contest. Other
provisions that may discourage, delay or prevent a change in
control or changes in management include:
|
|
|
|
|
limitations on the removal of directors;
|
|
|
|
advance notice requirements for stockholder proposals and
nominations;
|
|
|
|
the inability of stockholders to act by written consent or to
call special meetings; and
|
|
|
|
the ability of our board of directors to designate the terms of,
including voting, dividend and other special rights, and issue
new series of preferred stock without stockholder approval.
|
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly-held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns, or within the last three years has owned, 15%
of our voting stock, for a period of three years after the date
of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner.
A change of control may also impact employee benefit
arrangements, which could make an acquisition more costly and
could prevent it from going forward. For example, our option
plans allow for all or a portion of the options granted under
these plans to vest upon a change of control. Finally, upon any
change in control, the lenders under our senior secured credit
facility would have the right to require us to repay all of our
outstanding obligations.
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of our company, thereby reducing
the likelihood that you could receive a premium for your common
stock in an acquisition.
We do
not currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We do not intend to declare or pay any cash dividends on our
common stock for the foreseeable future. We currently intend to
invest our future earnings, if any, to fund our growth.
Therefore, you are not likely to receive any dividends on your
common stock for the foreseeable future and the success of an
investment in shares of our common stock will depend upon any
future appreciation in its value. There is no guarantee that
shares of our common stock will appreciate in value or even
maintain the price at which our stockholders have purchased
their shares.
|
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
Applicable
30
Facilities
and Property
We do not own any real property and lease our existing
facilities. Our principal executive offices are located in
leased office space in Alpharetta, Georgia. Our facilities
accommodate product development, marketing and sales,
information technology, administration, training, graphic
services and operations personnel. As of December 31, 2009,
we leased office space to support our operations in the
following locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
|
|
Floor Area
|
|
Function or
|
|
|
|
|
Location
|
|
(Sq. Feet)
|
|
Segment
|
|
End of Term
|
|
Renewal Option
|
|
Alpharetta, Georgia
|
|
21,914
|
|
|
Corporate
|
|
|
|
March 31, 2015
|
|
|
|
Period of five additional years
|
|
Alpharetta, Georgia
|
|
89,424
|
|
|
RCM
|
|
|
|
March 31, 2015
|
|
|
|
Period of five additional years
|
|
Atlanta, Georgia
|
|
7,712
|
|
|
SM
|
|
|
|
December 31, 2012
|
|
|
|
None
|
|
Bellevue, Washington
|
|
5,535
|
|
|
RCM
|
|
|
|
June 30, 2013
|
|
|
|
Period of five additional years
|
|
Billerica, Massachusetts
|
|
13,009
|
|
|
RCM
|
|
|
|
June 30, 2010
|
|
|
|
None
|
|
Bridgeton, Missouri
|
|
26,341
|
|
|
SM
|
|
|
|
June 30, 2013
|
|
|
|
Two periods of five additional years
|
|
Cape Girardeau, Missouri(1)
|
|
58,664
|
|
|
SM
|
|
|
|
July 31, 2017
|
|
|
|
Period of three additional years
|
|
Centennial, Colorado
|
|
13,653
|
|
|
SM
|
|
|
|
February 29, 2016
|
|
|
|
Two periods of three additional years
|
|
Dallas, Texas
|
|
55,420
|
|
|
RCM
|
|
|
|
February 28, 2011
|
|
|
|
Two periods of five additional years
|
|
El Segundo, California
|
|
31,536
|
|
|
RCM / SM
|
|
|
|
January 18, 2018
|
|
|
|
Period of five additional years
|
|
Franklin, Tennessee
|
|
7,081
|
|
|
SM
|
|
|
|
July 1, 2011
|
|
|
|
Period of three additional years
|
|
Mahwah, New Jersey
|
|
26,000
|
|
|
RCM
|
|
|
|
June 30, 2010
|
|
|
|
Period of five additional years
|
|
Nashville, Tennessee
|
|
17,794
|
|
|
RCM
|
|
|
|
July 31, 2011
|
|
|
|
Two periods of five additional years
|
|
Plano, Texas
|
|
49,606
|
|
|
RCM
|
|
|
|
December 31, 2021
|
|
|
|
Two periods of five additional years
|
|
Raleigh, North Carolina
|
|
3,115
|
|
|
RCM
|
|
|
|
April 30, 2011
|
|
|
|
Period of three additional years
|
|
Richardson, Texas
|
|
24,959
|
|
|
RCM
|
|
|
|
October 31, 2011
|
|
|
|
Period of five additional years
|
|
Richardson, Texas
|
|
3,588
|
|
|
RCM
|
|
|
|
May 31, 2013
|
|
|
|
Period of three additional years
|
|
Saddle River, New Jersey
|
|
19,361
|
|
|
RCM
|
|
|
|
January 31, 2016
|
|
|
|
None
|
|
Southborough, Massachusetts
|
|
4,342
|
|
|
RCM
|
|
|
|
March 31, 2014
|
|
|
|
Period of five additional years
|
|
Yakima, Washington
|
|
10,000
|
|
|
RCM
|
|
|
|
October 31, 2010
|
|
|
|
Period of two additional years
|
|
|
|
|
(1) |
|
See Finance Obligation in Note 6 to our
Consolidated Financial Statements for a discussion of the
capital lease treatment of our Cape Girardeau facility, lease
term ending July 31, 2017. |
In June 2009, we entered into a new lease agreement acquiring
100,528 square feet of office space in Plano, Texas. The
lease agreement contains two phases of varying amounts of office
space to be occupied commencing at different times during the
term of the lease. Phase One commenced on September 1, 2009
and consisted of 49,606 square feet. Phase Two will
commence on or around March 1, 2011 and will consist of
50,922 square feet. The term of the lease is twelve years
and four months and expires on December 31, 2021. The lease
contains an option to extend the lease term for two additional
five year periods after the initial expiration date. The total
rental commitment under the lease agreement is approximately
$22.0 million and is included in the table above.
In August 2009, we amended the lease for our office in
Nashville, Tennessee acquiring 6,832 square feet of
additional office space. The lease amendment is effective on
November 15, 2009 and the term of the lease remained
unchanged.
As of December 31, 2009, we did not have any other
off-balance sheet arrangements that have or are reasonably
likely to have a current or future significant effect on our
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
31
In January 2010, we amended our Centennial, Colorado lease and
acquired 4,281 square feet of additional office space. The
lease amendment will be effective March 1, 2010 and the
term of the lease remained unchanged.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS.
|
Legal
Proceedings
From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. Other than the
Med-Data dispute noted below, we are not presently involved in
any other legal proceedings, the outcome of which, if determined
adversely to us, would have a material adverse affect on our
business, operating results or financial condition.
In August 2007, the former owner of Med-Data Management, Inc.
(or Med-Data) disputed our earn-out calculation made
under the Med-Data Asset Purchase Agreement and alleged that we
failed to fulfill our obligations with respect to the earn-out.
In November 2007, the former owner filed a complaint alleging
that we failed to act in good faith with respect to the
operation of Med-Data subsequent to the acquisition which
affected the earn-out calculation. The Company refutes these
allegations and is vigorously defending itself against these
allegations. On March 21, 2008 we filed an answer, denying
the plaintiffs allegations and also filed a counterclaim,
alleging that the plaintiffs fraudulently induced us to enter
into the purchase agreement by intentionally concealing the
status of their relationship with their largest customer.
Discovery has been completed and briefing has been completed on
MedAssets and plaintiffs dispositive motions, but we
currently cannot estimate any probable outcome and have not
recorded a loss contingency in our Consolidated Statement of
Operations. The maximum earn-out payable under the Asset
Purchase Agreement is $4.0 million. In addition, the
plaintiffs claim that Ms. Hodges, one of the plaintiffs, is
entitled to the accelerated vesting of options to purchase
140,000 shares of our common stock that she received in
connection with her employment agreement with the Company.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
None.
PART II.
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Our common stock is publicly traded on the Nasdaq Global Select
Market under the ticker symbol MDAS. The following
chart sets forth, for the periods indicated, the high and low
sales prices of our common stock on the Nasdaq Global Select
Market.
Price
Range of Common Stock
|
|
|
|
|
|
|
|
|
|
|
Price Range
|
|
|
|
of Common Stock
|
|
Period
|
|
High
|
|
|
Low
|
|
|
Fourth Quarter 2009
|
|
$
|
24.74
|
|
|
$
|
18.20
|
|
Third Quarter 2009
|
|
$
|
23.81
|
|
|
$
|
17.22
|
|
Second Quarter 2009
|
|
$
|
19.73
|
|
|
$
|
13.73
|
|
First Quarter 2009
|
|
$
|
16.00
|
|
|
$
|
11.05
|
|
Fourth Quarter 2008
|
|
$
|
16.30
|
|
|
$
|
10.70
|
|
Third Quarter 2008
|
|
$
|
18.52
|
|
|
$
|
15.00
|
|
Second Quarter 2008
|
|
$
|
18.92
|
|
|
$
|
12.99
|
|
First Quarter 2008
|
|
$
|
23.08
|
|
|
$
|
14.70
|
|
At February 18, 2010 the last reported sale price for our
common stock was $20.26 per share. As of February 18, 2010
there were 193 holders of record of our common stock and
approximately 7,200 beneficial holders.
32
Dividend
Policy
We did not pay any dividends during the fiscal years ended
December 31, 2009 and 2008, respectively. We currently
anticipate that we will retain all of our future earnings, if
any, for use in the expansion and operation of our business and
do not anticipate paying any cash dividends for the foreseeable
future. The payment of dividends, if any, is subject to the
discretion of our board of directors and will depend on many
factors, including our results of operations, financial
condition and capital requirements, earnings, general business
conditions, restrictions imposed by our current and any future
financing arrangements, legal restrictions on the payment of
dividends and other factors our board of directors deems
relevant. Our current credit facility includes restrictions on
our ability to pay dividends.
Equity
Compensation Plan Information
The information regarding securities authorized for issuance
under the Companys equity compensation plans is set forth
below, as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities to be
|
|
|
|
|
|
Number of Securities
|
|
|
|
Issued Upon
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Exercise of
|
|
|
|
|
|
Future Issuance
|
|
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
Options,
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Warrants
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
8,977,945
|
(1)
|
|
$
|
11.58
|
|
|
|
1,836,540
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
|
8,977,945
|
|
|
$
|
11.58
|
|
|
|
1,836,540
|
|
|
|
|
(1) |
|
This amount includes 6,244,181 common stock options, 2,696,261
stock-settled stock appreciation rights (or SSARs)
and 37,503 common stock warrants issued under our Long Term
Performance Incentive Plan (effected in 2008), 2004 Long Term
Equity Incentive Plan, and 1999 Stock Incentive Plan. |
|
(2) |
|
All securities remaining available for future issuance are
issuable under our Long Term Performance Incentive Plan. See
Note 10 to our Consolidated Financial Statements for
discussion of the equity plans. |
|
(3) |
|
The above number of securities to be issued upon exercise of
outstanding options, warrants and rights does not include
200,675 options issued in connection with our acquisition of OSI
Systems, Inc. in June 2003. These options have a weighted
average exercise price of $1.67. |
Sales of
Unregistered Securities
Set forth below is information regarding shares of common stock
and preferred stock issued, and options and warrants granted, by
us in the period covered by this Annual Report on
Form 10-K
that were not registered under the Securities Act. Also included
is the consideration, if any, received by us for such shares,
options and warrants and information relating to the section of
the Securities Act, or rule of the SEC, under which exemption
from registration was claimed. All then outstanding shares of
preferred stock, including those shares described below, were
immediately converted to common stock upon the closing of our
initial public offering in December 2007. We had no preferred
stock outstanding as of December 31, 2009, 2008 or 2007.
Common
stock
During the fiscal years ended December 31, 2009 and 2008,
we issued approximately 227,000 and 84,000, respectively, of
unregistered shares of our common stock in connection with stock
option exercises related to options issued in connection with
our acquisition of OSI Systems, Inc. in June 2003. We received
approximately $0.3 million and $0.1 million in
consideration in connection with these stock option exercises
for the fiscal years ended December 31, 2009 and 2008,
respectively.
33
In June 2008, we issued approximately 8,850,000 unregistered
shares of our common stock to holders of Accuro securities as
part of the purchase price paid for the Accuro acquisition,
pursuant to the terms of the merger agreement.
Common
Stock Warrants
In June 2008, we issued approximately 190,000 unregistered
shares of our common stock in connection with the exercise of a
warrant for shares of our common stock. Approximately
55,000 shares issuable under the terms of the warrant were
surrendered as consideration for the cashless exercise of the
warrant.
In May 2007, we sold warrants to purchase 8,000 shares of
common stock to Capitol Health Group, a healthcare industry
lobbying firm, for professional services. The warrants had an
exercise price of $10.44 per share for an aggregate price of
$0.1 million. The warrants were exercised on June 30,
2007. In fiscal year ended 2007, warrants to purchase an
aggregate of 43,692 shares of common stock were exercised,
at exercise prices ranging from $0.01 to $10.44 per share for an
aggregate exercise price of $0.1 million.
Preferred
Stock
All then outstanding shares of preferred stock, including those
shares described below, were immediately converted to common
stock upon the closing of our initial public offering in
December 2007. We had no preferred stock outstanding as of
December 31, 2008 or 2007.
In May 2007, we sold an aggregate of 1,712,076 shares of
our Series I convertible preferred stock in connection with
our acquisition of XactiMed.
In July 2007, we sold an aggregate of 625,920 shares of our
Series J convertible preferred stock in connection with our
acquisition of the outstanding shares of MD-X, inclusive of
73,637 shares issued to an officer of MD-X for
$1.0 million.
The sales of the above securities were deemed to be exempt from
registration in reliance on Section 4(2) of the Securities
Act or Regulation D promulgated thereunder as transactions
by an issuer not involving any public offering. All recipients
were accredited investors, as those terms are defined in the
Securities Act and the regulations promulgated thereunder. The
recipients of securities in each such transaction represented
their intention to acquire the securities for investment only
and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the
share certificates and other instruments issued in such
transactions. All recipients either received adequate
information about us or had access, through employment or other
relationships, to such information.
Stock
Options and Restricted Stock Awards
During fiscal year ended December 31, 2007, we granted
options to purchase an aggregate of 2,705,521 shares of
common stock to employees, consultants and directors under our
2004 Long-Term Performance Incentive Plan at exercise prices
ranging from $9.29 to $16.00 per share for an aggregate purchase
price of $27,938,352.
During fiscal year ended December 31, 2007, we issued an
aggregate of 859,187 shares of common stock to employees,
consultants and directors pursuant to the exercise of stock
options issued pursuant to the exercise of stock options under
our 1999 Stock Incentive Plan and 2004 Long-Term Incentive Plan
at exercise prices ranging from $0.63 to $10.44 per share for an
aggregate consideration of $3.4 million.
During fiscal year ended December 31, 2007,
8,000 shares of restricted common stock were granted to
members of our advisory board.
The sales of the above securities were deemed to be exempt from
registration in reliance in Rule 701 promulgated under
Section 3(b) under the Securities Act as transactions
pursuant to a compensatory benefit plan or a written contract
relating to compensation.
34
Stock
Price Performance Graph
The following graph compares the cumulative total stockholder
return on the Companys common stock from December 13,
2007 to December 31, 2009 with the cumulative total return
of (i) the companies traded on the NASDAQ Global Select
Market (the NASDAQ Composite Index) and
(ii) the NASDAQ Computer & Data Processing Index.
COMPARISON
OF 2 YEAR CUMULATIVE TOTAL RETURN*
Among MedAssets Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
|
|
|
* |
|
Assumes $100 invested in the Companys common stock on
December 13, 2007 and in each index on November 30,
2007, and the reinvestment of all dividends. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/13/2007
|
|
|
12/07
|
|
|
12/08
|
|
|
3/09
|
|
|
6/09
|
|
|
9/09
|
|
|
12/09
|
MedAssets Inc.
|
|
|
|
100.00
|
|
|
|
|
116.78
|
|
|
|
|
71.22
|
|
|
|
|
69.51
|
|
|
|
|
94.88
|
|
|
|
|
110.10
|
|
|
|
|
103.46
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
99.71
|
|
|
|
|
58.93
|
|
|
|
|
57.11
|
|
|
|
|
68.59
|
|
|
|
|
79.42
|
|
|
|
|
85.12
|
|
NASDAQ Computer & Data Processing
|
|
|
|
100.00
|
|
|
|
|
103.08
|
|
|
|
|
58.90
|
|
|
|
|
60.18
|
|
|
|
|
74.14
|
|
|
|
|
82.69
|
|
|
|
|
94.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
Our historical financial data as of and for the fiscal years
ended December 31, 2009, 2008 and 2007 have been derived
from the audited consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K,
and such data as of and for the fiscal year ended
December 31, 2006 and 2005 has been derived from audited
consolidated financial statements not included in this Annual
Report on
Form 10-K.
Historical results of operations are not necessarily indicative
of results of operations or financial condition in the future or
to be expected in the future. Refer to Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations for a summary of managements
primary metrics to measure the consolidated financial
performance of our business, which includes non-GAAP gross fees,
non-GAAP revenue share obligation, non-GAAP adjusted EBITDA,
non-GAAP adjusted EBITDA margin and non-GAAP diluted cash EPS.
The summary historical consolidated financial data and notes
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the notes to those financial statements included elsewhere in
this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008(1)
|
|
|
2007(2)
|
|
|
2006(3)
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
$
|
205,918
|
|
|
$
|
151,717
|
|
|
$
|
80,512
|
|
|
$
|
48,834
|
|
|
$
|
20,650
|
|
Spend Management
|
|
|
135,363
|
|
|
|
127,939
|
|
|
|
108,006
|
|
|
|
97,401
|
|
|
|
77,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
341,281
|
|
|
|
279,656
|
|
|
|
188,518
|
|
|
|
146,235
|
|
|
|
98,640
|
|
Operating expenses:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (inclusive of certain depreciation and
amortization expense; Note 2)
|
|
|
74,651
|
|
|
|
51,548
|
|
|
|
27,983
|
|
|
|
15,601
|
|
|
|
7,491
|
|
Product development expenses
|
|
|
18,994
|
|
|
|
16,393
|
|
|
|
7,785
|
|
|
|
7,163
|
|
|
|
3,078
|
|
Selling and marketing expenses
|
|
|
45,282
|
|
|
|
43,205
|
|
|
|
35,748
|
|
|
|
32,205
|
|
|
|
23,740
|
|
General and administrative expenses
|
|
|
110,661
|
|
|
|
91,481
|
|
|
|
64,817
|
|
|
|
55,363
|
|
|
|
39,146
|
|
Depreciation
|
|
|
13,211
|
|
|
|
9,793
|
|
|
|
7,115
|
|
|
|
4,822
|
|
|
|
3,257
|
|
Amortization of intangibles
|
|
|
28,012
|
|
|
|
23,442
|
|
|
|
15,778
|
|
|
|
11,738
|
|
|
|
7,780
|
|
Impairment of property and equipment, intangibles and in process
research and development (5)
|
|
|
|
|
|
|
2,272
|
|
|
|
1,204
|
|
|
|
4,522
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
290,811
|
|
|
|
238,134
|
|
|
|
160,430
|
|
|
|
131,414
|
|
|
|
84,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
50,470
|
|
|
|
41,522
|
|
|
|
28,088
|
|
|
|
14,821
|
|
|
|
13,780
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(18,114
|
)
|
|
|
(21,271
|
)
|
|
|
(20,391
|
)
|
|
|
(10,921
|
)
|
|
|
(6,995
|
)
|
Other income (expense)
|
|
|
417
|
|
|
|
(1,921
|
)
|
|
|
3,115
|
|
|
|
(3,917
|
)
|
|
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
32,773
|
|
|
|
18,330
|
|
|
|
10,812
|
|
|
|
(17
|
)
|
|
|
5,948
|
|
Income tax expense (benefit)
|
|
|
12,826
|
|
|
|
7,489
|
|
|
|
4,516
|
|
|
|
(8,860
|
)
|
|
|
(10,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
19,947
|
|
|
|
10,841
|
|
|
|
6,296
|
|
|
|
8,843
|
|
|
|
16,465
|
|
Preferred stock dividends and accretion
|
|
|
|
|
|
|
|
|
|
|
(16,094
|
)
|
|
|
(14,713
|
)
|
|
|
(14,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
19,947
|
|
|
$
|
10,841
|
|
|
$
|
(9,798
|
)
|
|
$
|
(5,870
|
)
|
|
$
|
2,155
|
|
Income (loss) per share basic
|
|
$
|
0.36
|
|
|
$
|
0.22
|
|
|
$
|
(0.75
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
0.10
|
|
Income (loss) per share diluted
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
(0.75
|
)
|
|
$
|
(0.67
|
)
|
|
$
|
0.08
|
|
Shares used in per share calculation basic
|
|
|
54,841
|
|
|
|
49,843
|
|
|
|
12,984
|
|
|
|
8,752
|
|
|
|
22,064
|
|
Shares used in per share calculation diluted(6)
|
|
|
57,865
|
|
|
|
52,314
|
|
|
|
12,984
|
|
|
|
8,752
|
|
|
|
25,938
|
|
|
|
|
(1)
|
|
Amounts include the results of
operations of Accuro (as part of the Revenue Cycle Management
segment) from June 2, 2008, the date of acquisition.
|
(2)
|
|
Amounts include the results of
operations of XactiMed (as part of the Revenue Cycle Management
segment) from May 18, 2007 and MD-X (as part of the Revenue
Cycle Management segment) from July 2, 2007, the respective
dates of acquisition.
|
36
|
|
|
(3)
|
|
Amounts include the results of
operations of Avega Health Systems Inc., or Avega, (as part of
the Revenue Cycle Management segment) from January 1, 2006,
the date of acquisition.
|
|
(4)
|
|
We adopted generally accepted
accounting principles relating to stock compensation, on
January 1, 2006. Total share-based compensation expense for
each period presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
3,063
|
|
|
$
|
1,983
|
|
|
$
|
877
|
|
|
$
|
834
|
|
|
$
|
|
|
Product development
|
|
|
866
|
|
|
|
721
|
|
|
|
350
|
|
|
|
517
|
|
|
|
|
|
Selling and marketing
|
|
|
2,920
|
|
|
|
1,894
|
|
|
|
1,050
|
|
|
|
597
|
|
|
|
|
|
General and administrative
|
|
|
9,803
|
|
|
|
3,952
|
|
|
|
3,334
|
|
|
|
1,309
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
16,652
|
|
|
$
|
8,550
|
|
|
$
|
5,611
|
|
|
$
|
3,257
|
|
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
The impairment of intangibles during 2008 primarily relates to
acquired developed technology from prior acquisitions, revenue
cycle management tradenames and internally developed software
products deemed impaired due to the integration of Accuros
operations and products. The impairment of intangibles during
2007 and 2006 primarily relates to the write-off of in-process
research and development from XactiMed and Avega at the time of
acquisition. In 2005, impairment of intangibles primarily
relates to software impairments. |
|
(6) |
|
For the years ended December 31, 2007 and 2006, the effect
of dilutive securities has been excluded because the effect is
antidilutive as a result of the net loss attributable to common
stockholders. |
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Cash and cash equivalents(1)
|
|
$
|
5,498
|
|
|
$
|
5,429
|
|
|
$
|
136,972
|
|
|
$
|
23,459
|
|
|
$
|
68,331
|
|
Current assets
|
|
|
95,980
|
|
|
|
80,254
|
|
|
|
190,208
|
|
|
|
57,380
|
|
|
|
98,300
|
|
Total assets
|
|
|
778,544
|
|
|
|
773,860
|
|
|
|
526,379
|
|
|
|
277,204
|
|
|
|
219,713
|
|
Current liabilities
|
|
|
99,344
|
|
|
|
139,308
|
|
|
|
75,513
|
|
|
|
67,387
|
|
|
|
52,280
|
|
Total non-current liabilities(2)
|
|
|
241,828
|
|
|
|
251,613
|
|
|
|
221,351
|
|
|
|
181,159
|
|
|
|
98,523
|
|
Total liabilities
|
|
|
341,172
|
|
|
|
390,921
|
|
|
|
296,864
|
|
|
|
248,546
|
|
|
|
150,803
|
|
Redeemable convertible preferred stock(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,030
|
|
|
|
169,644
|
|
Total stockholders equity (deficit)(1)
|
|
|
437,372
|
|
|
|
382,939
|
|
|
|
229,515
|
|
|
|
(167,372
|
)
|
|
|
(100,734
|
)
|
Cash dividends declared per share(3)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.48
|
|
|
$
|
2.66
|
|
|
|
|
|
|
|
|
(1) |
|
In September 2008, we instituted an auto borrowing and repayment
plan whereby our excess cash balances are voluntarily used by
the credit agreement administrative agent to pay down
outstanding loan balances under our revolving credit facility on
a daily basis. We initiated this auto borrowing and repayment
plan in order to reduce the amount of interest expense incurred.
At December 31, 2009 and 2008, we had a positive cash and
cash equivalents balance because we had a zero balance on our
revolving credit facility. As a result of our initial public
offering of our common stock which closed on December 18,
2007, we received $216.6 million of net cash proceeds and
subsequently paid down indebtedness by $120.0 million on
the same date. In conjunction with the offering, all redeemable
convertible preferred shares were converted to common shares. |
|
(2) |
|
Inclusive of capital lease obligations and long-term notes
payable. |
|
(3) |
|
On October 30, 2006, our board of directors declared a
special dividend payable to common stockholders and preferred
stockholders, to the extent entitled to participate in dividends
payable on the common stock in the amount of $70.0 million
in the aggregate, or $2.66 per share. On July 23, 2007, our
board of directors declared an additional special dividend
payable to common stockholders and preferred stockholders, |
37
|
|
|
|
|
to the extent entitled to participate in dividends payable on
the common stock in the amount of $70.0 million in the
aggregate, or $2.48 per share. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The following discussion of our financial condition and results
of operations should be read in conjunction with this entire
Annual Report on
Form 10-K,
including the Risk Factors section and our
consolidated financial statements and the notes to those
financial statements appearing elsewhere in this report. The
discussion and analysis below includes certain forward-looking
statements that are subject to risks, uncertainties and other
factors described in Risk Factors and elsewhere in
this report that could cause our actual future growth, results
of operations, performance and business prospects and
opportunities to differ materially from those expressed in, or
implied by, such forward-looking statements. See Note On
Forward-Looking Statements herein.
Overview
We provide technology-enabled products and services which
together deliver solutions designed to improve operating margin
and cash flow for hospitals, health systems and other ancillary
healthcare providers. Our solutions are designed to efficiently
analyze detailed information across the spectrum of revenue
cycle and spend management processes. Our solutions integrate
with existing operations and enterprise software systems of our
customers and provide financial improvement with minimal upfront
costs or capital expenditures. Our operations and customers are
primarily located throughout the United States and to a lesser
extent, Canada.
MedAssets delivered strong financial performance in 2009. Our
full-year results included total consolidated net revenue of
$341.3 million, a 22.0% increase over 2008, net income
almost doubled to reach $19.9 million, or earnings of $0.34
per diluted share and adjusted EBITDA of $111.4 million, up
24.2% over last year. These results were primarily driven by
growth in our comprehensive revenue cycle services capabilities
as well as increased demand for our reimbursement technology
tools. In particular, we saw strength in our charge capture
audit, claims management and contract management tools. Although
our core GPO volume grew in the low single digits during the
year, we continued to experience significant growth in our
supply chain consulting business.
During 2009, we launched a number of product and service
capabilities. In our Spend Management segment, we upgraded our
Strategic Information (SI) analytics tool, and introduced
Service Line Analytics to help our customers identify and drive
sustainable financial improvement in the management of high-cost
medical devices, supplies, pharmaceuticals, and other ancillary
cost drivers. We also expanded and improved our suite of
solutions in the Revenue Cycle Management segment, such as the
addition and integration of capabilities from our Accuro
acquisition as well as the development and launch of our RAC
(recovery audit contractor) solution set.
Despite the challenges of the economic environment over the last
12 to 18 months, we finished the year with solid business
momentum heading into 2010. We are confident that our business
model and solution sets will continue to provide our customer
base the requisite direction, support and increased cash flow
that they need in the near-term and the long-term as the
economic effects from 2009 continues to impact their provision
of care.
Managements primary metrics to measure the consolidated
financial performance of the business are net revenue, non-GAAP
gross fees, non-GAAP revenue share obligation, non-GAAP adjusted
EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted
cash EPS.
38
For the fiscal years ended December 31, 2009, 2008 and
2007, our primary results of operations included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions)
|
|
|
(In millions)
|
|
|
Gross fees(1)
|
|
$
|
396.5
|
|
|
$
|
332.5
|
|
|
$
|
64.0
|
|
|
|
19.2
|
%
|
|
$
|
332.5
|
|
|
$
|
236.0
|
|
|
$
|
96.5
|
|
|
|
40.9
|
%
|
Revenue share obligation(1)
|
|
|
(55.2
|
)
|
|
|
(52.9
|
)
|
|
|
(2.3
|
)
|
|
|
4.3
|
|
|
|
(52.9
|
)
|
|
|
(47.5
|
)
|
|
|
(5.4
|
)
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
341.3
|
|
|
|
279.6
|
|
|
|
61.7
|
|
|
|
22.1
|
|
|
|
279.6
|
|
|
|
188.5
|
|
|
|
91.1
|
|
|
|
48.3
|
|
Operating income
|
|
|
50.5
|
|
|
|
41.5
|
|
|
|
9.0
|
|
|
|
21.7
|
|
|
|
41.5
|
|
|
|
28.1
|
|
|
|
13.4
|
|
|
|
47.7
|
|
Net income
|
|
$
|
19.9
|
|
|
$
|
10.8
|
|
|
$
|
9.1
|
|
|
|
84.3
|
%
|
|
$
|
10.8
|
|
|
$
|
6.3
|
|
|
$
|
4.5
|
|
|
|
71.4
|
%
|
Adjusted EBITDA(1)
|
|
$
|
111.4
|
|
|
$
|
89.7
|
|
|
$
|
21.7
|
|
|
|
24.2
|
%
|
|
$
|
89.7
|
|
|
$
|
60.6
|
|
|
$
|
29.1
|
|
|
|
48.0
|
%
|
Adjusted EBITDA margin(1)
|
|
|
32.6
|
%
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
|
32.1
|
%
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
Diluted cash EPS(1)
|
|
$
|
0.82
|
|
|
$
|
0.65
|
|
|
$
|
0.17
|
|
|
|
26.2
|
%
|
|
$
|
0.65
|
|
|
|
nm
|
*
|
|
|
nm
|
*
|
|
|
nm
|
*
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of
Non-GAAP Financial Measures section for additional
information. |
|
* |
|
The comparison of 2007 non-GAAP adjusted diluted EPS and
non-GAAP diluted cash EPS to 2008 performance is not meaningful
due to the significant non-recurring preferred stock dividends
accrued or paid in 2007 prior to the Companys initial
public offering in December of that year. |
For the fiscal years ended December 31, 2009 and 2008, we
generated non-GAAP gross fees of $396.5 million and
$332.5 million, respectively, and total net revenue of
$341.3 million and $279.6 million, respectively. The
increases in non-GAAP gross fees and total net revenue in the
fiscal year ended December 31, 2009 compared to the fiscal
year ended December 31, 2008 were primarily attributable to:
|
|
|
|
|
the Accuro acquisition;
|
|
|
|
organic growth in our Revenue Cycle Management segment from our
reimbursement technologies, revenue cycle services and decision
support software; and
|
|
|
|
organic growth in our Spend Management segment from our
technology solutions consulting services.
|
For the fiscal years ended December 31, 2009 and 2008, we
generated operating income of $50.5 million and
$41.5 million, respectively. The increase in operating
income compared to the prior year was primarily attributable to
the net revenue increase discussed above partially offset by the
following:
|
|
|
|
|
increases in the amortization of acquired intangibles;
|
|
|
|
increased share-based compensation expense from our Long Term
Performance Incentive Plan;
|
|
|
|
increased cost of revenue attributable to a higher percentage of
net revenue being derived from service-based engagements within
our Revenue Cycle Management and Spend Management
segments; and
|
|
|
|
higher operating expenses, exclusive of those mentioned above,
relating to such items as legal expense, new employee
compensation expense and bad debt expense partially mitigated by
certain cost control initiatives.
|
For the fiscal year ending December 31, 2009, increases in
non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA
margin compared to the fiscal year ended December 31, 2008
were primarily attributable to the net revenue increase
discussed above, as well as lower expense growth due to certain
management cost control initiatives and lower cash-based
incentive compensation expense during the year. In addition, we
had a reduction in certain discretionary expenses within our
operating infrastructure such as advertising and marketing costs
as well as a higher percentage of our product development being
capitalized during the year. This increase in non-GAAP Adjusted
EBITDA and non-GAAP Adjusted EBITDA margin was
39
offset primarily by increased cost of revenue from segment
revenue and product mix including a shift to more service-based
revenue and increased corporate operating expenses.
For the twelve months ended December 31, 2008 and 2007, we
generated non-GAAP gross fees of $332.5 million and
$236.0 million, respectively, and total net revenue of
$279.6 million and $188.5 million, respectively. The
increases in non-GAAP gross fees and total net revenue compared
to the fiscal year ended December 31, 2007 were primarily
attributable to:
|
|
|
|
|
the Accuro acquisition; and
|
|
|
|
strong performance by our Spend Management segment primarily due
to higher purchasing volumes by existing customers under our
group purchasing organization contracts with our manufacturer
and distributor vendors in addition to an increase in contingent
revenue with respect to meeting certain performance targets
during the fiscal year.
|
For the twelve months ended December 31, 2008 and 2007, we
generated operating income of $41.5 million and
$28.1 million, respectively. The increase in operating
income compared to the prior year was primarily attributable to
the net revenue increase discussed above partially offset by the
following:
|
|
|
|
|
increases in the amortization of acquired intangibles;
|
|
|
|
non-recurring charges incurred during the fiscal year ended
December 31, 2008, including $2.3 million in
intangible asset impairment charges, primarily related to the
Accuro acquisition, and a $3.9 million interest rate swap
cancellation charge;
|
|
|
|
expenses related to acquisition integration efforts at our
Revenue Cycle Management segment; and
|
|
|
|
higher general and administrative costs associated with being a
publicly-traded company.
|
For the fiscal year ending December 31, 2008, increases in
non-GAAP Adjusted EBITDA compared to the fiscal year ended
December 31, 2007 were primarily attributable to the
following:
|
|
|
|
|
a $20.7 million increase in non-GAAP Adjusted EBITDA
from our Revenue Cycle Management segment and a
$13.5 million increase from our Spend Management segment,
offset by $5.2 million of increased corporate expenses
excluding interest, income taxes, depreciation and amortization,
and other non-recurring or non-cash items; and
|
|
|
|
continued market acceptance of our SaaS-based solutions and
acquisition-based growth at the Revenue Cycle Management segment
and growth in our administrative fee net revenue in our Spend
Management segment.
|
Segment
Structure and Revenue Streams
We deliver our solutions through two business segments, Revenue
Cycle Management (or RCM) and Spend Management (or
SM). Managements primary metrics to measure
segment financial performance are net revenue, non-GAAP gross
fees and Segment Adjusted EBITDA. All of our revenues are from
external customers and inter-segment revenues have been
eliminated. See Note 13 of the Notes to our Consolidated
Financial Statements herein for discussion on Segment Adjusted
EBITDA and certain items of our segment results of operations
and financial position.
Revenue
Cycle Management
Our Revenue Cycle Management segment provides a comprehensive
suite of SaaS-based software services spanning the hospital
revenue cycle workflow from patient admission,
charge capture, case management and health information
management through claims processing and accounts receivable
management. Our workflow solutions, together with our data
management and business intelligence tools, increase revenue
capture and cash collections, reduce accounts receivable
balances and improve regulatory compliance. Our Revenue Cycle
Management segment revenue is listed under the caption
Other service fees on our
40
Consolidated Statements of Operations and consists of the
following components, which are also discussed in Note 1 of
our Consolidated Financial Statements:
|
|
|
|
|
Subscription and implementation
fees. We earn fixed subscription fees on a
monthly or annual basis on multi-year contracts for customer
access to our software as a service (SaaS) based
solutions. We also charge our customers upfront fees for
implementation services. Implementation fees are earned over the
subscription period or estimated customer relationship period,
whichever is longer.
|
|
|
|
Transaction fees. For certain revenue
cycle management solutions, we earn fees that vary based on the
volume of customer transactions or enrolled members.
|
|
|
|
Licensed-software fees. We earn
license, implementation, maintenance and other software-related
service fees for our business intelligence, decision support and
other software products. We have certain Revenue Cycle
Management contracts that are sold in multiple-element
arrangements and include software products. We have considered
Rule 5-03 of
Regulation S-X
for these types of multiple-element arrangements that include
software products and determined the amount is below the
threshold that would require separate disclosure on our
statement of operations.
|
|
|
|
Service fees. For certain revenue cycle
management solutions, we earn fees based on a percentage of cash
remittances collected, fixed-fee and cost-plus consulting
arrangements. The related revenues are earned as services are
rendered.
|
Spend
Management
Our Spend Management segment provides a suite of
technology-enabled services that help our customers manage their
non-labor expense categories. Our solutions lower supply and
medical device pricing and supply utilization by managing the
procurement process through our group purchasing
organizations portfolio of contracts, our consulting
services and analytical tool sets. Our Spend Management segment
revenue consists of the following components:
|
|
|
|
|
Administrative fees and revenue share
obligation. We earn administrative fees from
manufacturers, distributors and other vendors of products and
services with whom we have contracts under which our group
purchasing organization customers may purchase products and
services. Administrative fees represent a percentage, which we
refer to as our administrative fee ratio, typically ranging from
0.25% to 3.00% of the purchases made by our group purchasing
organization customers through contracts with our vendors.
|
Our group purchasing organization customers make purchases, and
receive shipments, directly from the vendors. Generally on a
monthly or quarterly basis, vendors provide us with a report
describing the purchases made by our customers through our group
purchasing organization vendor contracts, including associated
administrative fees. We recognize revenue upon the receipt of
these reports from vendors.
Some customer contracts require that a portion of our
administrative fees are contingent upon achieving certain
financial improvements, such as lower supply costs, which we
refer to as performance targets. Contingent administrative fees
are not recognized as revenue until the customer confirms
achievement of those contractual performance targets. Prior to
customer confirmation that a performance target has been
achieved, we record contingent administrative fees as deferred
revenue on our consolidated balance sheet. Often, recognition of
this revenue occurs in periods subsequent to the recognition of
the associated costs. Should we fail to meet a performance
target, we may be contractually obligated to refund some or all
of the contingent fees.
Additionally, in many cases, we are contractually obligated to
pay a portion of the administrative fees to our hospital and
health system customers. Typically this amount, which we refer
to as our revenue share obligation, is calculated as a
percentage of administrative fees earned on a particular
customers purchases from our vendors. Our total net
revenue on our Consolidated Statements of Operations is shown
net of the revenue share obligation.
41
|
|
|
|
|
Other service fees. The following items
are included as Other service fees in our
Consolidated Statement of Operations:
|
|
|
|
|
|
Consulting fees. We consult with our
customers regarding the costs and utilization of medical devices
and implantable physician preference items, or PPI, and the
efficiency and quality of their key clinical service lines. Our
consulting projects are typically fixed fee projects with an
average duration of six to nine months, and the related revenues
are earned as services are rendered.
|
|
|
|
Subscription fees. We also offer
technology-enabled services that provide spend management
analytics and data services to improve operational efficiency,
reduce supply costs, and increase transparency across spend
management processes. We earn fixed subscription fees on a
monthly basis for these Company-hosted SaaS-based solutions.
|
Operating
Expenses
We classify our operating expenses as follows:
|
|
|
|
|
Cost of revenue. Cost of revenue
primarily consists of the direct labor costs incurred to
generate our revenue. Direct labor costs consist primarily of
salaries, benefits, and other direct costs and share-based
compensation expenses related to personnel who provide services
to implement our solutions for our customers. As the majority of
our services are generated internally, our costs to provide
these services are primarily labor-driven. A less significant
portion of our cost of revenue consists of costs of third-party
products and services and client reimbursed
out-of-pocket
costs. Cost of revenue does not include allocated amounts for
rent, depreciation or amortization because we do not consider
the inclusion of these items in cost of revenue relevant to our
business. However, cost of revenue does include the amortization
for the cost of software to be sold, leased, or otherwise
marketed. As a result of the Accuro Acquisition and related
integration, there may be some re-allocation of expenses
primarily between cost of revenue and general and administrative
expense resulting from the implementation of our accounting
expense allocation policies that could affect period over period
comparability. In addition, any changes in revenue mix between
our Revenue Cycle Management and Spend Management segments,
specifically related to service-type arrangements, may cause
significant fluctuations in our cost of revenue and have a
favorable or unfavorable impact on operating income.
|
|
|
|
Product development expenses. Product
development expenses primarily consist of the salaries,
benefits, and share-based compensation expense of the technology
professionals who develop, support and maintain our
software-related products and services. Product development
expenses are net of capitalized software development costs.
|
|
|
|
Selling and marketing expenses. Selling
and marketing expenses consist primarily of costs related to
marketing programs (including trade shows and brand messaging),
personnel-related expenses for sales and marketing employees
(including salaries, benefits, incentive compensation and
share-based compensation expense), certain meeting costs and
travel-related expenses.
|
|
|
|
General and administrative
expenses. General and administrative expenses
consist primarily of personnel-related expenses for
administrative employees (including salaries, benefits,
incentive compensation and share-based compensation expense) and
travel-related expenses, occupancy and other indirect costs,
insurance costs, professional fees, and other general overhead
expenses.
|
|
|
|
Depreciation. Depreciation expense
consists primarily of depreciation of fixed assets and the
amortization of software, including capitalized costs of
software developed for internal use.
|
|
|
|
Amortization of
intangibles. Amortization of intangibles
includes the amortization of all identified intangible assets
(with the exception of software), primarily resulting from
acquisitions.
|
Key
Considerations
Certain significant items or events must be considered to better
understand differences in our results of operations from period
to period. We believe that the following items or events have
had a material impact on
42
our results of operations for the periods discussed below or may
have a material impact on our results of operations in future
periods:
Long-Term
Performance Incentive Plan
On January 5, 2009, the compensation committee of our Board
granted equity awards totaling 3.6 million underlying
shares to certain employees at a fair value of $14.74 per share,
of which approximately 36% of the total grant was allocated to
the Companys named executive officers (or
NEOs), under the Companys Long-Term
Performance Incentive Plan. Our stock-based compensation expense
increased significantly in 2009 and is expected to be higher in
future periods as compared to prior periods as a result of the
issuance of equity awards under the Long-Term Performance
Incentive Plan. See Note 10 of the Notes to our
Consolidated Financial Statements herein for further information.
Cash-based
Incentive Compensation
Historically, we have fully funded our discretionary bonus and
incentive pool. During 2009, we did not fund a significant
majority of our discretionary bonus and incentive pool. This
decrease in compensation expense provided for a favorable impact
on our operating expenses, net income and Adjusted EBITDA for
the fiscal year ended December 31, 2009 as compared to the
fiscal years ended December 31, 2008 and 2007.
Revenue
Cycle Management Acquisitions
The results of operations of acquired businesses (the
Revenue Cycle Management Acquisitions) are included
in our consolidated results of operations from the date of
acquisition. Since January 1, 2007, material acquisitions
include (for details regarding these acquisitions, see
Note 5 of the Notes to Consolidated Financial Statements):
|
|
|
|
|
Accuro, acquired on June 2, 2008, provides SaaS-based
revenue cycle management products and services to a broad range
of healthcare providers.
|
|
|
|
MD-X, acquired on July 2, 2007, provides revenue cycle
products and services for hospitals and health systems.
|
|
|
|
XactiMed, acquired on May 18, 2007, provides SaaS-based
revenue cycle products and services that focus on claims
management, remittance management, and denial management.
|
Purchase
Accounting
|
|
|
|
|
Deferred revenue and cost
adjustment. Upon acquiring Accuro and
XactiMed, we made certain purchase accounting adjustments to
reduce the acquired deferred revenue and deferred cost to the
fair value of outstanding services and products to be provided
post-acquisition. On June 2, 2008, we reduced the acquired
deferred revenue and deferred cost from Accuro by
$7.6 million and $7.0 million, respectively. On
May 18, 2007, we reduced the acquired deferred revenue from
XactiMed by $3.2 million. These changes only impacted our
Revenue Cycle Management segment.
|
|
|
|
In-process research and development, or
IPR&D. Upon acquiring
XactiMed, we made certain purchase accounting adjustments to
write off acquired IPR&D. During the fiscal year ended
December 31, 2007, we incurred charges of $1.2 million
related to the XactiMed acquisition to impair the value of
acquired intangibles associated with software development costs
for products that were not yet available for general release and
had no alternative future use at the time of acquisition. The
charge only impacted our Revenue Cycle Management segment.
|
Credit
Facility Amendment
In May 2008, in connection with the completion of the Accuro
acquisition, we entered into the third amendment to our existing
credit agreement. The amendment increased our term loan facility
by $50.0 million and the commitments to loan amounts under
our revolving credit facility from $110.0 million to
$125.0 million.
43
The amendment also increased the applicable margins on the rate
of interest we pay under our credit agreement. Upon closing this
amendment, we received $50.0 million of proceeds (less debt
issuance costs) under our increased term loan facility, and we
borrowed $50.0 million under our revolving credit facility.
The proceeds of the $100.0 million in increased borrowings
and existing cash on hand were used to fund the cash portion of
the Accuro acquisition purchase price.
Termination
of Interest Rate Swaps
In June 2008, we terminated two
floating-to-fixed
rate LIBOR-based interest rate swaps that were originally set to
terminate July 2010. In consideration of the early terminations,
we paid to the swap counterparty, and incurred an expense of,
$3.9 million for the fiscal year ended December 31,
2008. Accordingly, the swaps are no longer recorded on our
Consolidated Balance Sheet as of December 31, 2008.
Impairment
of Assets
During 2008, certain of our assets were deemed to be impaired as
they no longer provided future economic benefit. Such assets
primarily included certain acquired trade names, developed
technology, and internally developed software. Hence, we
recorded non-cash impairment charges totaling $2.3 million
during the fiscal year ended December 31, 2008.
Initial
Public Offering
On December 18, 2007, we closed on our initial public
offering of common stock. As a result of the offering, we issued
14,781,781 shares of common stock for proceeds of
$216.6 million (net of underwriting fees of
$16.6 million and other offering costs of
$3.4 million).
44
Results
of Operations
Consolidated
Tables
The following tables set forth our consolidated results of
operations grouped by segment for the periods shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
$
|
205,918
|
|
|
$
|
151,717
|
|
|
$
|
80,512
|
|
Spend Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross administrative fees(1)
|
|
|
163,454
|
|
|
|
158,618
|
|
|
|
142,320
|
|
Revenue share obligation(1)
|
|
|
(55,231
|
)
|
|
|
(52,853
|
)
|
|
|
(47,528
|
)
|
Other service fees
|
|
|
27,140
|
|
|
|
22,174
|
|
|
|
13,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Spend Management
|
|
|
135,363
|
|
|
|
127,939
|
|
|
|
108,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
341,281
|
|
|
|
279,656
|
|
|
|
188,518
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
183,876
|
|
|
|
142,854
|
|
|
|
76,445
|
|
Spend Management
|
|
|
77,042
|
|
|
|
73,108
|
|
|
|
66,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating expenses
|
|
|
260,918
|
|
|
|
215,962
|
|
|
|
143,419
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
22,042
|
|
|
|
8,863
|
|
|
|
4,067
|
|
Spend Management
|
|
|
58,321
|
|
|
|
54,831
|
|
|
|
41,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
80,363
|
|
|
|
63,694
|
|
|
|
45,099
|
|
Corporate expenses(2)
|
|
|
29,893
|
|
|
|
22,172
|
|
|
|
17,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
50,470
|
|
|
|
41,522
|
|
|
|
28,088
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(18,114
|
)
|
|
|
(21,271
|
)
|
|
|
(20,391
|
)
|
Other income (expense)
|
|
|
417
|
|
|
|
(1,921
|
)
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,773
|
|
|
|
18,330
|
|
|
|
10,812
|
|
Income tax
|
|
|
12,826
|
|
|
|
7,489
|
|
|
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
19,947
|
|
|
|
10,841
|
|
|
|
6,296
|
|
Reportable segment adjusted EBITDA(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
64,257
|
|
|
|
43,375
|
|
|
|
22,711
|
|
Spend Management
|
|
$
|
68,265
|
|
|
$
|
64,175
|
|
|
$
|
50,632
|
|
Reportable segment adjusted EBITDA margin(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
31.2
|
%
|
|
|
28.6
|
%
|
|
|
28.2
|
%
|
Spend Management
|
|
|
50.4
|
%
|
|
|
50.2
|
%
|
|
|
46.9
|
%
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of Non-GAAP Financial
Measures section for additional information. |
|
(2) |
|
Represents the expenses of corporate office operations.
Corporate does not represent an operating segment of the Company. |
|
(3) |
|
Managements primary metric of segment profit or loss is
Segment Adjusted EBITDA. See Note 13 of the Notes to
Consolidated Financial Statements. |
|
(4) |
|
Reportable segment Adjusted EBITDA margin represents each
reportable segments Adjusted EBITDA as a percentage of
each segments respective net revenue. |
45
The following table sets forth our consolidated results of
operations as a percentage of total net revenue for the periods
shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
60.3
|
%
|
|
|
54.3
|
%
|
|
|
42.7
|
%
|
Spend Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross administrative fees(1)
|
|
|
47.9
|
|
|
|
56.7
|
|
|
|
75.5
|
|
Revenue share obligation(1)
|
|
|
(16.2
|
)
|
|
|
(18.9
|
)
|
|
|
(25.2
|
)
|
Other service fees
|
|
|
8.0
|
|
|
|
7.9
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Spend Management
|
|
|
39.7
|
|
|
|
45.7
|
|
|
|
57.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
53.9
|
|
|
|
51.1
|
|
|
|
40.6
|
|
Spend Management
|
|
|
22.6
|
|
|
|
26.1
|
|
|
|
35.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating expenses
|
|
|
76.5
|
|
|
|
77.2
|
|
|
|
76.1
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
6.5
|
|
|
|
3.2
|
|
|
|
2.2
|
|
Spend Management
|
|
|
17.1
|
|
|
|
19.6
|
|
|
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
23.6
|
|
|
|
22.7
|
|
|
|
23.7
|
|
Corporate expenses(2)
|
|
|
8.8
|
|
|
|
7.9
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14.8
|
|
|
|
14.8
|
|
|
|
14.9
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5.3
|
)
|
|
|
(7.6
|
)
|
|
|
(10.8
|
)
|
Other income (expense)
|
|
|
0.1
|
|
|
|
(0.7
|
)
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9.6
|
|
|
|
6.6
|
|
|
|
5.7
|
|
Income tax
|
|
|
3.8
|
|
|
|
2.7
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5.8
|
%
|
|
|
3.9
|
%
|
|
|
3.3
|
%
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of Non-GAAP Financial
Measures section for additional information. |
|
(2) |
|
Represents the expenses of corporate office operations.
Corporate does not represent an operating segment of the Company. |
46
Comparison
of the Fiscal Years Ended December 31, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
$
|
205,918
|
|
|
|
60.3
|
%
|
|
$
|
151,717
|
|
|
|
54.3
|
%
|
|
$
|
54,201
|
|
|
|
35.7
|
%
|
Spend Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross administrative fees(1)
|
|
|
163,454
|
|
|
|
47.9
|
|
|
|
158,618
|
|
|
|
56.7
|
|
|
|
4,837
|
|
|
|
3.0
|
|
Revenue share obligation(1)
|
|
|
(55,231
|
)
|
|
|
(16.2
|
)
|
|
|
(52,853
|
)
|
|
|
(18.9
|
)
|
|
|
(2,378
|
)
|
|
|
4.5
|
|
Other service fees
|
|
|
27,140
|
|
|
|
8.0
|
|
|
|
22,174
|
|
|
|
7.9
|
|
|
|
4,965
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Spend Management
|
|
|
135,363
|
|
|
|
39.7
|
|
|
|
127,939
|
|
|
|
45.7
|
|
|
|
7,424
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
341,281
|
|
|
|
100.0
|
%
|
|
$
|
279,656
|
|
|
|
100.0
|
%
|
|
$
|
61,625
|
|
|
|
22.0
|
%
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of
Non-GAAP Financial Measures section for additional
information. |
Total net revenue. Total net revenue
for the fiscal year ended December 31, 2009 was
$341.3 million, an increase of $61.6 million, or
22.0%, from revenue of $279.7 million for the fiscal year
ended December 31, 2008. The increase in total net revenue
was comprised of a $54.2 million increase in Revenue Cycle
Management revenue and a $7.4 million increase in Spend
Management revenue.
Revenue Cycle Management
revenue. Revenue Cycle Management revenue for
the fiscal year ended December 31, 2009 was
$205.9 million, an increase of $54.2 million, or
35.7%, from revenue of $151.7 million for the fiscal year
ended December 31, 2008. The increase was primarily the
result of the following:
|
|
|
|
|
Accuro related revenue. The operating
results of Accuro were included in our full fiscal year ended
December 31, 2009 and were only included in the comparable
prior period for approximately seven months from the date of the
Accuro Acquisition on June 2, 2008. In 2009,
$34.9 million of the net revenue increase was attributable
to the Accuro Acquisition.
|
|
|
|
Given the significant impact of the Accuro Acquisition on our
Revenue Cycle Management segment, we believe
acquisition-affected measures are useful for the comparison of
our year over year net revenue growth. Revenue Cycle Management
net revenue for the fiscal year ended December 31, 2009 was
$205.9 million, an increase of $25.7 million, or
14.2%, from Revenue Cycle Management non-GAAP
acquisition-affected net revenue of $180.3 million for the
fiscal year ended December 31, 2008. The following table
sets forth the reconciliation of Revenue Cycle Management
non-GAAP acquisition-affected net revenue to GAAP net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
%
|
|
|
|
(Unaudited, in thousands)
|
|
|
Revenue Cycle Management net revenue
|
|
$
|
205,918
|
|
|
$
|
151,717
|
|
|
$
|
54,201
|
|
|
|
35.7
|
%
|
Accuro Acquisition-related RCM adjustment(1)
|
|
|
|
|
|
|
28,540
|
|
|
|
(28,540
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RCM acquisition-affected net revenue(1)
|
|
$
|
205,918
|
|
|
$
|
180,257
|
|
|
$
|
25,661
|
|
|
|
14.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of
Non-GAAP Financial Measures section for additional
information. |
|
|
|
|
|
Non-acquisition related product and service revenue
growth. The increase in net revenue from
non-Accuro related products and services was approximately
$19.3 million, or 17.3%. The increase was primarily
attributable to stronger demand for our products and services
and consisted of a $10.3 million increase from our revenue
cycle services; a $7.0 million increase from our claims and
denial
|
47
|
|
|
|
|
management tools; and a $3.5 million increase from our
decision support software. The increase was partially offset by
a $1.5 million decrease primarily relating to our charge
integrity consulting services.
|
Spend Management net revenue. Spend Management net
revenue for the fiscal year ended December 31, 2009 was
$135.4 million, an increase of $7.4 million, or 5.8%,
from revenue of $127.9 million for the fiscal year ended
December 31, 2008. The net revenue increase was the result
of a net increase in gross administrative fees of
$4.8 million, or 3.0%, partially offset by a
$2.4 million increase in revenue share obligation, and an
increase in other service fees of $5.0 million.
|
|
|
|
|
Gross administrative fees. Non-GAAP
gross administrative fee revenue increased by $4.8 million,
or 3.0%, as compared to the prior period, primarily due to
slightly higher purchasing volumes by new and existing customers
under our group purchasing organization contracts with our
manufacturer and distributor vendors. This net increase in
non-GAAP gross administrative fee revenue was comprised of a
$7.0 million, or 4.5% increase, in non-GAAP gross
administrative fee revenue not associated with performance
targets. This increase was partially offset by a
$2.2 million decrease in contingent revenue, which is
recognized upon confirmation from certain customers that
respective performance targets had been achieved, during the
fiscal year ended December 31, 2009 compared to the fiscal
year ended December 31, 2008. We may have fluctuations in
our non-GAAP gross administrative fee revenue in future periods
as the timing of vendor reporting and customer acknowledgement
of achieved performance targets vary in their timing and may not
result in discernable trends. In addition, a decrease in
customer patient volume and supply utilization, the effect of
continued hospital budget challenges and the lingering effect of
the weakened economy may negatively impact non-GAAP gross
administrative fees in the future.
|
|
|
|
Revenue share obligation. Non-GAAP
revenue share obligation increased $2.4 million, or 4.5%,
as compared to the prior period. We analyze the impact of our
non-GAAP revenue share obligation on our results of operations
by calculating the ratio of non-GAAP revenue share obligation to
non-GAAP gross administrative fees (or the revenue share
ratio). Our revenue share ratio was 33.8% and 33.3% for
the fiscal years ended December 31, 2009 and 2008,
respectively. We have not had any significant changes in our
customer revenue mix during the year that would cause a notable
impact on our revenue share ratio. We may experience
fluctuations in our revenue share ratio because of the timing of
vendor reporting and the timing of revenue recognition based on
performance target achievement for certain customers.
|
|
|
|
Other service fees. The
$5.0 million, or 22.4%, increase in other service fees
primarily related to $5.8 million in higher revenues from
medical device consulting and strategic sourcing services
partially offset by a $0.8 million decrease in our market
research services. The growth in supply chain consulting was
mainly due to an increased number of engagements from new and
existing customers.
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
74,651
|
|
|
|
21.9
|
%
|
|
$
|
51,548
|
|
|
|
18.4
|
%
|
|
$
|
23,103
|
|
|
|
44.8
|
%
|
Product development expenses
|
|
|
18,994
|
|
|
|
5.6
|
|
|
|
16,393
|
|
|
|
5.9
|
|
|
|
2,601
|
|
|
|
15.9
|
|
Selling and marketing expenses
|
|
|
45,282
|
|
|
|
13.3
|
|
|
|
43,205
|
|
|
|
15.4
|
|
|
|
2,077
|
|
|
|
4.8
|
|
General and administrative expenses
|
|
|
110,661
|
|
|
|
32.4
|
|
|
|
91,481
|
|
|
|
32.7
|
|
|
|
19,180
|
|
|
|
21.0
|
|
Depreciation
|
|
|
13,211
|
|
|
|
3.9
|
|
|
|
9,793
|
|
|
|
3.5
|
|
|
|
3,418
|
|
|
|
34.9
|
|
Amortization of intangibles
|
|
|
28,012
|
|
|
|
8.2
|
|
|
|
23,442
|
|
|
|
8.4
|
|
|
|
4,570
|
|
|
|
19.5
|
|
Impairment of property & equipment and intangibles
|
|
|
|
|
|
|
0.0
|
|
|
|
2,272
|
|
|
|
0.8
|
|
|
|
(2,272
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
290,811
|
|
|
|
85.2
|
|
|
|
238,134
|
|
|
|
85.2
|
|
|
|
52,677
|
|
|
|
22.1
|
|
Operating expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
183,876
|
|
|
|
53.9
|
|
|
|
142,854
|
|
|
|
51.1
|
|
|
|
41,022
|
|
|
|
28.7
|
|
Spend Management
|
|
|
77,042
|
|
|
|
22.6
|
|
|
|
73,108
|
|
|
|
26.1
|
|
|
|
3,934
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating expenses
|
|
|
260,918
|
|
|
|
76.5
|
|
|
|
215,962
|
|
|
|
77.2
|
|
|
|
44,956
|
|
|
|
20.8
|
|
Corporate expenses
|
|
|
29,893
|
|
|
|
8.8
|
|
|
|
22,172
|
|
|
|
7.9
|
|
|
|
7,721
|
|
|
|
34.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
290,811
|
|
|
|
85.2
|
%
|
|
$
|
238,134
|
|
|
|
85.2
|
%
|
|
$
|
52,677
|
|
|
|
22.1
|
%
|
Total
Operating Expenses
Cost of revenue. Cost of revenue for
the fiscal year ended December 31, 2009 was
$74.7 million, or 21.9% of total net revenue, an increase
of $23.1 million, or 44.8%, from cost of revenue of
$51.5 million, or 18.4% of total net revenue, for the
fiscal year ended December 31, 2008.
Of the increase, $8.5 million was attributable to cost of
revenue associated with the Accuro Acquisition. The remaining
$14.6 million increase was attributable to the direct costs
resulting from the continuing shift in our revenue mix towards
our RCM segment, which contributed 60.3% and 54.3% of
consolidated net revenue for the fiscal years ended
December 31, 2009 and 2008, respectively. Specifically, the
increase in SaaS-based revenue and other consulting services
within the RCM segment resulted in a higher associated cost of
revenue than does GPO activities in our SM segment. In addition,
we had an increase in service-related engagements in both our
RCM and SM segments, which provides for a higher cost of revenue
given these activities are more labor intensive.
Excluding the impact of the Accuro Acquisition, our cost of
revenue as a percentage of related net revenue increased from
17.0% to 20.8% period over period. This increase is primarily
attributable to the reasons described above.
Product development expenses. Product
development expenses for the fiscal year ended December 31,
2009 were $19.0 million, or 5.6% of total net revenue, an
increase of $2.6 million, or 15.9%, from product
development expenses of $16.4 million, or 5.9% of total net
revenue, for the fiscal year ended December 31, 2008.
The increase during the fiscal year ended December 31, 2009
was attributable to a $3.0 million increase in product
development expenses associated with our Revenue Cycle
Management segment as we continue to develop, enhance and
integrate these products and services. The increase was
partially offset by a $0.4 million decrease in product
development expenses in our Spend Management segment. We expect
to maintain or increase our product development spending during
the 2010 fiscal year.
49
Excluding the impact of the Accuro Acquisition, our product
development expenses as a percentage of related net revenue
increased from 4.5% to 5.3% for the reasons described above.
Selling and marketing expenses. Selling
and marketing expenses for the fiscal year ended
December 31, 2009 were $45.3 million, or 13.3% of
total net revenue, an increase of $2.1 million, or 4.8%,
from selling and marketing expenses of $43.2 million, or
15.4% of total net revenue, for the fiscal year ended
December 31, 2008.
The increase during the fiscal year ended December 31, 2009
was primarily attributable to a $1.0 million increase in
share-based compensation; a $1.0 million increase in
expenses relating to our annual customer and vendor meeting; and
a $0.8 million increase in compensation expense to new
employees. These increases were offset by a $0.7 million
decrease in other general selling and marketing expense.
Excluding the impact of the Accuro Acquisition, selling and
marketing expenses, as a percentage of related net revenue,
decreased from 16.8% to 16.6% period over period for the reasons
described above.
General and administrative
expenses. General and administrative expenses
for the fiscal year ended December 31, 2009 were
$110.7 million, or 32.4% of total net revenue, an increase
of $19.2 million, or 21.0%, from general and administrative
expenses of $91.5 million, or 32.7% of total net revenue,
for the fiscal year ended December 31, 2008.
The increase during the fiscal year ended December 31, 2009
includes $1.6 million of general and administrative
expenses attributable to the Accuro Acquisition. Also
contributing to the increase was a $5.9 million increase in
share-based compensation; a $3.6 million increase in
compensation expense to new employees; a $2.1 million
increase in bad debt expense to reserve for potential
uncollectible accounts along with certain bankruptcies that
occurred with respect to customers of our Revenue Cycle
Management segment; $1.6 million of higher legal expenses
primarily for discovery and document production in connection
with a lawsuit in which the Company was retained as an expert
witness by the plaintiffs; a $1.2 million increase in
travel expenses; a $0.8 million increase in meals and
entertainment expense; a $0.7 million increase in rent
expense; and a $0.6 million increase in telecommunications
expense. The remaining increase was attributable to general
operating infrastructure expenses.
Excluding the impact of the Accuro Acquisition, our general and
administrative expenses as a percentage of related net revenue
increased from 35.5% to 38.6% period over period. This increase
is primarily attributable to the reasons described above.
Depreciation. Depreciation expense for
the fiscal year ended December 31, 2009 was
$13.2 million, or 3.9% of total net revenue, an increase of
$3.4 million, or 34.9%, from depreciation of
$9.8 million, or 3.5% of total net revenue, for the fiscal
year ended December 31, 2008.
This increase was primarily attributable to depreciation
resulting from the additions of property and equipment acquired
in the Accuro Acquisition and internally developed software
placed into service.
Amortization of
intangibles. Amortization of intangibles for
the fiscal year ended December 31, 2009 was
$28.0 million, or 8.2% of total net revenue, an increase of
$4.6 million, or 19.5%, from amortization of intangibles of
$23.4 million, or 8.4% of total net revenue, for the fiscal
year ended December 31, 2008. This increase primarily
resulted from the amortization of certain identified intangible
assets acquired in the Accuro Acquisition slightly offset by
fully amortized assets in our SM segment.
Impairment of property & equipment and
intangibles. The impairment of intangibles
for the fiscal year ended December 31, 2009 was zero
compared to $2.3 million for the fiscal year ended
December 31, 2008.
Impairment during the fiscal year ended December 31, 2008
relates to acquired developed technology from prior
acquisitions, revenue cycle management tradenames and internally
developed software products that were deemed to be impaired,
primarily in conjunction with the product integration of the
Accuro Acquisition.
50
Segment
Operating Expenses
Revenue Cycle Management
expenses. Revenue Cycle Management expenses
for the fiscal year ended December 31, 2009 were
$183.9 million, or 53.9% of total net revenue, an increase
of $41.0 million, or 28.7%, from $142.9 million, or
51.1% of total net revenue for the fiscal year ended
December 31, 2008.
Of the $41.0 million increase in operating expenses,
$17.0 million of expenses are attributable to the Accuro
Acquisition. Revenue Cycle Management operating expenses also
increased as a result of an $11.7 million increase in cost
of revenue in connection with direct labor costs associated with
revenue growth; a $7.8 million increase in compensation
expense primarily related to new employees; $2.1 million of
increased bad debt expense to reserve for potentially
uncollectible accounts; $2.0 million of higher share-based
compensation expense; and $1.4 million of increased legal
expenses primarily for discovery and document production in
connection with a lawsuit in which the Company was retained as
an expert witness by the plaintiffs. The increase was partially
offset by a $1.8 million impairment charge of intangible
assets that occurred during the fiscal year ended
December 31, 2008 that did not re-occur in 2009.
As a percentage of Revenue Cycle Management segment revenue,
segment expenses decreased to 89.3% from 94.2% for the fiscal
year ended December 31, 2009 and 2008, respectively, for
the reasons described above.
Spend Management expenses. Spend
Management expenses for the fiscal year ended December 31,
2009 were $77.0 million, or 22.6% of total net revenue, an
increase of $3.9 million, or 5.4%, from $73.1 million,
or 26.1% of total net revenue for the fiscal year ended
December 31, 2008.
The increase in Spend Management expenses was primarily
attributable to $1.9 million of higher share-based
compensation expense; a $1.9 million increase in cost of
revenues associated with new customers and the revenue mix shift
in the segment toward consulting; $1.2 million of higher
compensation expense to new employees; and a $0.9 million
increase in education and training expense relating to our
annual customer and vendor meeting. The increase was offset by a
$1.3 million decrease in the amortization of intangibles as
certain of these assets reached the end of their useful life;
and a $0.7 million decrease in general operating expense.
As a percentage of Spend Management segment net revenue, segment
expenses remained relatively consistent decreasing to 56.9% from
57.1% for the fiscal year ended December 31, 2009 and 2008,
respectively, for the reasons described above.
Corporate expenses. Corporate expenses
for the fiscal year ended December 31, 2009 were
$29.9 million, an increase of $7.7 million, or 34.8%,
from $22.2 million for the fiscal year ended
December 31, 2008, or 8.8% and 7.9% of total net revenue,
respectively. The increase in corporate expenses was primarily
attributable to $4.3 million of higher share-based
compensation expense associated with our Long-Term Performance
Incentive Plan; $1.5 million of increased travel costs;
$0.9 million of operating infrastructure expense;
$0.6 million of higher depreciation; and $0.4 million
of higher rent expense.
As a percentage of total net revenue, we expect corporate
expenses to have minimal fluctuations in future periods due to
the relatively fixed cost nature of our corporate operations.
Non-operating
Expenses
Interest expense. Interest expense for
the fiscal year ended December 31, 2009 was
$18.1 million, a decrease of $3.2 million, or 14.8%,
from interest expense of $21.3 million for the fiscal year
ended December 31, 2008. As of December 31, 2009, we
had total bank indebtedness of $215.2 million compared to
$245.6 million as of December 31, 2008. The decrease
in interest expense is attributable to the decrease in our
indebtedness and lower interest rates period over period. Our
interest expense may vary during 2010 as a result of
fluctuations in unhedged interest rates. Also refer to
Item 7.A for a quantitative and qualitative analysis of our
interest rate risk.
Other income (expense). Other income
for the fiscal year ended December 31, 2009 was
$0.4 million, comprised principally of $0.4 million in
rental income and $0.1 million in interest income offset by
51
$0.1 million in foreign exchange transaction losses. The
decrease in interest income during the fiscal year ended
December 31, 2009 compared to the prior year was
attributable to the change in our cash management policy that
occurred in the third quarter of 2008 which significantly
reduced our cash balance. Other expense for the fiscal year
ended December 31, 2008 was $1.9 million, comprised
principally of a $3.9 million expense to terminate our
interest rate swap arrangements, partially offset by
approximately $1.5 million in interest income and
$0.4 million in rental income.
Income tax expense (benefit). Income
tax expense for the fiscal year ended December 31, 2009 was
$12.8 million, an increase of $5.3 million from an
income tax expense of $7.5 million for the fiscal year
ended December 31, 2008, which was primarily attributable
to (i) increased income before taxes resulting in higher
federal income tax expense of $5.1 million; and,
(ii) additional foreign and state income taxes totaling
$1.1 million. Partially offsetting this increase was a
$0.9 million decrease in income tax expense related to
research and development credits recorded during the year. The
income tax expense recorded during the fiscal year ended
December 31, 2009 and 2008 reflected an annual effective
tax rate of 39.1% and 40.9%, respectively. The decrease in the
effective tax rate was primarily attributable to research and
development tax credits.
As of December 31, 2009, a valuation allowance of
approximately $0.7 million was recorded against the
deferred tax assets on certain state net operating loss
carryforwards because apportioned taxable income to certain
states may not be sufficient for these loss carryforwards to be
utilized. In addition, certain restrictions within
Section 382 of the Internal Revenue Code will limit the
usage of certain state net operating losses and may make the
utilization of these net operating losses uncertain. We will
analyze our federal and state net operating loss carryforwards
periodically to ensure our valuation allowance is accurately
stated.
Comparison
of the Fiscal Years Ended December 31, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
$
|
151,717
|
|
|
|
54.3
|
%
|
|
$
|
80,512
|
|
|
|
42.7
|
%
|
|
$
|
71,205
|
|
|
|
88.4
|
%
|
Spend Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross administrative fees(1)
|
|
|
158,618
|
|
|
|
56.7
|
|
|
|
142,320
|
|
|
|
75.5
|
|
|
|
16,298
|
|
|
|
11.5
|
|
Revenue share obligation(1)
|
|
|
(52,853
|
)
|
|
|
(18.9
|
)
|
|
|
(47,528
|
)
|
|
|
(25.2
|
)
|
|
|
(5,325
|
)
|
|
|
11.2
|
|
Other service fees
|
|
|
22,174
|
|
|
|
7.9
|
|
|
|
13,214
|
|
|
|
7.0
|
|
|
|
8,960
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Spend Management
|
|
|
127,939
|
|
|
|
45.7
|
|
|
|
108,006
|
|
|
|
57.3
|
|
|
|
19,933
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
279,656
|
|
|
|
100.0
|
%
|
|
$
|
188,518
|
|
|
|
100.0
|
%
|
|
$
|
91,138
|
|
|
|
48.3
|
%
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of
Non-GAAP Financial Measures section for additional
information. |
Total net revenue. Total net revenue
for the fiscal year ended December 31, 2008 was
$279.7 million, an increase of $91.1 million, or
48.3%, from revenue of $188.5 million for the fiscal year
ended December 31, 2007. The increase in total net revenue
was comprised of a $71.2 million increase in Revenue Cycle
Management revenue and a $19.9 million increase in Spend
Management revenue.
Revenue Cycle Management
revenue. Revenue Cycle Management revenue for
the fiscal year ended December 31, 2008 was
$151.7 million, an increase of $71.2 million, or
88.4%, from revenue of $80.5 million for the fiscal year
ended December 31, 2007. The increase was primarily the
result of the following:
|
|
|
|
|
Acquisition related
revenue. $40.2 million of the increase
resulted from service revenue attributable to Accuro, which we
acquired on June 2, 2008. The operating results of Accuro
were included in our fiscal year ended December 31, 2008
from the date of acquisition and were not included in the
|
52
|
|
|
|
|
comparable prior period. $7.2 million and
$21.0 million of the increase resulted from service revenue
attributable to the 2007 acquisitions of XactiMed and MD-X,
respectively, which were included in our full fiscal year ended
December 31, 2008 compared to only approximately seven and
half months and six months, respectively, of operating results
in the fiscal year ended December 31, 2007.
|
Revenue Cycle Management non-GAAP acquisition-affected net
revenue for the fiscal year ended December 31, 2008 was
$180.3 million, an increase of $14.2 million, or 8.6%,
from Revenue Cycle Management non-GAAP acquisition affected net
revenue of $166.1 million for the fiscal year ended
December 31, 2007. Given the significant impact of the
Revenue Cycle Management Acquisitions on our Revenue Cycle
Management segment, we believe acquisition-affected measures are
useful for the comparison of our year over year net revenue
growth. The following table sets forth the reconciliation of
Revenue Cycle Management non-GAAP acquisition-affected net
revenue to GAAP net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
(Unaudited, in thousands)
|
|
|
|
|
|
Revenue Cycle Management net revenue
|
|
$
|
151,717
|
|
|
$
|
80,512
|
|
|
$
|
71,205
|
|
|
|
88.4
|
%
|
Acquisition related RCM adjustments(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accuro
|
|
|
28,540
|
|
|
|
64,510
|
|
|
|
(35,970
|
)
|
|
|
(55.8
|
)
|
MD-X
|
|
|
|
|
|
|
14,925
|
|
|
|
(14,925
|
)
|
|
|
(100.0
|
)
|
XactiMed
|
|
|
|
|
|
|
6,104
|
|
|
|
(6,104
|
)
|
|
|
(100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition related RCM adjustments(1)
|
|
|
28,540
|
|
|
|
85,539
|
|
|
|
(56,999
|
)
|
|
|
(66.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total RCM acquisition-affected net revenue(1)
|
|
$
|
180,257
|
|
|
$
|
166,051
|
|
|
$
|
14,206
|
|
|
|
8.6
|
%
|
|
|
|
(1) |
|
These are non-GAAP measures. See Use of
Non-GAAP Financial Measures section for additional
information. |
|
|
|
|
|
Non-acquisition related products and
services. The increase in net revenue from
non-acquisition related products and services was approximately
$2.8 million or 4.9%. This increase was comprised of
$4.7 million, or 21.6%, in our software-related
subscription fees which was primarily driven by the continued
market demand for our RCM compliance services.
|
Partially offsetting the increase in our software-related
subscription fees was an approximate $1.9 million decrease
in revenue from our decision support software and services. This
decrease was primarily attributable to a $2.2 million
revenue loss due to a scheduled and planned step down in
software support and maintenance fees from a large decision
support customer. We believe that the delay in the release of
the fourth version of our decision support software limited the
growth of revenue from our decision support software and
services during 2007 and 2008.
Spend Management net revenue. Spend
Management net revenue for the fiscal year ended
December 31, 2008 was $127.9 million, an increase of
$19.9 million, or 18.5%, from revenue of
$108.0 million for the fiscal year ended December 31,
2007. The revenue increase was primarily the result of an
increase in administrative fees of $16.3 million, or 11.5%,
partially offset by a $5.3 million increase in revenue
share obligations, and an increase in other service fees of
$8.9 million.
|
|
|
|
|
Gross administrative fees. Non-GAAP
gross administrative fee revenue increased by
$16.3 million, or 11.5%, as compared to the prior period,
primarily due to higher purchasing volumes by existing customers
under our group purchasing organization contracts with our
manufacturer and distributor vendors which totaled
$13.1 million. Also contributing to the above increase, we
experienced a net $3.2 million increase in contingent
revenue recognized upon confirmation from certain customers that
the respective performance targets had been achieved during the
fiscal year ended December 31, 2008 compared to the fiscal
year ended December 31, 2007.
|
53
|
|
|
|
|
Revenue share obligation. Non-GAAP
revenue share obligation increased $5.3 million, or 11.2%,
as compared to the prior period. We analyze the impact that our
non-GAAP revenue share obligation has on our results of
operations by analyzing the revenue share ratio. The revenue
share ratio for the fiscal year ended December 31, 2008 was
33.3%, which was relatively consistent with the revenue share
ratio of 33.4% for the fiscal year ended December 31, 2007.
|
|
|
|
Other service fees. The
$8.9 million of growth, or 67.8%, in other service fees
consisted of $6.2 million in higher revenues from our
medical device consulting and strategic sourcing services and
$2.7 million from our data analysis subscription services.
The consulting growth was mainly due to more consulting hours
and an increased number of consulting engagements from new and
existing customers, including a new engagement with a large
health system whose services began in the second quarter 2008.
Additionally, we realized growth in the number of our
subscription-based customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
51,548
|
|
|
|
18.4
|
%
|
|
$
|
27,983
|
|
|
|
14.8
|
%
|
|
$
|
23,565
|
|
|
|
84.2
|
%
|
Product development expenses
|
|
|
16,393
|
|
|
|
5.9
|
|
|
|
7,785
|
|
|
|
4.1
|
|
|
|
8,608
|
|
|
|
110.6
|
|
Selling and marketing expenses
|
|
|
43,205
|
|
|
|
15.4
|
|
|
|
35,748
|
|
|
|
19.0
|
|
|
|
7,457
|
|
|
|
20.9
|
|
General and administrative expenses
|
|
|
91,481
|
|
|
|
32.7
|
|
|
|
64,817
|
|
|
|
34.4
|
|
|
|
26,664
|
|
|
|
41.1
|
|
Depreciation
|
|
|
9,793
|
|
|
|
3.5
|
|
|
|
7,115
|
|
|
|
3.8
|
|
|
|
2,678
|
|
|
|
37.6
|
|
Amortization of intangibles
|
|
|
23,442
|
|
|
|
8.4
|
|
|
|
15,778
|
|
|
|
8.4
|
|
|
|
7,664
|
|
|
|
48.6
|
|
Impairment of property & equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and intangibles
|
|
|
2,272
|
|
|
|
0.8
|
|
|
|
1,204
|
|
|
|
0.6
|
|
|
|
1,068
|
|
|
|
88.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
238,134
|
|
|
|
85.2
|
|
|
|
160,430
|
|
|
|
85.1
|
|
|
|
77,704
|
|
|
|
48.4
|
|
Operating expenses by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Cycle Management
|
|
|
142,854
|
|
|
|
51.1
|
|
|
|
76,445
|
|
|
|
40.6
|
|
|
|
66,409
|
|
|
|
86.9
|
|
Spend Management
|
|
|
73,108
|
|
|
|
26.1
|
|
|
|
66,974
|
|
|
|
35.5
|
|
|
|
6,134
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating expenses
|
|
|
215,962
|
|
|
|
77.2
|
|
|
|
143,419
|
|
|
|
76.1
|
|
|
|
72,543
|
|
|
|
50.6
|
|
Corporate expenses
|
|
|
22,172
|
|
|
|
7.9
|
|
|
|
17,011
|
|
|
|
9.0
|
|
|
|
5,161
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
238,134
|
|
|
|
85.2
|
%
|
|
$
|
160,430
|
|
|
|
85.1
|
%
|
|
$
|
77,704
|
|
|
|
48.4
|
%
|
Total
Operating Expenses
Cost of revenue. Cost of revenue for
the fiscal year ended December 31, 2008 was
$51.5 million, or 18.4% of total net revenue, an increase
of $23.5 million, or 84.2%, from cost of revenue of
$28.0 million, or 14.8% of total net revenue, for the
fiscal year ended December 31, 2007. Of the increase,
$18.5 million was attributable to cost of revenue
associated with the operations acquired in the Revenue Cycle
Management Acquisitions.
Excluding the cost of revenue associated with the Revenue Cycle
Management Acquisitions, the cost of revenue for the fiscal year
ended December 31, 2008 was $24.4 million, or 13.1% of
related net revenue, an increase of $5.0 million, or 26.3%,
from cost of revenue for the fiscal year ended December 31,
2007 of $19.3 million or 11.8% of related revenue. This
increase was attributable to our direct costs totaling
$2.9 million associated with signing and renewing several
larger Spend Management segment client service agreements;
$1.2 million in higher share-based compensation expense;
and a moderate revenue mix shift towards our revenue cycle
products and services totaling $0.9 million, which provides
a higher cost of revenue than our Spend Management revenue.
54
The Revenue Cycle Management Acquisitions increased our total
cost of revenue, as a percentage of net revenue, during the
fiscal year ended December 31, 2008 from 14.8% to 18.4%
primarily due to the mix of acquired Revenue Cycle Management
revenue being more service, implementation and consulting based.
A higher percentage of direct internal and external resources
are required to derive related service revenue, specifically
with respect to our accounts receivable collection services.
Product development expenses. Product
development expenses for the fiscal year ended December 31,
2008 were $16.4 million, or 5.9% of total net revenue, an
increase of $8.6 million, or 110.6%, from product
development expenses of $7.8 million, or 4.1% of total net
revenue, for the fiscal year ended December 31, 2007.
The increase during the fiscal year ended December 31, 2008
includes $8.4 million of product development expenses
attributable to the operations of the Revenue Cycle Management
Acquisitions as we continue to make significant investments in
product development. Excluding the product development expenses
associated with these recently acquired businesses, product
development expenses increased by $0.3 million, period over
period.
Excluding the impact of the Revenue Cycle Management
Acquisitions, our product development expenses as a percentage
of related net revenue remained consistent, decreasing from 4.1%
to 3.8%.
Selling and marketing expenses. Selling
and marketing expenses for the fiscal year ended
December 31, 2008 were $43.2 million, or 15.4% of
total net revenue, an increase of $7.5 million, or 20.9%,
from selling and marketing expenses of $35.7 million, or
19.0% of total net revenue, for the fiscal year ended
December 31, 2007.
This increase primarily consists of (i) $6.0 million
of selling and marketing expenses attributable to the operations
of the Revenue Cycle Management Acquisitions, which mainly
consist of compensation payable to additional sales and
marketing personnel of the acquired businesses;
(ii) $0.8 million of higher share-based compensation
expense compared to the fiscal year ended December 31,
2007; and, (iii) $0.6 million of higher meeting
expenses associated with our annual customer and vendor meeting
due to a larger number of attendees.
Excluding the impact of the Revenue Cycle Management
Acquisitions, selling and marketing expenses, as a percentage of
related net revenue, decreased from 20.7% to 19.0% period over
period which was primarily attributable to the revenue growth of
our Revenue Cycle Management business which incurs less selling
and marketing expenses, as a percentage of revenue, than our
Spend Management business.
General and administrative
expenses. General and administrative expenses
for the fiscal year ended December 31, 2008 were
$91.5 million, or 32.7% of total net revenue, an increase
of $26.7 million, or 41.1%, from general and administrative
expenses of $64.8 million, or 34.4% of total net revenue,
for the fiscal year ended December 31, 2007.
The increase during the fiscal year ended December 31, 2008
includes $16.6 million of general and administrative
expenses attributable to the operations of the Revenue Cycle
Management Acquisitions. The increase in organic general and
administrative expenses is primarily attributable to
$5.2 million of higher corporate expenses, mainly due to
additional costs associated with being a publicly-traded company
(personnel), excluding share-based compensation; higher employee
compensation from new and existing personnel in our Revenue
Cycle Management and Spend Management segments of
$2.1 million and $0.7 million, respectively;
$0.7 million of higher legal expenses from certain legal
actions and claims arising in the normal course of business;
$0.5 million in higher bad debt expense to reserve for
potential uncollectible accounts; and $0.9 million of
general increases to operating infrastructure in both our
Revenue Cycle Management and Spend Management segments.
Excluding the impact of the Revenue Cycle Management
Acquisitions, general and administrative expenses increased by
$10.1 million from the prior period, or 18.1% to
$66.0 million, or 35.3% of related net revenue.
55
Depreciation. Depreciation expense for
the fiscal year ended December 31, 2008 was
$9.8 million, or 3.5% of total net revenue, an increase of
$2.7 million, or 37.6%, from depreciation of
$7.1 million, or 3.8% of total net revenue, for the fiscal
year ended December 31, 2007.
This increase primarily resulted from $1.7 million of
depreciation of fixed assets acquired in the Revenue Cycle
Management Acquisitions, and depreciation resulting from
increased capital expenditures subsequent to 2007 for computer
software developed for internal use, computer hardware related
to personnel growth, and furniture and fixtures.
Amortization of
intangibles. Amortization of intangibles for
the fiscal year ended December 31, 2008 was
$23.4 million, or 8.4% of total net revenue, an increase of
$7.7 million, or 48.6%, from amortization of intangibles of
$15.8 million, or 8.4% of total net revenue, for the fiscal
year ended December 31, 2007. This increase primarily
resulted from the amortization of certain identified intangible
assets acquired in the Revenue Cycle Management Acquisitions.
Impairment of property & equipment and
intangibles. The impairment of intangibles
for the fiscal year ended December 31, 2008 was
$2.3 million compared to $1.2 million for the fiscal
year ended December 31, 2007.
Impairment during the fiscal year ended December 31, 2008
relates to acquired developed technology from prior
acquisitions, revenue cycle management tradenames and internally
developed software products that were deemed to be impaired,
primarily in conjunction with the product integration of the
Accuro Acquisition. The 2007 impairment charge relates to the
write off of acquired in-process research and development in
conjunction with the XactiMed acquisition. The impairment
charges in both periods were primarily incurred at the Revenue
Cycle Management segment.
Segment
Operating Expenses
Revenue Cycle Management
expenses. Revenue Cycle Management expenses
for the fiscal year ended December 31, 2008 were
$142.9 million, or 51.1% of total net revenue, an increase
of $66.4 million, or 86.9%, from $76.4 million for the
fiscal year ended December 31, 2007.
The primary reason for the $66.4 million increase in
operating expenses is $61.9 million of expenses that are
attributable to the operations acquired in the Revenue Cycle
Management Acquisitions. We also incurred growth in
personnel-related expenses to support future implementations,
customer service and related revenue growth. As a percentage of
Revenue Cycle Management segment net revenue, segment expenses
decreased slightly from 95.0% during the fiscal year ended
December 31, 2007 to 94.2% during the fiscal year ended
December 31, 2008.
Excluding the expenses attributable to the recently acquired
businesses, Revenue Cycle Management operating expenses
increased by $4.5 million, or 9.2%, primarily due to
$1.9 million of increased share-based compensation;
$1.0 million of higher cost of revenue associated with our
revenue growth; $0.6 million of higher general operating
costs; $0.5 million of impairment of intangible assets;
$0.3 million in higher professional fees; and
$0.2 million of higher sales and service training costs
related to the segment for the annual customer and vendor
meeting.
Spend Management expenses. Spend
Management expenses for the fiscal year ended December 31,
2008 were $73.1 million, or 26.1% of total net revenue, an
increase of $6.1 million, or 9.2%, from $67.0 million
for the fiscal year ended December 31, 2007.
The growth in Spend Management expenses was primarily due to
higher compensation expense to new and existing consulting and
support staff, contributing $5.0 million of the overall
increase. We also incurred higher share-based compensation
expense to new and existing employees of $0.7 million
compared to the prior period. Partially offsetting these expense
increases was a $1.2 million decrease in the amortization
of identified intangible assets as certain of these assets are
amortized under an accelerated method and are nearing the end of
their useful life.
56
As a percentage of Spend Management segment net revenue, segment
expenses decreased from 35.5% during the fiscal year ended
December 31, 2007 to 26.1% during the fiscal year ended
December 31, 2008, primarily because of a decline in the
amortization of identified intangibles.
Corporate expenses. Corporate expenses
for the fiscal year ended December 31, 2008 were
$22.2 million, an increase of $5.2 million, or 30.3%,
from $17.0 million for the fiscal year ended
December 31, 2007, or 7.9% and 9.0% of total net revenue,
respectively. These changes were mainly as a result of increased
compensation payable to new and existing employees of
$2.1 million, including the addition of certain senior
staff functions; increased legal expenses from certain legal
actions and claims arising in the normal course of business of
$0.7 million; increased travel expenses of
$0.7 million; and other general increases in overhead costs
as a result of being a publicly-traded company, such as higher
professional fees of $0.5 million and higher insurance
expense for our directors and officers of $0.4 million.
Partially offsetting these expense increases was an approximate
$0.5 million decrease in share-based expense during the
fiscal year ended December 31, 2008 compared to that of the
prior year.
Non-operating
Expenses
Interest expense. Interest expense for
the fiscal year ended December 31, 2008 was
$21.3 million, an increase of $0.9 million, or 4.3%,
from interest expense of $20.4 million for the fiscal year
ended December 31, 2007. As of December 31, 2008, we
had total bank indebtedness of $245.6 million compared to
$197.5 million as of December 31, 2007. The
indebtedness incurred because of the Accuro Acquisition in June
2008 and higher interest rates resulting from the related
refinancing are primarily responsible for the increase in our
interest expense.
Other income (expense). Other expense
for the fiscal year ended December 31, 2008 was
$1.9 million, comprised principally of a $3.9 million
expense to terminate our interest rate swap arrangements, offset
by approximately $1.5 million in interest income and
$0.4 million in rental income. Other income for the fiscal
year ended December 31, 2007 was $3.1 million,
primarily consisting of interest and rental income.
Income tax expense (benefit). Income
tax expense for the fiscal year ended December 31, 2008 was
$7.5 million, an increase of $3.0 million from an
income tax expense of $4.5 million for the fiscal year
ended December 31, 2007, which was primarily attributable
to (i) increased income before taxes resulting in higher
federal income tax expense of $2.6 million; and,
(ii) additional state income taxes totaling
$2.3 million. Partially offsetting this increase was a
$1.4 million decrease in our FIN 48 liability
attributable to the resolution of uncertain tax positions in
connection with the settlement of our tax years under audit with
the Internal Revenue Service. The income tax expense recorded
during the fiscal year ended December 31, 2008 and 2007
reflected an annual effective tax rate of 40.9% and 41.8%,
respectively.
As of December 31, 2008, a valuation allowance of
approximately $0.3 million was recorded against the
deferred tax assets on certain state net operating loss
carryforwards as the apportionment of this taxable income to
certain states may not be sufficient for these loss
carryforwards to be realized.
Critical
Accounting Policy Disclosure
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenue and expenses
during the reporting period. We base our estimates and judgments
on historical experience and other assumptions that we find
reasonable under the circumstances. Actual results may differ
from such estimates under different conditions.
Management believes that the following accounting judgments and
uncertainties are the most critical to aid in fully
understanding and evaluating our reported financial results, as
they require managements most difficult, subjective or
complex judgments. Management has reviewed these critical
accounting estimates and related disclosures with the audit
committee of our board of directors.
57
Revenue
Recognition
In accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition, we recognize revenue when
(a) there is a persuasive evidence of an arrangement,
(b) the fee is fixed or determinable, (c) services
have been rendered and payment has been contractually earned,
and (d) collectability is reasonably assured.
Inclusive in our revenue recognition policies, we are required
to make certain critical judgments that impact the period over
which revenue is recognized. These judgments are described below.
Subscription
and Implementation Fees
We apply the revenue recognition guidance prescribed by
generally accepted accounting principles in the United States of
America (or U.S. GAAP) relating to software for our
hosted solutions. We provide subscription-based revenue cycle
and spend management services through software tools accessed by
our customers while the data is hosted and maintained on our
servers. In many arrangements, customers are charged
set-up fees
for implementation and monthly subscription fees for access to
these web-based hosted services. Implementation fees are
typically billed at the beginning of the arrangement and
recognized as revenue over the greater of the subscription
period or the estimated customer relationship period. We
estimate the customer relationship period based on historical
customer retention rates. We currently estimate our customer
relationship period to be between four and five years for our
hosted services. Revenue from monthly hosting arrangements is
recognized on a subscription basis over the period in which the
customer uses the service. Contract subscription periods
typically range from three to five years from execution.
We consistently monitor our customer relationship periods and as
a result, our estimated customer relationship period may change
due to the changing attrition rates of our customers. We have
historically changed our estimates of customer relationship
periods for certain of our web-hosted customers. These changes
in estimated customer lives have typically deferred revenue over
longer periods.
Licensed-Software
Fees
We license certain revenue cycle decision support software
products. Software revenues are derived from three primary
sources: (i) software licenses, (ii) software support,
and (iii) services, which include consulting, product
services and training programs. We recognize revenue for our
software arrangements based on generally accepted accounting
principles relating to software. We evaluate vendor-specific
objective evidence, or VSOE, of fair value based on the price
charged when the same element is sold separately. In certain of
our multi-element software arrangements we are unable to
establish VSOE for certain of our deliverables. The majority of
our software licenses are for a term of one year which results
in undeterminable VSOE.
In arrangements where VSOE cannot be determined for the separate
elements of the arrangement, the entire arrangement fee is
recognized ratably over the period in which the services are
expected to be performed or over the software support period,
whichever is longer, beginning with the delivery and acceptance
of the software, provided all other revenue recognition criteria
are met.
As a result, we are required to make assumptions regarding the
implementation period of each particular arrangement in order to
determine the appropriate period to recognize revenue. We
evaluate the expected implementation period in which services
are expected to be performed based on historical trends and
current customer specific criteria. Our actual implementation
periods may differ from our estimates. In the event we have to
adjust our estimate, we would record a cumulative adjustment in
the period in which the estimate is changed.
Goodwill
and Intangible Assets
We evaluate goodwill and other intangible assets for impairment
annually and whenever events or changes in circumstances
indicate the carrying value of the goodwill or other intangible
assets may not be recoverable. The Company considers the
following to be important factors that could trigger an
impairment review and may result in an impairment charge:
significant and sustained underperformance relative to
historical or projected future operating results; identification
of other impaired assets within a reporting unit; significant
58
and sustained adverse changes in business climate or
regulations; significant negative changes in senior management;
significant changes in the manner of use of the acquired assets
or the strategy for the Companys overall business;
significant negative industry or economic trends; and a
significant decline in the Companys stock price for a
sustained period.
We complete our impairment evaluation by performing valuation
analyses, in accordance with generally accepted accounting
principles relating to goodwill and other intangibles. This
analysis contains uncertainties because it requires us to make
market participant assumptions and to apply judgment to estimate
industry economic factors and the profitability and growth of
future business strategies to determine estimated future cash
flows and an appropriate discount rate. We measure the fair
value of a reporting unit or asset group based on market prices
(i.e., the amount for which the asset could be sold to a third
party), when available. When market prices are not available, we
estimate the fair value of the reporting unit or asset group
using the income approach
and/or the
market approach. The income approach uses cash flow projections.
Inherent in our development of cash flow projections are
assumptions and estimates derived from a review of our operating
results, approved business plans, expected growth rates, capital
expenditures and cost of capital, similar to those a market
participant would use to assess fair value. We also make certain
assumptions about future economic conditions and other data.
Many of the factors used in assessing fair value are outside the
control of management, and these assumptions and estimates may
change in future periods.
Changes in assumptions or estimates can materially affect the
fair value measurement of a reporting unit or asset group, and
therefore can affect the amount of the impairment. The following
are key assumptions we use in making cash flow projections:
|
|
|
|
|
Business projections. We make assumptions about
the demand for our products in the marketplace. These
assumptions drive our planning assumptions for volume, mix, and
pricing. We also make assumptions about our cost levels. These
projections are derived using our internal business plans that
are updated at least annually and reviewed by our Board of
Directors.
|
|
|
Long-term growth rate. A growth rate is used to
calculate the terminal value of the business, and is added to
the present value of the debt-free cash flows. The growth rate
is the expected rate at which a business units earnings
stream is projected to grow beyond the planning period.
|
|
|
Discount rate. When measuring possible impairment,
future cash flows are discounted at a rate that is consistent
with a weighted-average cost of capital that we anticipate a
potential market participant would use. Weighted-average cost of
capital is an estimate of the overall risk-adjusted after-tax
rate of return required by equity and debt holders of a business
enterprise.
|
|
|
Economic projections. Assumptions regarding
general economic conditions are included in and affect our
assumptions regarding industry sales and pricing estimates.
These macro-economic assumptions include, but are not limited
to, industry sales volumes and interest rates.
|
Our estimates of future cash flow used in these valuations could
differ from actual results. If actual results are not consistent
with our estimates or assumptions, we may be exposed to an
impairment charge that could be material. Based on our
sensitivity analysis, a hypothetical 10% decrease applied to our
assumed growth rates or a hypothetical 10% increase applied to
our weighted average cost of capital applied to our discounted
cash flow analysis would not result in an impairment of our
intangible assets nor would it cause us to further evaluate
goodwill for impairment.
Acquisitions
Purchase Price Allocation
We adopted revised generally accepted accounting principles
relating to business combinations as of January 1, 2009.
The revised guidance retains the purchase method of accounting
for acquisitions and requires a number of changes to the
previous guidance, including changes in the way assets and
liabilities are recognized in purchase accounting. Other changes
include requiring the recognition of assets acquired and
liabilities assumed arising from contingencies, requiring the
capitalization of in-process research and development at fair
value, and requiring the expensing of acquisition-related costs
as incurred.
Our purchase price allocation methodology requires us to make
assumptions and to apply judgment to estimate the fair value of
acquired assets and liabilities. We estimate the fair value of
assets and liabilities
59
based upon appraised market values, the carrying value of the
acquired assets and widely accepted valuation techniques,
including discounted cash flows and market multiple analyses.
Management determines the fair value of fixed assets and
identifiable intangible assets such as developed technology or
customer relationships, and any other significant assets or
liabilities. We adjust the purchase price allocation, as
necessary, up to one year after the acquisition closing date as
we obtain more information regarding asset valuations and
liabilities assumed. Unanticipated events or circumstances may
occur which could affect the accuracy of our fair value
estimates, including assumptions regarding industry economic
factors and business strategies, and result in an impairment or
a new allocation of purchase price.
Given our history of acquisitions, we may allocate part of the
purchase price of future acquisitions to contingent
consideration as required by generally accepted accounting
principles for business combinations. The fair value calculation
of contingent consideration will involve a number of assumptions
that are subjective in nature and which may differ significantly
from actual results. We may experience volatility in our
earnings to some degree in future reporting periods as a result
of these fair value measurements.
Allowance
for Doubtful Accounts
In evaluating the collectibility of our accounts receivable, we
assess a number of factors, including a specific clients
ability to meet its financial obligations to us, such as whether
a customer declares bankruptcy. Other factors include the length
of time the receivables are past due and historical collection
experience. Based on these assessments, we record a reserve for
specific account balances as well as a general reserve based on
our historical experience for bad debt to reduce the related
receivables to the amount we expect to collect from clients. If
circumstances related to specific clients change, or economic
conditions deteriorate such that our past collection experience
is no longer relevant, our estimate of the recoverability of our
accounts receivable could be further reduced from the levels
provided for in the Consolidated Financial Statements.
We have not made any material changes in the accounting
methodology used to estimate the allowance for doubtful
accounts. If actual results are not consistent with our
estimates or assumptions, we may experience a higher or lower
expense.
Our bad debt expense to total net revenue ratio for the fiscal
years ended December 31, 2009 and 2008 was 1.7% and 0.7%
(or 2.5% and 1.1% of other service fee revenue), respectively.
The increase was attributable to approximately $4.1 million
for potential uncollectible accounts which includes certain
bankruptcies that occurred during the fiscal year with respect
to customers in our Revenue Cycle Management segment. In
addition, as more revenues are being generated from certain
SaaS-based solutions and consulting services within our Revenue
Cycle Management segment, we may continue to experience a higher
bad debt expense to total revenue ratio percentage.
Given the lingering effect of the weakened economy and customer
financial constraints, we may experience additional
collectibility challenges that affect our ability to collect
customer payments in future periods. This could require
additional charges to bad debt expense.
A hypothetical 10% increase in bad debt expense would result in
approximately $0.6 million and $0.2 million of
additional bad debt expense for the fiscal years ended
December 31, 2009 and 2008, respectively.
Income
Taxes
We regularly review our deferred tax assets for recoverability
and establish a valuation allowance, as needed, based upon
historical taxable income, projected future taxable income, the
expected timing of the reversals of existing temporary
differences and the implementation of tax-planning strategies.
Our tax valuation allowance requires us to make assumptions and
apply judgment regarding the forecasted amount and timing of
future taxable income.
We estimate the companys effective tax rate based upon the
known rates and estimated state tax apportionment. This rate is
determined based upon location of company personnel, location of
company assets and determination of sales on a jurisdictional
basis. We currently file returns in approximately 80
jurisdictions.
60
We recognize excess tax benefits associated with the exercise of
stock options directly to stockholders equity when
realized. When assessing whether a tax benefit relating to
share-based compensation has been realized, we follow the tax
law ordering method, under which current year share-based
compensation deductions are assumed to be utilized before net
operating loss carryforwards and other tax attributes. If tax
law does not specify the ordering in a particular circumstance,
then a pro-rata approach is used.
Effective January 1, 2007, we adopted generally accepted
accounting principles relating to the accounting for uncertainty
in income taxes. The guidance prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of uncertain tax positions taken or
expected to be taken in a companys income tax return, and
also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods,
disclosure, and transition. The cumulative effect of adopting
this guidance on January 1, 2007 was recognized as a change
in accounting principle, recorded as an adjustment to the
opening balance of retained earnings on the adoption date.
Upon adoption of this guidance, our policy is to include
interest and penalties in our provision for income taxes. The
tax years 1999 through 2009 remain open to examination by the
Internal Revenue Service and certain state taxing jurisdictions
to which we are subject.
Each quarter we assess our uncertain tax positions and adjust
our reserve accordingly based on the most recent facts and
circumstances. If there is a significant change in the
underlying facts and circumstances or applicable tax law
modifications, we may be exposed to additional benefits or
expense. See Note 11 of our consolidated financial
statements for the impact of uncertain tax positions in 2009.
We expect a significant increase in our cash taxes in future
years, primarily attributable to exhausting the majority of our
federal net operating loss carryforwards.
Share-Based
Compensation
We have a share-based compensation plan, which includes
non-qualified stock options, non-vested share awards and
stock-settled stock appreciation rights. See Note 1,
Summary of Significant Accounting Policies, Note 9,
Stockholders Equity and Note 10, Share-Based
Compensation, to the Notes to Consolidated Financial Statements
for a complete discussion of our share-based compensation
programs.
Prior to our initial public offering, valuing our share price as
a privately held company was complex. We used reasonable
methodologies, approaches and assumptions consistent with
U.S. GAAP for privately-held-company equity securities
issued as compensation, in assessing and determining the fair
value of our common stock for financial reporting purposes. The
fair value of our common stock was determined through periodic
valuations.
Our stock valuations used a combination of the market-comparable
approach and the income approach to estimate the aggregate
enterprise value of our company at each valuation date. There
was a high degree of subjectivity involved in using
option-pricing models and there was no market-based mechanism or
other practical application to verify the reliability and
accuracy of the estimates resulting from these valuation models,
nor was there a means to compare and adjust the estimates to
actual values.
For grants following the initial public offering, we utilized
market-based share prices of our common stock in the
Black-Scholes option pricing model to calculate fair value of
our common stock option awards. This valuation technique will
continue to involve highly subjective assumptions. These
assumptions include estimating the length of time employees will
retain their vested stock options before exercising them
(expected term), the estimated volatility of our
common stock price over the expected term and estimated
forfeitures.
It is not practicable for us to estimate the expected volatility
of our share price, required by existing accounting
requirements, given our limited history as a publicly traded
company. Once we have sufficient history as a public company, we
will calculate the expected volatility of our share price based
on our trading history, which may impact our future share-based
compensation. In accordance with generally accepted accounting
principles for stock compensation, we have estimated grant-date
fair value of our shares using
61
volatility calculated (calculated volatility) from
an appropriate industry sector index of comparable entities. We
identified similar public entities for which share and option
price information was available, and considered the historical
volatilities of those entities share prices in calculating
volatility. Dividend payments were not assumed, as we did not
anticipate paying a dividend at the dates in which the various
option grants occurred during the year. The risk-free rate of
return reflects the weighted average interest rate offered for
zero coupon treasury bonds over the expected term of the
options. The expected term of the awards represents the period
of time that options granted are expected to be outstanding.
Based on our limited history, we utilized the simplified
method as prescribed in Staff Accounting
Bulletin No. 107, Share-based Payment, to
calculate expected term. For service-based equity awards,
compensation cost is recognized using an accelerated method over
the vesting or service period and is net of estimated
forfeitures. For performance-based equity awards, compensation
cost is recognized using a straight-line method over the vesting
or performance period and is adjusted each reporting period in
which a change in performance achievement is determined and is
net of estimated forfeitures.
Self-Insurance
Reserves
Beginning January 1, 2008, we established a company-wide
self-insurance plan for employee healthcare and dental
insurance. We accrue self-insurance reserves based upon
estimates of the aggregate liability of claim costs which are
probable and estimable. We obtain third-party insurance coverage
to limit our exposure on certain catastrophic claims. Our
current insurance policy contains a stop-loss amount of
$0.2 million per individual and a maximum aggregated
stop-loss limit of $1.0 million per policy year on certain
catastrophic claims. Reserves for claim costs are estimated
using certain actuarial assumptions followed in the insurance
industry and our historical experience.
Self-insurance reserves are based on managements estimates
of the costs to settle employee insurance claims. As such,
differences between actual costs and managements estimates
could be significant. Additionally, changes in actuarial
assumptions used in the development of these reserves could
affect net income in a given period. Changes in the nature of
claims or the number of employees could also impact our
estimate. Our current estimated aggregate maximum payment
exposure under the insurance plan, for the current plan year, is
approximately $1.5 and $1.0 million as of December 31,
2009 and 2008, respectively. Based on the trend of rising
healthcare costs, we may experience higher employee healthcare
expense in future periods.
A hypothetical 10% change in our self-insured liabilities as of
December 31, 2009 would have affected net earnings by
approximately $0.2 million and $0.1 million in fiscal
year 2009 and 2008, respectively.
Liquidity
and Capital Resources
Our primary cash requirements involve payment of ordinary
expenses, working capital fluctuations, debt service obligations
and capital expenditures. Our capital expenditures typically
consist of software purchases, internal product development
capitalization and computer hardware purchases. Historically,
the acquisition of complementary businesses has resulted in a
significant use of cash. Our principal sources of funds have
primarily been cash provided by operating activities and
borrowings under our credit facilities.
We believe we currently have adequate cash flow from operations,
capital resources and liquidity to meet our cash flow
requirements including the following near term obligations:
(i) our working capital needs; (ii) our debt service
obligations including a required excess cash payment to our
lenders; (iii) planned capital expenditures for the
remainder of the year; (iv) our revenue share obligation
and rebate payments; and (v) estimated federal and state
income tax payments.
Historically, we have utilized federal net operating loss
carryforwards (NOLs) for both regular and
Alternative Minimum Tax payment purposes. Consequently, our
federal cash tax payments in past reporting periods have been
minimal. However, given the current amount and limitations of
our NOLs, we expect our cash paid for taxes to increase
significantly in future years.
We have not historically utilized borrowings available under our
credit agreement to fund operations. However, pursuant to the
change in our cash management practice in 2008, we currently use
the swing-line
62
component of our revolver for funding operations while we
voluntarily apply our excess cash balances to reduce our
swing-line loan on a daily basis and to reduce our revolving
credit facility on a routine basis. As of December 31,
2009, we had zero dollars drawn on our revolving credit facility
resulting in $124.0 million of availability under our
revolving credit facility inclusive of the swing-line (netted
for a $1.0 million letter of credit). Based on our analysis
as of December 31, 2009, we are in compliance with all
applicable covenant requirements of our credit agreement. We may
observe fluctuations in cash flows provided by operations from
period to period. Certain events may cause us to draw additional
amounts under our swing-line or revolving facility and may
include the following:
|
|
|
|
|
changes in working capital due to inconsistent timing of cash
receipts and payments for major recurring items such as trade
accounts payable, revenue share obligation, incentive
compensation, changes in deferred revenue, and other various
items;
|
|
|
|
acquisitions; and
|
|
|
|
unforeseeable events or transactions.
|
We may continue to pursue other acquisitions or investments in
the future. We may also increase our capital expenditures
consistent with our anticipated growth in infrastructure,
software solutions, and personnel, and as we expand our market
presence. Cash provided by operating activities may not be
sufficient to fund such expenditures. Accordingly, in addition
to the use of our available revolving credit facility, we may
need to engage in additional equity or debt financings to secure
additional funds for such purposes. Any debt financing obtained
by us in the future could involve restrictive covenants relating
to our capital raising activities and other financial and
operational matters including higher interest costs, which may
make it more difficult for us to obtain additional capital and
to pursue business opportunities, including potential
acquisitions. In addition, we may not be able to obtain
additional financing on terms favorable to us, if at all. If we
are unable to obtain required financing on terms satisfactory to
us, our ability to continue to support our business growth and
to respond to business challenges could be limited.
Discussion
of Cash Flow
As of December 31, 2009 and 2008, we had cash and cash
equivalents totaling $5.5 million and $5.4 million,
respectively.
Operating
Activities.
The following table summarizes the cash provided by operating
activities for the fiscal years ended December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions)
|
|
|
Net income
|
|
$
|
19.9
|
|
|
$
|
10.8
|
|
|
$
|
9.1
|
|
|
|
84.3
|
%
|
Non-cash items
|
|
|
67.6
|
|
|
|
53.5
|
|
|
|
14.1
|
|
|
|
26.4
|
|
Net changes in working capital
|
|
|
(27.2
|
)
|
|
|
(12.2
|
)
|
|
|
(15.0
|
)
|
|
|
123.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
$
|
60.3
|
|
|
$
|
52.1
|
|
|
$
|
8.2
|
|
|
|
15.7
|
%
|
Net income represents the profitability attained during the
periods presented and is inclusive of certain non-cash expenses.
These non-cash expenses include depreciation for fixed assets,
amortization of intangible assets, stock compensation expense,
bad debt expense, deferred income tax expense, excess tax
benefit from the exercise of stock options, loss on sale of
assets, impairment of intangibles and non-cash interest expense.
The total for these non-cash expenses was $67.6 million and
$53.5 million for the fiscal years ended December 31,
2009 and 2008, respectively.
63
Working capital is a measure of our liquid assets. Changes in
working capital are included in the determination of cash
provided by operating activities. For the fiscal year ended
December 31, 2009, Working capital changes resulting in a
reduction to cash flow from operations of $38.4 million
were:
|
|
|
|
|
an increase in accounts receivable of $18.4 million related
to the timing of invoicing and cash collections and our revenue
growth;
|
|
|
|
an increase in other long term assets of $4.6 million
related to the timing of cash payments for our deferred sales
expenses;
|
|
|
|
an increase in prepaid expenses and other assets of
$2.4 million primarily related to sales incentive
compensation payments;
|
|
|
|
a decrease in accrued payroll and benefits of $9.1 million
due to payroll cycle timing and cash incentive compensation
accruals; and
|
|
|
|
a decrease in other accrued expenses of $3.9 million due to
the timing of various payment obligations.
|
The working capital changes resulting in reductions to the 2009
operating cash flow discussed above were partially offset by: a
$7.7 million working capital increase in trade accounts
payable due to the timing of various payment obligations; and a
$2.3 million increase in accrued revenue share obligation
and rebates due to the timing of cash payments and customer
purchasing volume for our GPO.
For the fiscal year ended December 31, 2008, Working
capital changes resulting in a reduction to cash flow from
operations of $20.0 million were:
|
|
|
|
|
an increase in accounts receivable of $15.2 million related
to the timing of invoicing and cash collections and our revenue
growth;
|
|
|
|
an increase in other long term assets of $2.7 million
related to the timing of cash payments for our deferred sales
expenses; and
|
|
|
|
a decrease in other accrued expenses of $1.4 million due to
the timing of various payment obligations.
|
The working capital changes resulting in reductions to the 2008
operating cash flow discussed above were partially offset by a
$3.5 million increase in deferred revenue for cash receipts
not yet recognized as revenue; and a $3.0 million working
capital increase in trade accounts payable due to the timing of
various payment obligations.
Investing
Activities.
Investing activities used $46.5 million of cash for the
fiscal year ended December 31, 2009 which included:
$18.3 million related to the deferred purchase
consideration of $19.8 million (inclusive of
$1.5 million of imputed interest) made in June 2009 as part
of the Accuro Acquisition; $16.4 million for investment in
software development; and $11.8 million of capital
expenditures that are primarily related to the growth in our RCM
segment. We believe that cash used in investing activities will
continue to be materially impacted by continued growth in
investments in property and equipment, future acquisitions and
capitalized software. Our property, equipment, and software
investments consist primarily of SaaS-based technology
infrastructure to provide capacity for expansion of our customer
base, including computers and related equipment and software
purchased or implemented by outside parties. Our software
development investments consist primarily of company-managed
design, development, testing and deployment of new application
functionality.
Investing activities used $228.0 million of cash for the
fiscal year ended December 31, 2008 which included:
$210.0 million for costs associated with the Accuro
Acquisition; $11.1 million for investment in software
development; and $6.9 million of capital expenditures that
were primarily related to the growth in our RCM segment.
64
Financing
Activities.
Financing activities used $13.8 million of cash for the
fiscal year ended December 31, 2009. We borrowed
$71.8 million on our credit facility during the period. We
also received $10.4 million from the issuance of common
stock and $6.9 million from the excess tax benefit from the
exercise of stock options. This was offset by payments made on
our credit facility of $102.3 million inclusive of the
$27.5 million 2008 excess cash flow payment in addition to
payments of $0.7 million that were made on our finance
obligation. Our credit agreement requires an annual payment of
excess cash flow which amounted to $11.3 million for the
fiscal year ended December 31, 2009. We have adequate
liquidity to fund this payment and expect to pay it in the first
quarter of 2010.
Financing activities provided $44.3 million of cash for the
fiscal year ended December 31, 2008. We borrowed
$199.0 million on our credit facility during the period. We
also received $1.9 million from the excess tax benefit from
the exercise of stock options and $1.8 million from the
issuance of common stock. This was offset by payments made on
our credit facility of $151.7 million in addition to
payments of $6.2 million in bank fees relating to
modifications made to our credit facility and $0.6 million
that were made on our finance obligation.
Credit
Agreement
We are party to a credit agreement, with Bank of America, N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer, BNP
Paribas, as Syndication Agent, CIT Healthcare LLC, as
Documentation Agent, and the other lenders party thereto, or the
Lenders, as amended. The agreement provides for a (i) term
loan facility and (ii) a revolving loan facility with a
$125.0 million aggregate loan commitment amount available,
including a $10.0 million
sub-facility
for letters of credit and a $30.0 million swing-line
facility. We utilize the revolving credit facility for working
capital and other general corporate purposes.
Borrowings under the Credit Agreement bear interest, at our
option, equal to the Eurodollar Rate for a Eurodollar Rate Loan
(as defined in the Credit Agreement), or the Base Rate for a
Base Rate Loan (as defined in the Credit Agreement), plus an
applicable margin. Under the revolving loan facility we also pay
a quarterly commitment fee on the undrawn portion of the
revolving loan facility ranging from 0.25% to 0.50% based on the
same consolidated leverage ratio and a quarterly fee equal to
the applicable margin for Eurodollar Rate Loans on the aggregate
amount of outstanding letters of credit. See table below for a
summary of the pricing tiers for all applicable margin rates. As
of December 31, 2009, our applicable margin on our
revolving credit facility and term loan facility was tier four
and tier two, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Pricing
|
|
Leverage
|
|
Commitment
|
|
Letter of
|
|
Eurodollar
|
|
Base Rate
|
Tier
|
|
Ratio
|
|
Fee
|
|
Credit Fee
|
|
Loans
|
|
Loans
|
|
|
1
|
|
|
³
3.5:1.0
|
|
|
0.50
|
%
|
|
|
3.50
|
%
|
|
|
3.50
|
%
|
|
|
2.50
|
%
|
|
2
|
|
|
³
3.0:1.0 but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 3.5:1.0
|
|
|
0.375
|
%
|
|
|
3.25
|
%
|
|
|
3.25
|
%
|
|
|
2.25
|
%
|
|
3
|
|
|
³
2.5:1.0 but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 3.0:1.0
|
|
|
0.375
|
%
|
|
|
2.75
|
%
|
|
|
2.75
|
%
|
|
|
1.75
|
%
|
|
4
|
|
|
³
2.0:1.0 but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 2.5:1.0
|
|
|
0.30
|
%
|
|
|
2.50
|
%
|
|
|
2.50
|
%
|
|
|
1.50
|
%
|
|
5
|
|
|
< 2.0:1.0
|
|
|
0.25
|
%
|
|
|
2.25
|
%
|
|
|
2.25
|
%
|
|
|
1.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan Facility
|
|
|
Consolidated
|
|
|
|
|
|
|
Pricing
|
|
Leverage
|
|
Eurodollar
|
|
Base Rate
|
|
|
Tier
|
|
Ratio
|
|
Loans
|
|
Loans
|
|
|
|
|
1
|
|
|
|
³
3.0:1.0
|
|
|
|
4.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
|
2
|
|
|
|
< 3.0:1.0
|
|
|
|
3.75
|
%
|
|
|
2.75
|
%
|
|
|
|
|
65
The term loan facility matures on October 23, 2013 and the
revolving loan facility matures on October 23, 2011. We are
required to make quarterly principal amortization payments of
approximately $0.6 million on the term loan facility. Such
required quarterly principal payments were reduced from
$0.8 million after partially prepaying our term loan using
proceeds from our initial public offering. No principal payments
are due on the revolving loan facility until the revolving
facility maturity date. We are also required to prepay our debt
obligations based on an excess cash flow calculation for the
applicable fiscal year which is determined in accordance with
the terms of our credit agreement.
In May 2008, we entered into the third amendment to our existing
credit agreement in connection with the completion of the Accuro
acquisition. The third amendment increased our term loan
facility by $50.0 million and the commitments to loan
amounts under our revolving credit facility from
$110.0 million to $125.0 million. The third amendment
also increased the applicable margins on the rate of interest we
pay under our credit agreement. As set forth above, the
additional debt is subject to certain financial covenants of the
original credit agreement. With respect to our revolving credit
facility, there are no provisions in the credit agreement that
require us to maintain a lock-box arrangement. The Third
amendment became effective upon the closing of the Accuro
Acquisition on June 2, 2008. We utilized cash on hand and
approximately $100.0 million of the increased borrowings to
fund the cash portion of the purchase price of Accuro.
In July 2008, we entered into the fourth amendment to our
existing credit agreement. The fourth amendment increased the
swing-line loan sublimit from $10.0 million to
$30.0 million. The balance outstanding under our swing-line
loan is a component of the revolving credit commitments. The
total commitments under the credit facility, including the
aggregate revolving credit commitments, were not increased as a
result of the fourth amendment.
During September 2008, we voluntarily changed our cash
management practice to reduce our interest expense by
instituting an auto-borrowing plan with the agent under our
credit agreement. As a result, all of our excess cash on hand is
voluntarily used to repay our swing-line credit facility on a
daily basis and we now fund our cash expenditures by using
swing-line loans.
As of December 31, 2009, we had a zero balance on our
swing-line loan and $124.0 million was available under our
revolving credit facility (after giving effect to
$1.0 million of outstanding but undrawn letters of credit
on such date. We also had $215.2 million outstanding of
bank debt and a cash balance of $5.5 million as of
December 31, 2009.
Our credit agreement contains financial and other restrictive
covenants, ratios and tests that limit our ability to incur
additional debt and engage in other activities. For example, our
credit agreement includes covenants restricting, among other
things, our ability to incur indebtedness, create liens on
assets, engage in certain lines of business, engage in mergers
or consolidations, dispose of assets, make investments or
acquisitions, engage in transactions with affiliates, enter into
sale leaseback transactions, enter into negative pledges or pay
dividends or make other restricted payments. Our credit
agreement also includes financial covenants including
requirements that we maintain compliance with a maximum
consolidated total debt to adjusted EBITDA leverage ratio of
4.00 to 1.0 and a minimum consolidated fixed charges coverage
ratio of 1.5 to 1.0 as of December 31, 2009. The
consolidated total debt to adjusted EBITDA leverage ratio and
the consolidated fixed charges coverage ratio thresholds adjust
in future periods. The following table shows our future covenant
thresholds:
|
|
|
|
|
|
|
|
|
Covenant Requirements Table
|
|
|
Maximum
|
|
|
|
|
Consolidated
|
|
Minimum
|
|
|
Total Debt
|
|
Consolidated
|
|
|
to Adjusted
|
|
Fixed
|
|
|
EBITDA
|
|
Charge
|
|
|
Leverage
|
|
Coverage
|
Period
|
|
Ratio
|
|
Ratio
|
|
October 1, 2008 through September 30, 2009
|
|
|
4.5:1.0
|
|
|
|
1.25:1.0
|
|
October 1, 2009 through September 30, 2010
|
|
|
4.0:1.0
|
|
|
|
1.5:1.0
|
|
Thereafter
|
|
|
3.5:1.0
|
|
|
|
1.5:1.0
|
|
66
The components that comprise the calculation of the
aforementioned covenants are specifically defined in our credit
agreement and require us to make certain adjustments to derive
the amounts used in the calculation of each ratio. Based on our
analysis as of December 31, 2009, our consolidated total
debt to adjusted EBITDA leverage ratio, calculated in accordance
with the credit agreement, was approximately 1.9 to 1.0 and our
consolidated fixed charges coverage ratio was approximately 4.91
to 1.0, both of which are in compliance with the requirements of
our credit agreement. Refer to the table in the earlier part of
this section for a summary of the pricing tiers and the
applicable rates.
The determination of our pricing tier is based on the
consolidated leverage ratio that was calculated in the most
recent compliance certificate received by our administrative
agent which would have been for the nine-month reporting period
ended September 30, 2009. In addition, our loans and other
obligations under the credit agreement are guaranteed, subject
to specified limitations, by our present and future direct and
indirect domestic subsidiaries. As of December 31, 2009, we
were not in default of any restrictive or financial covenants or
ratios under our credit agreement.
Summary
Disclosure Concerning Contractual Obligations and Commercial
Commitments
We have contractual obligations under our credit agreement and a
capital lease finance obligation. In addition, we maintain
operating leases for certain facilities and office equipment.
The following table summarizes our long-term contractual
obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Bank credit facility(1)
|
|
$
|
215,161
|
|
|
$
|
13,771
|
|
|
$
|
4,998
|
|
|
$
|
196,392
|
|
|
$
|
|
|
Operating leases(2)
|
|
|
54,881
|
|
|
|
8,133
|
|
|
|
14,000
|
|
|
|
12,873
|
|
|
|
19,875
|
|
Accuro severance(3)
|
|
|
3,059
|
|
|
|
1,877
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
Finance obligations(4)
|
|
|
16,369
|
|
|
|
1,096
|
|
|
|
2,217
|
|
|
|
2,228
|
|
|
|
10,828
|
|
Other liabilities(5)
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax liability(6)
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
289,777
|
|
|
$
|
24,927
|
|
|
$
|
22,397
|
|
|
$
|
211,493
|
|
|
$
|
30,960
|
|
|
|
|
(1) |
|
Interest payments on our credit facility are not included in the
above table. In addition to our regularly scheduled principal
reduction payments, we have included an estimated excess cash
flow payment required by our lenders of approximately
$11.3 million in the above table in the less than one year
column. Indebtedness under our credit facility bears interest at
an annual rate of LIBOR plus an applicable margin. The
applicable weighted average interest rate, inclusive of the
LIBOR, the applicable margin and the impact of our interest rate
collar, was 5.88% on our term loan facility at December 31,
2009. We had zero outstanding under our revolving credit
facility at December 31, 2009. See Note 6 of the Notes
to Consolidated Financial Statements for additional information
regarding our borrowings. |
|
(2) |
|
Relates to certain office space and office equipment under
operating leases. Amounts represent future minimum rental
payments under operating leases with initial or remaining
non-cancelable lease terms of one year or more. See Note 7
of the Notes to Consolidated Financial Statements for more
information. |
|
(3) |
|
Represents severance costs and lease term penalties associated
with the Accuro Acquisition on June 2, 2008. See
Note 5 of the Notes to Consolidated Financial Statements
for additional information. The remaining severance of $246 is
expected to be paid during the first quarter 2010. The remaining
$2,813 is associated with the Dallas lease termination penalty.
Approximately $1,767 will be paid ratably from January 2010
through January 2011 with a final payment of $1,046 due in
February 2011. |
|
(4) |
|
Represents a capital lease obligation incurred in a sale and
subsequent leaseback transaction of an office building in August
2003. The transaction did not qualify for sale and leaseback
treatment under generally accepted accounting principles
relating to leases. In July 2007, we extended the terms of our
office building lease agreement by an additional four years
through July 2017, which increased our total finance |
67
|
|
|
|
|
obligation by $1.1 million. See Note 6 of the Notes to
Consolidated Financial Statements under the subheading
Finance Obligations for additional information
regarding this transaction and the related obligation. |
|
(5) |
|
Aggregation of other purchase obligations. |
|
(6) |
|
Effective January 1, 2007, we adopted generally accepted
accounting principles relating to accounting for uncertainty in
income taxes. The above amount relates to managements
estimate of uncertain tax positions. As a result of our NOLs, we
have several tax periods with open statutes of limitations that
will remain open until our NOLs are utilized. As such, we cannot
predict the precise timing that this liability will be applied
or utilized. Additionally the liability may increase or decrease
if managements estimate of uncertain tax positions changes
when new information arises or changes in circumstances occur. |
Indemnification of product users. We
provide a limited indemnification to users of our products
against any patent, copyright, or trade secret claims brought
against them. The duration of the indemnifications vary based
upon the life of the specific individual agreements. We have not
had a material indemnification claim, and we do not believe we
will have a material claim in the future. As such, we have not
recorded any liability for these indemnification obligations in
our financial statements.
Acquisition contingent
consideration. In August 2007, the former
owner of Med-Data Management, Inc. (or Med-Data)
disputed our earn-out calculation made under the Med-Data Asset
Purchase Agreement and alleged that we failed to fulfill our
obligations with respect to the earn-out. In November 2007, the
former owner filed a complaint alleging that we failed to act in
good faith with respect to the operation of Med-Data subsequent
to the acquisition which affected the earn-out calculation. The
Company refutes these allegations and is vigorously defending
itself against these allegations. On March 21, 2008 we
filed an answer, denying the plaintiffs allegations and
also filed a counterclaim, alleging that the plaintiffs
fraudulently induced us to enter into the purchase agreement by
intentionally concealing the status of their relationship with
their largest customer. Discovery has been completed and
briefing has been completed on MedAssets and
plaintiffs dispositive motions, but we currently cannot
estimate any probable outcome and have not recorded a loss
contingency in our Consolidated Statement of Operations. The
maximum earn-out payable under the Asset Purchase Agreement is
$4.0 million. In addition, the plaintiffs claim that
Ms. Hodges, one of the plaintiffs, is entitled to the
accelerated vesting of options to purchase 140,000 shares
of our common stock that she received in connection with her
employment agreement with the Company.
Off-Balance
Sheet Arrangements
We have provided a $1.0 million letter of credit to
guarantee our performance under the terms of a ten-year lease
agreement. The letter of credit is associated with the capital
lease of a building located in Cape Girardeau, Missouri under a
finance obligation. We do not believe that this letter of credit
will be drawn.
We lease office space and equipment under operating leases. Some
of these operating leases include rent escalations, rent
holidays, and rent concessions and incentives. However, we
recognize lease expense on a straight-line basis over the
minimum lease term utilizing total future minimum lease payments.
As of December 31, 2009, we did not have any other
off-balance sheet arrangements that have or are reasonably
likely to have a current or future significant effect on our
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Use of
Non-GAAP Financial Measures
In order to provide investors with greater insight, promote
transparency and allow for a more comprehensive understanding of
the information used by management and the Board in its
financial and operational decision-making, we supplement our
Consolidated Financial Statements presented on a GAAP basis in
this Annual Report on
Form 10-K
with the following non-GAAP financial measures: gross fees,
gross administrative fees, revenue share obligation, EBITDA,
Adjusted EBITDA, Adjusted EBITDA margin, Revenue Cycle
Management acquisition-affected net revenue and cash diluted
earnings per share.
68
These non-GAAP financial measures have limitations as analytical
tools and should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP.
We compensate for such limitations by relying primarily on our
GAAP results and using non-GAAP financial measures only
supplementally. We provide reconciliations of non-GAAP measures
to their most directly comparable GAAP measures, where possible.
Investors are encouraged to carefully review those
reconciliations. In addition, because these non-GAAP measures
are not measures of financial performance under GAAP and are
susceptible to varying calculations, these measures, as defined
by us, may differ from and may not be comparable to similarly
titled measures used by other companies.
Gross Fees, Gross Administrative Fees and Revenue Share
Obligation. Gross fees include all gross
administrative fees we receive pursuant to our vendor contracts
and all other fees we receive from customers. Our revenue share
obligation represents the portion of the gross administrative
fees we are contractually obligated to share with certain of our
GPO customers. Total net revenue (a GAAP measure) reflects our
gross fees net of our revenue share obligation. These non-GAAP
measures assist management and the Board and may be helpful to
investors in analyzing our growth in the Spend Management
segment given that administrative fees constitute a material
portion of our revenue and are paid to us by over 1,150 vendors
contracted by our GPO, and that our revenue share obligation
constitutes a significant outlay to certain of our GPO
customers. A reconciliation of these non-GAAP measures to their
most directly comparable GAAP measure can be found in the
Overview and Results of Operations
section of Item 7.
EBITDA, Adjusted EBITDA and Adjusted EBITDA
margin. We define: (i) EBITDA, as net
income (loss) before net interest expense, income tax expense
(benefit), depreciation and amortization; (ii) Adjusted
EBITDA, as net income (loss) before net interest expense, income
tax expense (benefit), depreciation and amortization and other
non-recurring, non-cash or non-operating items; and
(iii) Adjusted EBITDA margin, as Adjusted EBITDA as a
percentage of net revenue. We use EBITDA, Adjusted EBITDA and
Adjusted EBITDA margin to facilitate a comparison of our
operating performance on a consistent basis from period to
period and provide for a more complete understanding of factors
and trends affecting our business than GAAP measures alone.
These measures assist management and the Board and may be useful
to investors in comparing our operating performance consistently
over time as it removes the impact of our capital structure
(primarily interest charges and amortization of debt issuance
costs), asset base (primarily depreciation and amortization) and
items outside the control of the management team (taxes), as
well as other non-cash (purchase accounting adjustments, and
imputed rental income) and non-recurring items, from our
operational results. Adjusted EBITDA also removes the impact of
non-cash share-based compensation expense.
Our Board and management also use these measures as i) one
of the primary methods for planning and forecasting overall
expectations and for evaluating, on at least a quarterly and
annual basis, actual results against such expectations; and,
ii) as a performance evaluation metric in determining
achievement of certain executive incentive compensation
programs, as well as for incentive compensation plans for
employees generally.
Additionally, research analysts, investment bankers and lenders
may use these measures to assess our operating performance. For
example, our credit agreement requires delivery of compliance
reports certifying compliance with financial covenants certain
of which are, in part, based on an adjusted EBITDA measurement
that is similar to the Adjusted EBITDA measurement reviewed by
our management and our Board. The principal difference is that
the measurement of adjusted EBITDA considered by our lenders
under our credit agreement allows for certain adjustments (e.g.,
inclusion of interest income, franchise taxes and other non-cash
expenses, offset by the deduction of our capitalized lease
payments for one of our office leases) that result in a higher
adjusted EBITDA than the Adjusted EBITDA measure reviewed by our
Board and management and disclosed in our Annual Report on
Form 10-K.
Additionally, our credit agreement contains provisions that
utilize other measures, such as excess cash flow, to measure
liquidity.
EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not
measures of liquidity under GAAP, or otherwise, and are not
alternatives to cash flow from continuing operating activities.
Despite the advantages regarding the use and analysis of these
measures as mentioned above, EBITDA, Adjusted EBITDA and
Adjusted EBITDA margin, as disclosed in this Annual Report on
Form 10-K,
have limitations as analytical
69
tools, and you should not consider these measures in isolation,
or as a substitute for analysis of our results as reported under
GAAP; nor are these measures intended to be measures of
liquidity or free cash flow for our discretionary use. Some of
the limitations of EBITDA are:
|
|
|
|
|
EBITDA does not reflect our cash expenditures or future
requirements for capital expenditures or contractual commitments;
|
|
|
|
EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
|
|
|
|
EBITDA does not reflect the interest expense, or the cash
requirements to service interest or principal payments under our
credit agreement;
|
|
|
|
EBITDA does not reflect income tax payments we are required to
make; and
|
|
|
|
Although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized often will have to be
replaced in the future, and EBITDA does not reflect any cash
requirements for such replacements.
|
Adjusted EBITDA has all the inherent limitations of EBITDA. To
properly and prudently evaluate our business, we encourage you
to review the GAAP financial statements included elsewhere in
this Annual Report on
Form 10-K,
and not rely on any single financial measure to evaluate our
business. We also strongly urge you to review the reconciliation
of net income to Adjusted EBITDA in this section, along with our
Consolidated Financial Statements included elsewhere in this
Annual Report on
Form 10-K.
The following table sets forth a reconciliation of EBITDA and
Adjusted EBITDA to net income, a comparable GAAP-based measure.
All of the items included in the reconciliation from net income
to EBITDA to Adjusted EBITDA are either (i) non-cash items
(e.g., depreciation and amortization, impairment of intangibles
and share-based compensation expense) or (ii) items that
management does not consider in assessing our on-going operating
performance (e.g., income taxes, interest expense and expenses
related to the cancellation of an interest rate swap). In the
case of the non-cash items, management believes that investors
may find it useful to assess our comparative operating
performance because the measures without such items are less
susceptible to variances in actual performance resulting from
depreciation, amortization and other non-cash charges and more
reflective of other factors that affect operating performance.
In the case of the other non-recurring items, management
believes that investors may find it useful to assess our
operating performance if the measures are presented without
these items because their financial impact does not reflect
ongoing operating performance.
70
The following table reconciles net income to Adjusted EBITDA for
the fiscal years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
19,947
|
|
|
$
|
10,841
|
|
|
$
|
6,296
|
|
Depreciation
|
|
|
13,211
|
|
|
|
9,793
|
|
|
|
7,115
|
|
Amortization of intangibles
|
|
|
28,012
|
|
|
|
23,442
|
|
|
|
15,778
|
|
Amortization of intangibles (included in cost of revenue)
|
|
|
3,166
|
|
|
|
1,581
|
|
|
|
1,145
|
|
Interest expense, net of interest income(1)
|
|
|
18,087
|
|
|
|
19,823
|
|
|
|
18,213
|
|
Income tax (benefit)
|
|
|
12,826
|
|
|
|
7,489
|
|
|
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
95,249
|
|
|
|
72,969
|
|
|
|
53,063
|
|
Impairment of intangibles(2)
|
|
|
|
|
|
|
2,272
|
|
|
|
1,204
|
|
Share-based compensation expense(3)
|
|
|
16,652
|
|
|
|
8,550
|
|
|
|
5,611
|
|
Rental income from capitalizing building lease(4)
|
|
|
(439
|
)
|
|
|
(438
|
)
|
|
|
(438
|
)
|
Accuro & XactiMed purchase accounting adjustments(5)
|
|
|
(24
|
)
|
|
|
2,449
|
|
|
|
1,131
|
|
Interest rate swap cancellation(6)
|
|
|
|
|
|
|
3,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
111,438
|
|
|
$
|
89,716
|
|
|
$
|
60,571
|
|
|
|
|
(1) |
|
Interest income is included in other income (expense) and is not
netted against interest expense in our Consolidated Statement of
Operations. |
|
(2) |
|
Impairment of intangibles during the fiscal year ended
December 31, 2008 primarily relates to acquired developed
technology from prior acquisitions, revenue cycle management
tradename and internally developed software products, mainly due
to the integration of Accuros operations and products.
Impairment of intangibles during fiscal year ended
December 31, 2007 represents the write-off of in-process
research and development from the XactiMed acquisition in May
2007. |
|
(3) |
|
Represents non-cash share-based compensation to both employees
and directors. The increase in 2009 is due to share-based grants
made under our 2008 Long-Term Performance Incentive Plan. The
increase in 2008 is due to share-based grants made subsequent to
our initial public offering. The significant increase in 2007 is
due to the adoption of SFAS No. 123(R). We believe
excluding this non-cash expense allows us to compare our
operating performance without regard to the impact of
share-based compensation expense, which varies from period to
period based on the amount and timing of grants. |
|
(4) |
|
The imputed rental income recognized with respect to a
capitalized building lease is deducted from net income (loss)
due to its non-cash nature. We believe this income is not a
useful measure of continuing operating performance. See
Note 6 to our Consolidated Financial Statements for further
discussion of this rental income. |
|
(5) |
|
These adjustments include the effect on revenue of adjusting
acquired deferred revenue balances, net of any reduction in
associated deferred costs, to fair value as of the respective
acquisition dates for Accuro and XactiMed. The reduction of the
deferred revenue balances materially affects
period-to-period
financial performance comparability and revenue and earnings
growth in future periods subsequent to the acquisition and is
not indicative of changes in underlying results of operations.
In 2010, these adjustments will no longer be reconciling items
related to acquired deferred revenue balances because the
amounts were fully amortized in 2009. We may have this
adjustment in future periods if we have any new acquisitions. |
|
(6) |
|
During the fiscal year ended December 31, 2008, we recorded
an expense associated with the cancellation of our interest rate
swap arrangements. In connection with the cancellation, we paid
the counterparty $3.9 million in termination fees. We
believe such expense is infrequent in nature and is not
indicative of continuing operating performance. |
Revenue Cycle Management Acquisition-Affected Net
Revenue. Revenue Cycle Management
acquisition-affected net revenue includes the revenue of Accuro
prior to our actual ownership. The Accuro Acquisition
71
was consummated on June 2, 2008. This measure assumes the
acquisition of Accuro occurred on January 1, 2008. Revenue
Cycle Management acquisition-affected net revenue is used by
management and the Board to better understand the extent of
organic
period-over-period
growth of the Revenue Cycle Management segment. Given the
significant impact that this acquisition had on the Company
during the fiscal years ended December 31, 2009 and 2008,
we believe such acquisition-affected net revenue may be useful
and meaningful to investors in their analysis of such growth.
Revenue Cycle Management acquisition-affected net revenue is
presented for illustrative and informational purposes only and
is not intended to represent or be indicative of what our
results of operations would have been if these transactions had
occurred at the beginning of such period. This measure also
should not be considered representative of our future results of
operations. Reconciliations of Revenue Cycle Management
acquisition-affected net revenue to its most directly comparable
GAAP measure can be found in the Results of
Operations section of Item 7.
Diluted
Cash Earnings Per Share
The Company defines diluted cash EPS as diluted earnings per
share excluding non-cash acquisition-related intangible
amortization, non-recurring expense items on a tax-adjusted
basis and non-cash tax-adjusted shared-based compensation
expense. Diluted cash EPS is not a measure of liquidity under
GAAP, or otherwise, and is not an alternative to cash flow from
continuing operating activities. Diluted cash EPS growth is used
by the Company as the financial performance metric that
determines whether certain equity awards granted pursuant to the
Companys Long-Term Performance Incentive Plan will vest.
Use of this measure for this purpose allows management and the
Board to analyze the Companys operating performance on a
consistent basis by removing the impact of certain non-cash and
non-recurring items from our operations and reward organic
growth and accretive business transactions. As a significant
portion of senior managements incentive based compensation
is based on the achievement of certain diluted cash EPS growth
over time, investors may find such information useful; however,
as a non-GAAP financial measure, diluted cash EPS is not the
sole measure of the Companys financial performance and may
not be the best measure for investors to gauge such performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
Per share data
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Diluted EPS
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
|
nm*
|
|
Pre-tax non-cash, acquisition-related intangible amortization
|
|
|
0.50
|
|
|
|
0.47
|
|
|
|
nm*
|
|
Pre-tax non-cash, share-based compensation(1)
|
|
|
0.29
|
|
|
|
0.16
|
|
|
|
nm*
|
|
Pre-tax interest rate swap cancellation(2)
|
|
|
|
|
|
|
0.07
|
|
|
|
nm*
|
|
Pre-tax non-cash, impairment of intangibles(3)
|
|
|
|
|
|
|
0.04
|
|
|
|
nm*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect on pre-tax adjustments(4)
|
|
|
(0.31
|
)
|
|
|
(0.30
|
)
|
|
|
nm*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP diluted cash EPS
|
|
$
|
0.82
|
|
|
$
|
0.65
|
|
|
|
nm*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
57,865
|
|
|
|
52,314
|
|
|
|
|
|
|
|
|
* |
|
The comparison of 2007 non-GAAP adjusted diluted EPS and
non-GAAP diluted cash EPS to 2008 performance is not meaningful
due to the significant non-recurring preferred stock dividends
accrued or paid in 2007 prior to the Companys initial
public offering in December of that year. |
|
(1) |
|
Represents the per share impact, on a tax-adjusted basis of
non-cash share-based compensation to both employees and
directors. The significant increase in 2009 is due to
share-based grants made from the Long-Term Performance Incentive
Plan previously discussed. We believe excluding this non-cash
expense allows us to compare our operating performance without
regard to the impact of share-based compensation expense, which
varies from period to period based on the amount and timing of
grants. |
|
(2) |
|
Represents the per share impact, on a tax-adjusted basis of an
expense associated with the cancellation of our interest rate
swap arrangement during the fiscal year ended December 31,
2008. In connection with the cancellation, we paid the
counterparty $3.9 million in termination fees. We believe
such expense is infrequent in nature and is not indicative of
continuing operating performance. |
72
|
|
|
(3) |
|
Represents the per share impact, on a tax-adjusted basis of
impairment of intangibles during the fiscal year ended
December 31, 2008. The impairment primarily relates to
acquired developed technology from prior acquisitions, revenue
cycle management tradename and internally developed software
products deemed impaired as a result of the Accuro Acquisition. |
|
(4) |
|
This amount reflects the tax impact to the adjustments used to
derive Non-GAAP diluted cash EPS. The Company uses its effective
tax rate for each respective period to tax effect the
adjustments. The effective tax rate for the three months ended
December 31, 2009 and 2008 was 39.9% and 41.2%,
respectively. The effective tax rate for the twelve months ended
December 31, 2009 and 2008 was 39.1% and 40.8%,
respectively. |
Related
Party Transactions
For a discussion of our transactions with certain related
parties see Note 18 of the Notes to Consolidated Financial
Statements.
New
Accounting Pronouncements
Accounting
Standards Codification
In June 2009, the Financial Accounting Standards Board
(FASB) made the FASB Accounting Standards
Codification (the Codification) the single source of
U.S. GAAP used by non-governmental entities in the
preparation of financial statements, except for rules and
interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative accounting
guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into approximately 90
accounting topics within a consistent structure; its purpose is
not to create new accounting and reporting guidance. The
Codification supersedes all existing non-SEC accounting and
reporting standards and was effective for the Company beginning
July 1, 2009. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting
Standards Updates. The FASB will not consider Accounting
Standards Updates as authoritative in their own right; these
updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases
for conclusions on the change(s) in the Codification. As a
result of adopting this standard, we will no longer reference
specific standards under the pre-codification naming convention
and all references to accounting standards will be made in plain
english as defined by the SEC.
Revenue
Recognition
In October 2009, the FASB issued an accounting standards update
for multiple-deliverable revenue arrangements. The update
addressed the accounting for multiple-deliverable arrangements
to enable vendors to account for products or services separately
rather than as a combined unit. The update also addresses how to
separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting.
The amendments in the update significantly expand the
disclosures related to a vendors multiple-deliverable
revenue arrangements with the objective of providing information
about the significant judgments made and changes to those
judgments and how the application of the relative selling-price
method affects the timing or amount of revenue recognition. The
accounting standards update will be applicable for annual
periods beginning after June 15, 2010, however, early
adoption is permitted. We are currently assessing the impact of
the adoption of this update on our Consolidated Financial
Statements.
Software
In October 2009, the FASB issued an accounting standards update
relating to certain revenue arrangements that include software
elements. The update will change the accounting model for
revenue arrangements that include both tangible products and
software elements. Among other things, tangible products
containing software and nonsoftware components that function
together to deliver the tangible products essential
functionality are no longer within the scope of software revenue
guidance. In addition, the update also
73
provides guidance on how a vendor should allocate arrangement
consideration to deliverables in an arrangement that includes
tangible products and software. The accounting standards update
will be applicable for annual periods beginning after
June 15, 2010, however, early adoption is permitted. We are
currently assessing the impact of the adoption of this update on
our Consolidated Financial Statements.
Accounting
for Transfers of Financial Assets
In June 2009, the FASB issued an amendment to generally accepted
accounting principles relating to transfers and servicing. The
guidance eliminates the concept of a qualifying special-purpose
entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies
other sale-accounting criteria, and changes the initial
measurement of a transferors interest in transferred
financial assets. The guidance is applicable for annual periods
beginning after November 15, 2009 and interim periods
thereafter. We are currently assessing the impact, if any, of
the adoption of this guidance on our Consolidated Financial
Statements.
Consolidation
of Variable Interest Entities
In June 2009, the FASB issued an amendment to generally accepted
accounting principles relating to consolidation. The guidance
eliminates previous exceptions to consolidating qualifying
special-purpose entities, contains new criteria for determining
the primary beneficiary of a variable interest entity, and
increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable
interest entity. The guidance also contains a new requirement
that any term, transaction, or arrangement that does not have a
substantive effect on an entitys status as a variable
interest entity, a companys power over a variable interest
entity, or a companys obligation to absorb losses or its
right to receive benefits of an entity must be disregarded in
applying the guidance. The guidance is applicable for annual
periods beginning after November 15, 2009 and interim
periods thereafter. We are currently assessing the impact, if
any, of the adoption of this guidance on our Consolidated
Financial Statements.
|
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Quantitative
and Qualitative Disclosures About Market Risk
Foreign currency exchange risk. Certain
of our contracts are denominated in Canadian dollars. As our
Canadian sales have not historically been significant to our
operations, we do not believe that changes in the Canadian
dollar relative to the U.S. dollar will have a significant
impact on our financial condition, results of operations or cash
flows. As we continue to grow our operations, we may increase
the amount of our sales to foreign customers. Although we do not
expect foreign currency exchange risk to have a significant
impact on our future operations, we will assess the risk on a
case-specific basis to determine whether a forward currency
hedge instrument would be warranted. On August 2, 2007, we
entered into a series of forward contracts to fix the Canadian
dollar-to-U.S. dollar
exchange rates on a Canadian customer contract, as discussed in
Note 14 to our Consolidated Financial Statements herein. We
have one other Canadian dollar contract that we have not elected
to hedge. We currently do not transact any other business in any
currency other than the U.S. dollar.
We continue to evaluate the credit worthiness of the
counterparty of the hedge instruments. Considering the current
state of the credit markets and specific challenges related to
financial institutions, the Company continues to believe that
the size, international presence and US government cash
infusion, and operating history of the counterparty will allow
them to perform under the obligations of the contract and are
not a risk of default that would change the highly effective
status of the hedged instruments.
Interest rate risk. We had outstanding
borrowings on our term loan and revolving credit facility of
$215.2 million as of December 31, 2009. The term loan
and revolving credit facility bear interest at LIBOR plus an
applicable margin.
On May 21, 2009, we entered into a London Inter-bank
Offered Rate (or LIBOR) interest rate swap with a
notional amount of $138.3 million beginning June 30,
2010, which effectively converts a portion of our variable rate
term loan credit facility to a fixed rate debt. The notional
amount subject to the swap has pre-set
74
quarterly step downs corresponding to our anticipated principal
reduction schedule. The interest rate swap converts the
three-month LIBOR rate on the corresponding notional amount of
debt to an effective fixed rate of 1.99% (exclusive of the
applicable bank margin charged by our lender). The interest rate
swap terminates on March 31, 2012 and qualifies as a highly
effective cash flow hedge under generally accepted accounting
principles for derivatives and hedging. As such, the fair value
of the derivative will be recorded on our Consolidated Balance
Sheet. The interest rate swap matures on March 31, 2012. As
of December 31, 2009, the interest rate swap had a market
value of $0.6 million ($0.4 million net of tax). The
liability is included in other long-term liabilities in the
accompanying Consolidated Balance Sheet as of December 31,
2009. The unrealized loss is recorded in other comprehensive
loss, net of tax, in the Consolidated Statement of
Stockholders Equity.
We entered into an interest rate collar in June 2008 which
effectively sets a maximum LIBOR interest rate of 6.00% and a
minimum LIBOR interest rate of 2.85% on the interest rate we pay
on $155.0 million of our term loan debt outstanding,
effectively limiting our base interest rate exposure on this
portion of our term loan debt to within that range (2.85% to
6.00%). The collar does not hedge the applicable margin that the
counterparty charges on our revolving credit facility and term
loan (see rate schedule in our discussion of cash flow section).
Settlement payments are made between the hedge counterparty and
us on a quarterly basis, coinciding with our term loan
installment payment dates, for any rate overage on the maximum
rate and any rate deficiency on the minimum rate on the notional
amount outstanding. The collar terminates on September 30,
2010 and no consideration was exchanged with the counterparty to
enter into the hedging arrangement. As of December 31,
2009, we pay an effective interest rate of 2.85% on
$155.0 million of notional term loan debt outstanding
before applying the applicable margin.
We continue to evaluate the credit worthiness of the
counterparty of the hedge instruments when assessing
effectiveness. The Company believes that given the size of the
hedged instruments and the likelihood that the counterparty
would have to perform under the contracts mitigates any
potential credit risk and risk of non-performance under the
contract. In addition, the Company understands the interest rate
hedge counterparty has been acquired by a much larger financial
institution. We believe that the creditworthiness of the
acquirer mitigates risk and will allow the interest rate hedge
counterparty to be able to perform under the terms of the
contract.
A hypothetical 100 basis point increase or decrease in
LIBOR would have resulted in an approximate $0.5 million
change to our interest expense for the fiscal year ended
December 31, 2009, which represents potential interest rate
change exposure on our outstanding unhedged portion of our term
loan and revolving credit facility.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
The information required by this item is included herein
beginning on
page F-1.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
Not applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in
reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management,
including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating disclosure
controls and procedures, management recognizes that any control
and procedure, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives
75
and management necessarily applies its judgment in evaluating
the cost-benefit relationship regarding the potential
utilization of certain controls and procedures.
As required by
Rule 13a-15(b)
under the Exchange Act, our management, with the participation
of our chief executive officer and chief financial officer,
evaluated the design and operation of our disclosure controls
and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on such evaluation, our chief
executive officer and chief financial officer have concluded
that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective and were
operating at a reasonable assurance level.
Management
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) to provide reasonable assurance
regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles. Management assessed our internal control over
financial reporting as of December 31, 2009. In making this
assessment, we used the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal Control Integrated Framework.
Managements assessment included evaluation of elements
such as the design and operating effectiveness of key financial
reporting controls, process documentation, accounting policies,
and our overall control environment.
Based on our assessment, management has concluded that our
internal control over financial reporting was effective as of
December 31, 2009 to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting
principles. The effectiveness of our internal control over
financial reporting as of December 31, 2009 has been
audited by BDO Seidman, LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
Changes
in Internal Control over Financial Reporting
There have been no changes in our internal control over
financial reporting for the three months ended December 31,
2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Information regarding directors, executive officers and
corporate governance will be set forth in the proxy statement
for our 2010 annual meeting of stockholders and is incorporated
herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
Information regarding executive compensation will be set forth
in the proxy statement for our 2010 annual meeting of
stockholders and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters will be
set forth in the proxy statement for our 2010 annual meeting of
stockholders and is
76
incorporated herein by reference. Also, see section Equity
Compensation Plan Information in Item 5 of
Part 2 herein.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Information regarding certain relationships and related
transactions and director independence will be set forth in the
proxy statement for our 2010 annual meeting of stockholders and
is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
Information regarding principal accountant fees and services
will be set forth in the proxy statement for our 2010 annual
meeting of stockholders and is incorporated herein by reference.
77
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules.
|
a) documents as part of this Report.
(1) The following consolidated financial statements are
filed herewith in Item 8 of Part II above.
(i) Reports of Independent Registered Public Accounting firm
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Operations
(iv) Consolidated Statements of Changes in
Stockholders (Deficit) Equity
(v) Consolidated Statements of Cash Flows
(vi) Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
All other supplemental schedules are omitted because of the
absence of conditions under which they are required.
(3) Exhibits
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to the
Companys Annual Report on
Form 10-K
filed on March 24, 2008)
|
|
3
|
.2
|
|
Amended and Restated By-laws of the Company (Incorporated by
reference to Exhibit 3.1 to the Companys Annual
Report on
Form 10-K
filed on March 24, 2008)
|
|
4
|
.1
|
|
Form of common stock certificate of the Company (Incorporated by
reference to Exhibit 4.3 to the Companys Registration
Statement on
Form S-1
No. 333-145693)
|
|
4
|
.2
|
|
Amended and Restated Registration Rights Agreement (Incorporated
by reference to Exhibit 4.4 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.1
|
|
MedAssets Inc. 2004 Long-Term Incentive Plan (as amended)
(Incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.2
|
|
1999 Stock Incentive Plan (as amended) (Incorporated by
reference to Exhibit 10.2 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.3
|
|
Credit Agreement, dated as of October 23, 2006 among the
Company, its domestic subsidiaries, Bank of America, N.A., BNP
Paribas, CIT Healthcare LLC, and the other lenders party
thereto, as amended by the First Amendment to Credit Agreement
and Waiver dated as of March 15, 2007 and the Second
Amendment to Credit Agreement dated as of July 2, 2007
(Incorporated by reference to Exhibit 10.3 to the
Companys Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.4
|
|
Employment Agreement, dated as of August 21, 2007, by and
between the Company and John A. Bardis (Incorporated by
reference to Exhibit 10.4 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.5
|
|
Employment Agreement, dated as of August 21, 2007, by and
between the Company and Rand A. Ballard (Incorporated by
reference to Exhibit 10.5 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.6
|
|
Employment Agreement, dated as of August 21, 2007, by and
between the Company and Jonathan H. Glenn (Incorporated by
reference to Exhibit 10.6 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.7
|
|
Employment Agreement, dated as of August 21, 2007, by and
between the Company and Scott E. Gressett (Incorporated by
reference to Exhibit 10.7 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
78
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
10
|
.8
|
|
Employment Agreement, dated as of August 21, 2007, by and
between the Company and L. Neil Hunn (Incorporated by reference
to Exhibit 10.8 to the Companys Registration
Statement on
Form S-1
No. 333-145693)
|
|
10
|
.9
|
|
Form of Indemnification Agreement entered into by the Company
with each of its executive officers and directors (Incorporated
by reference to Exhibit 10.9 to the Companys
Registration Statement on
Form S-1
No. 333-145693)
|
|
10
|
.10
|
|
Med Assets, Inc. Long Term Performance Incentive Plan
(Incorporated by reference to Annex A to the Companys
Definitive Proxy Statement on Form DEF 14A filed on
September 30, 2008)
|
|
10
|
.11
|
|
Form of Stock Appreciation Right (non-performance based) Grant
Notice and Agreement (Incorporated by reference to
Exhibit 10.11 to the Companys Annual Report on
Form 10-K
filed on March 11, 2009)
|
|
10
|
.12
|
|
Form of Stock Appreciation Right (performance based) Grant
Notice and Agreement (Incorporated by reference to
Exhibit 10.12 to the Companys Annual Report on
Form 10-K
filed on March 11, 2009)
|
|
10
|
.13
|
|
Form of Restricted Stock (non-performance based) Grant Notice
and Agreement (Incorporated by reference to Exhibit 10.13
to the Companys Annual Report on
Form 10-K
filed on March 11, 2009)
|
|
10
|
.14
|
|
Form of Restricted Stock (performance based) Grant Notice and
Agreement (Incorporated by reference to Exhibit 10.14 to
the Companys Annual Report on
Form 10-K
filed on March 11, 2009)
|
|
21
|
.1*
|
|
Subsidiaries of the Company
|
|
23
|
.1*
|
|
Consent of BDO Seidman, LLP with respect to the consolidated
financial statements of the Company
|
|
31
|
.1*
|
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for
President and Chief Executive Officer
|
|
31
|
.2*
|
|
Sarbanes-Oxley Act of 2002, Section 302 Certification for
Chief Financial Officer
|
|
32
|
.1*
|
|
Sarbanes-Oxley Act of 2002, Section 906 Certification for
President and Chief Executive Officer and Chief Financial
Officer
|
79
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.
|
|
|
|
|
MEDASSETS, INC.
|
|
|
|
February 26, 2010
|
|
By: /s/ JOHN
A. BARDIS
Name: John
A. Bardis
Title: Chief
Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ JOHN
A. BARDIS
Name:
John A. Bardis
|
|
Chairman of the Board of Directors and Chief Executive
Officer
(Principal Executive Officer)
|
|
February 26, 2010
|
|
|
|
|
|
/s/ L.
NEIL HUNN
Name:
L. Neil Hunn
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
February 26, 2010
|
|
|
|
|
|
/s/ SCOTT
E. GRESSETT
Name:
Scott E. Gressett
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 26, 2010
|
|
|
|
|
|
/s/ RAND
A. BALLARD
Name:
Rand A. Ballard
|
|
Director and Chief Operating Officer
|
|
February 26, 2010
|
|
|
|
|
|
/s/ SAMANTHA
TROTMAN BURMAN
Name:
Samantha Trotman Burman
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ HARRIS
HYMAN IV
Name:
Harris Hyman IV
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ VERNON
R. LOUCKS, JR.
Name:
Vernon R. Loucks, Jr.
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ TERRENCE
J. MULLIGAN
Name:
Terrence J. Mulligan
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ LANCE
PICCOLO
Name:
Lance Piccolo
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ SAMUEL
K. SKINNER
Name:
Samuel K. Skinner
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ BRUCE
F. WESSON
Name:
Bruce F. Wesson
|
|
Director
|
|
February 26, 2010
|
80
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders of MedAssets, Inc.
Alpharetta, Georgia
We have audited the accompanying consolidated balance sheets of
MedAssets, Inc. as of December 31, 2009 and 2008 and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2009. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these 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, 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 MedAssets, Inc. at December 31, 2009 and 2008,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2009,
in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
MedAssets, Inc.s internal control over financial reporting
as of December 31, 2009, 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 26, 2010,
expressed an unqualified opinion thereon.
Atlanta, Georgia
February 26, 2010
F-2
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders of MedAssets, Inc.
Alpharetta, Georgia
We have audited MedAssets, Inc.s internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
MedAssets, Inc.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
Item 9A, Managements Report on Internal Control
Over Financial Reporting. Our responsibility is to express
an opinion on the companys 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 companys 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 companys
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
companys 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, MedAssets, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of MedAssets, Inc. as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2009 and our report dated February 26,
2010, expressed an unqualified opinion thereon.
Atlanta, Georgia
February 26, 2010
F-3
MedAssets,
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,498
|
|
|
$
|
5,429
|
|
Accounts receivable, net of allowances of $4,189 and $2,247 as
of December 31,
|
|
|
|
|
|
|
|
|
2009 and 2008
|
|
|
67,617
|
|
|
|
55,048
|
|
Deferred tax asset, current
|
|
|
14,423
|
|
|
|
13,780
|
|
Prepaid expenses and other current assets
|
|
|
8,442
|
|
|
|
5,997
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
95,980
|
|
|
|
80,254
|
|
Property and equipment, net
|
|
|
54,960
|
|
|
|
42,417
|
|
Other long term assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
511,861
|
|
|
|
508,748
|
|
Intangible assets, net (Note 4)
|
|
|
95,589
|
|
|
|
124,340
|
|
Other
|
|
|
20,154
|
|
|
|
18,101
|
|
|
|
|
|
|
|
|
|
|
Other long term assets
|
|
|
627,604
|
|
|
|
651,189
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
778,544
|
|
|
$
|
773,860
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,680
|
|
|
$
|
6,725
|
|
Accrued revenue share obligation and rebates
|
|
|
31,948
|
|
|
|
29,698
|
|
Accrued payroll and benefits
|
|
|
12,874
|
|
|
|
21,837
|
|
Other accrued expenses
|
|
|
7,410
|
|
|
|
6,981
|
|
Deferred revenue, current portion
|
|
|
24,498
|
|
|
|
24,280
|
|
Deferred purchase consideration (Note 5)
|
|
|
|
|
|
|
19,361
|
|
Current portion of notes payable (Note 6)
|
|
|
13,771
|
|
|
|
30,277
|
|
Current portion of finance obligation
|
|
|
163
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
99,344
|
|
|
|
139,308
|
|
Notes payable, less current portion
|
|
|
201,390
|
|
|
|
215,349
|
|
Finance obligation, less current portion
|
|
|
9,694
|
|
|
|
9,860
|
|
Deferred revenue, less current portion
|
|
|
7,380
|
|
|
|
6,411
|
|
Deferred tax liability
|
|
|
19,239
|
|
|
|
15,817
|
|
Other long term liabilities
|
|
|
4,125
|
|
|
|
4,176
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
341,172
|
|
|
|
390,921
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 150,000,000 shares
authorized; 56,715,000 and
|
|
|
|
|
|
|
|
|
53,917,000 shares issued and outstanding as of
December 31, 2009 and 2008
|
|
|
567
|
|
|
|
539
|
|
Additional paid in capital
|
|
|
639,315
|
|
|
|
605,340
|
|
Accumulated other comprehensive loss (Note 14)
|
|
|
(1,605
|
)
|
|
|
(2,088
|
)
|
Accumulated deficit
|
|
|
(200,905
|
)
|
|
|
(220,852
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
437,372
|
|
|
|
382,939
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
778,544
|
|
|
$
|
773,860
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
MedAssets
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative fees, net
|
|
$
|
108,223
|
|
|
$
|
105,765
|
|
|
$
|
94,792
|
|
Other service fees
|
|
|
233,058
|
|
|
|
173,891
|
|
|
|
93,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
341,281
|
|
|
|
279,656
|
|
|
|
188,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (inclusive of certain depreciation and
amortization expense; Note 2)
|
|
|
74,651
|
|
|
|
51,548
|
|
|
|
27,983
|
|
Product development expenses
|
|
|
18,994
|
|
|
|
16,393
|
|
|
|
7,785
|
|
Selling and marketing expenses
|
|
|
45,282
|
|
|
|
43,205
|
|
|
|
35,748
|
|
General and administrative expenses
|
|
|
110,661
|
|
|
|
91,481
|
|
|
|
64,817
|
|
Depreciation
|
|
|
13,211
|
|
|
|
9,793
|
|
|
|
7,115
|
|
Amortization of intangibles
|
|
|
28,012
|
|
|
|
23,442
|
|
|
|
15,778
|
|
Impairment of property and equipment, intangibles and in process
research and development (Notes 2, 4 and 6)
|
|
|
|
|
|
|
2,272
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
290,811
|
|
|
|
238,134
|
|
|
|
160,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
50,470
|
|
|
|
41,522
|
|
|
|
28,088
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(18,114
|
)
|
|
|
(21,271
|
)
|
|
|
(20,391
|
)
|
Other income (expense)
|
|
|
417
|
|
|
|
(1,921
|
)
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,773
|
|
|
|
18,330
|
|
|
|
10,812
|
|
Income tax expense
|
|
|
12,826
|
|
|
|
7,489
|
|
|
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
19,947
|
|
|
|
10,841
|
|
|
|
6,296
|
|
Preferred stock dividends and accretion
|
|
|
|
|
|
|
|
|
|
|
(16,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
19,947
|
|
|
$
|
10,841
|
|
|
$
|
(9,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) attributable to common stockholders
|
|
$
|
0.36
|
|
|
$
|
0.22
|
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) attributable to common stockholders
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
54,841
|
|
|
|
49,843
|
|
|
|
12,984
|
|
Weighted average shares diluted
|
|
|
57,865
|
|
|
|
52,314
|
|
|
|
12,984
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MedAssets,
Inc.
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2008
|
|
|
53,917
|
|
|
$
|
539
|
|
|
$
|
605,340
|
|
|
$
|
(2,088
|
)
|
|
$
|
(220,852
|
)
|
|
$
|
382,939
|
|
Issuance of common stock from stock option exercises
|
|
|
1,749
|
|
|
|
18
|
|
|
|
10,389
|
|
|
|
|
|
|
|
|
|
|
|
10,407
|
|
Other common stock issuances
|
|
|
1,049
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
16,652
|
|
|
|
|
|
|
|
|
|
|
|
16,652
|
|
Excess tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
6,944
|
|
|
|
|
|
|
|
|
|
|
|
6,944
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain from hedging activities (net of a tax expense of
$290)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
|
|
|
|
483
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,947
|
|
|
|
19,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
19,947
|
|
|
|
20,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
56,715
|
|
|
$
|
567
|
|
|
$
|
639,315
|
|
|
$
|
(1,605
|
)
|
|
$
|
(200,905
|
)
|
|
$
|
437,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
MedAssets,
Inc.
Consolidated
Statements of Stockholders Equity
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
from
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2007
|
|
|
44,429
|
|
|
$
|
444
|
|
|
$
|
464,313
|
|
|
$
|
(614
|
)
|
|
$
|
(2,935
|
)
|
|
$
|
(231,693
|
)
|
|
$
|
229,515
|
|
Repayment of notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from stockholders
|
|
|
(33
|
)
|
|
|
(1
|
)
|
|
|
(521
|
)
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Interest accrued on notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
Issuance of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with acquisition
|
|
|
8,850
|
|
|
|
89
|
|
|
|
129,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,387
|
|
Issuance of common stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock option exercises
|
|
|
455
|
|
|
|
5
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,841
|
|
Issuance of common stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrant exercises
|
|
|
190
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other common stock issuances
|
|
|
26
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,550
|
|
Excess tax benefit from stock option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercises
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss from hedging activities (net of a tax benefit of
$1,642)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,932
|
)
|
|
|
|
|
|
|
(1,932
|
)
|
Interest rate swap termination (net of a tax expense of $1,173;
Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,779
|
|
|
|
|
|
|
|
2,779
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,841
|
|
|
|
10,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
847
|
|
|
|
10,841
|
|
|
|
11,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008
|
|
|
53,917
|
|
|
$
|
539
|
|
|
$
|
605,340
|
|
|
$
|
|
|
|
$
|
(2,088
|
)
|
|
$
|
(220,852
|
)
|
|
$
|
382,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
MedAssets,
Inc.
Consolidated
Statements of Stockholders Equity
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
from
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balances at December 31, 2006
|
|
|
10,737
|
|
|
$
|
107
|
|
|
$
|
|
|
|
$
|
(862
|
)
|
|
$
|
56
|
|
|
$
|
(166,673
|
)
|
|
$
|
(167,372
|
)
|
Cumulative adjustment in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with adoption of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,316
|
)
|
|
|
(1,316
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and accretion
|
|
|
|
|
|
|
|
|
|
|
(16,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,094
|
)
|
Payment of notes receivable from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
335
|
|
Issuance of notes receivable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
Payment of dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,000
|
)
|
|
|
(70,000
|
)
|
Issuance of restricted stock
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
|
|
|
17,983
|
|
|
|
179
|
|
|
|
251,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,954
|
|
Issuance of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with acquisition
|
|
|
16
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
Issuance of common stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock option exercises
|
|
|
859
|
|
|
|
9
|
|
|
|
3,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,441
|
|
Issuance of common stock from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrant exercises
|
|
|
44
|
|
|
|
1
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
Issuance of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
connection with initial public
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
offering, net of offering costs
|
|
|
14,782
|
|
|
|
148
|
|
|
|
216,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,574
|
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
5,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,611
|
|
Excess tax benefit from stock option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercises
|
|
|
|
|
|
|
|
|
|
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,894
|
|
Reclass from share-based payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liability
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Other comprehensive loss (net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $1,737)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,991
|
)
|
|
|
|
|
|
|
(2,991
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,296
|
|
|
|
6,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,991
|
)
|
|
|
6,296
|
|
|
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
44,429
|
|
|
$
|
444
|
|
|
$
|
464,313
|
|
|
$
|
(614
|
)
|
|
$
|
(2,935
|
)
|
|
$
|
(231,693
|
)
|
|
$
|
229,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
MedAssets
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,947
|
|
|
$
|
10,841
|
|
|
$
|
6,296
|
|
Adjustments to reconcile income from continuing operations to
net cash provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
5,753
|
|
|
|
1,906
|
|
|
|
1,076
|
|
Impairment of property and equipment
|
|
|
|
|
|
|
243
|
|
|
|
9
|
|
Depreciation
|
|
|
15,639
|
|
|
|
10,503
|
|
|
|
7,469
|
|
Amortization of intangibles
|
|
|
28,753
|
|
|
|
24,316
|
|
|
|
16,571
|
|
Loss (gain) on sale of assets
|
|
|
191
|
|
|
|
(120
|
)
|
|
|
56
|
|
Noncash stock compensation expense
|
|
|
16,652
|
|
|
|
8,550
|
|
|
|
5,611
|
|
Excess tax benefit from exercise of stock options
|
|
|
(6,944
|
)
|
|
|
(1,866
|
)
|
|
|
(2,894
|
)
|
Amortization of debt issuance costs
|
|
|
1,841
|
|
|
|
1,374
|
|
|
|
452
|
|
Noncash interest expense, net
|
|
|
1,184
|
|
|
|
1,419
|
|
|
|
520
|
|
Impairment of intangibles
|
|
|
|
|
|
|
2,029
|
|
|
|
1,195
|
|
Deferred income tax expense
|
|
|
4,512
|
|
|
|
5,132
|
|
|
|
367
|
|
Changes in assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(18,446
|
)
|
|
|
(15,242
|
)
|
|
|
(4,345
|
)
|
Prepaid expenses and other current assets
|
|
|
(2,446
|
)
|
|
|
(409
|
)
|
|
|
(587
|
)
|
Other long-term assets
|
|
|
(4,560
|
)
|
|
|
(2,677
|
)
|
|
|
1,440
|
|
Accounts payable
|
|
|
7,707
|
|
|
|
2,996
|
|
|
|
(121
|
)
|
Accrued revenue share obligations and rebates
|
|
|
2,250
|
|
|
|
(300
|
)
|
|
|
7,410
|
|
Accrued payroll and benefits
|
|
|
(9,068
|
)
|
|
|
1,364
|
|
|
|
873
|
|
Other accrued expenses
|
|
|
(3,847
|
)
|
|
|
(1,403
|
)
|
|
|
1,433
|
|
Deferred revenue
|
|
|
1,185
|
|
|
|
3,472
|
|
|
|
(1,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
60,303
|
|
|
|
52,128
|
|
|
|
41,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
|
(11,785
|
)
|
|
|
(6,895
|
)
|
|
|
(9,862
|
)
|
Capitalized software development costs
|
|
|
(16,402
|
)
|
|
|
(11,129
|
)
|
|
|
(6,829
|
)
|
Acquisitions, net of cash acquired (Note 5)
|
|
|
(18,275
|
)
|
|
|
(209,972
|
)
|
|
|
(90,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(46,462
|
)
|
|
|
(227,996
|
)
|
|
|
(107,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
|
|
|
|
20
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
71,797
|
|
|
|
198,999
|
|
|
|
160,188
|
|
Repayment of notes payable and capital lease obligations
|
|
|
(102,262
|
)
|
|
|
(151,658
|
)
|
|
|
(132,668
|
)
|
Repayment of finance obligations
|
|
|
(658
|
)
|
|
|
(648
|
)
|
|
|
(647
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
(6,167
|
)
|
|
|
(1,590
|
)
|
Excess tax benefit from exercise of stock options
|
|
|
6,944
|
|
|
|
1,866
|
|
|
|
2,894
|
|
Payment of dividend (Note 8)
|
|
|
|
|
|
|
|
|
|
|
(70,000
|
)
|
Payment of note receivable to stockholders
|
|
|
|
|
|
|
92
|
|
|
|
248
|
|
Issuance of series J preferred stock
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Issuance of common stock, net of offering costs (Notes 9
and 10)
|
|
|
10,407
|
|
|
|
1,841
|
|
|
|
220,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(13,772
|
)
|
|
|
44,345
|
|
|
|
179,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
69
|
|
|
|
(131,523
|
)
|
|
|
113,493
|
|
Cash and cash equivalents, beginning of period
|
|
|
5,429
|
|
|
|
136,952
|
|
|
|
23,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
5,498
|
|
|
$
|
5,429
|
|
|
$
|
136,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock for services received
|
|
$
|
369
|
|
|
$
|
94
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock acquisition
|
|
|
|
|
|
|
129,387
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock warrants services received
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of series I preferred stock acquisition
|
|
|
|
|
|
|
|
|
|
|
29,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of series J preferred stock acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
MedAssets,
Inc.
(in
thousands, except share and per share amounts)
|
|
1.
|
DESCRIPTION
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
|
We provide technology-enabled products and services which
together deliver solutions designed to improve operating margin
and cash flow for hospitals, health systems and other ancillary
healthcare providers. Our customer-specific solutions are
designed to efficiently analyze detailed information across the
spectrum of revenue cycle and spend management processes. Our
solutions integrate with existing operations and enterprise
software systems of our customers and provide financial
improvement with minimal upfront costs or capital expenditures.
Our operations and customers are primarily located throughout
the United States.
Basis
of Presentation
The consolidated financial statements include the accounts of
MedAssets, Inc. and our wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of
Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Reclassifications
Certain amounts in our 2008 and 2007 consolidated financial
statements have been reclassified to conform to the 2009
presentation.
Cash
and Cash Equivalents
All of our highly liquid investments with original maturities of
three months or less at the date of purchase are carried at cost
which approximates fair value and are considered to be cash
equivalents. Currently, our excess cash on hand is voluntarily
used to repay our swing-line credit facility on a daily basis
and applied against our revolving credit facility on a routine
basis when our swing-line credit facility is undrawn. Cash and
cash equivalents were $5,498 and $5,429 as of December 31,
2009 and 2008, respectively. See Note 6 for immediately
available cash under our revolving credit facility.
Financial
Instruments
The carrying amount reported in the balance sheet for trade
accounts receivable, trade accounts payable, accrued revenue
share obligations and rebates, accrued payroll and benefits, and
other accrued expenses approximate fair values due to the short
maturities of the financial instruments.
We believe the carrying amount of notes payable approximates
fair value, and interest expense is accrued on notes
outstanding. The current portion of notes payable represents the
portion of notes payable due within one year of the period end.
Revenue
Recognition
Net revenue consists primarily of (a) administrative fees
reported under contracts with manufacturers and distributors,
(b) other service fee revenue that is comprised of
(i) consulting revenues received under fixed-fee service
contracts; (ii) subscription and implementation fees
received under our SaaS agreements; (iii) transaction and
contingent fees received under service contracts; and
(iv) licensed-software fees.
F-10
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Revenue is recognized when 1) there is a persuasive
evidence of an arrangement; 2) the fee is fixed or
determinable; 3) services have been rendered and payment
has been contractually earned, and 4) collectability is
reasonably assured.
Administrative
Fees
Administrative fees are generated under contracted purchasing
agreements with manufacturers and distributors of healthcare
products and services (vendors). Vendors pay
administrative fees to us in return for the provision of
aggregated sales volumes from hospitals and health systems that
purchase products qualified under our contracts. The
administrative fees paid to us represent a percentage of the
purchase volume of our hospitals and healthcare system customers.
We earn administrative fees in the quarter in which the
respective vendors report customer purchasing data to us,
usually a month or a quarter in arrears of actual customer
purchase activity. The majority of our vendor contracts disallow
netting product returns from the vendors administrative
fee calculations in periods subsequent to their reporting dates.
The vendors that are not subject to this requirement supply us
with sufficient purchase and return data needed for us to build
and maintain an allowance for sales returns.
Revenue is recognized upon the receipt of vendor reports as this
reporting proves that the delivery of product or service has
occurred, the administrative fees are fixed and determinable
based on reported purchasing volume, and collectability is
reasonably assured. Our customer and vendor contracts
substantiate persuasive evidence of an arrangement.
Certain hospital and healthcare system customers receive revenue
share payments (Revenue Share Obligation). This
obligation is recognized according to the customers
contractual agreements with our Group Purchasing Organization
(or GPO) as the related administrative fee revenue
is recognized. In accordance with generally accepted accounting
principles relating to principal agent considerations under
revenue recognition, this obligation is netted against the
related gross administrative fees, and is presented on the
accompanying Consolidated Statement of Operations as a reduction
to arrive at total net revenue on our consolidated statement of
operations.
Net administrative fees shown on our consolidated statements of
operations reflect our gross administrative fees net of our
revenue share obligation. Gross administrative fees include all
administrative fees we receive pursuant to our group purchasing
organization vendor contracts. Our revenue share obligation
represents the portion of the administrative fees we are
contractually obligated to share with certain of our group
purchasing organization customers. The following shows the
details of net administrative fee revenues for the years ended
December 31, 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross administration fees
|
|
$
|
163,454
|
|
|
$
|
158,618
|
|
|
$
|
142,320
|
|
Less: Revenue share obligation
|
|
|
(55,231
|
)
|
|
|
(52,853
|
)
|
|
|
(47,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative fees, net
|
|
$
|
108,223
|
|
|
$
|
105,765
|
|
|
$
|
94,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Service Fees
Consulting
Fees
We generate revenue from fixed-fee consulting contracts. Revenue
under these fixed-fee arrangements is recognized as services are
performed and deliverables are provided, provided all other
elements of SAB 104 are met.
F-11
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Consulting
Fees with Performance Targets
We generate revenue from consulting contracts that also include
performance targets. The performance targets generally relate to
committed financial improvement to our customers from the use
and implementation of initiatives that result from our
consulting services. Performance targets are measured as our
strategic initiatives are identified and implemented and the
financial improvement can be quantified by the customer. In the
event the performance targets are not achieved, we are obligated
to refund or reduce a portion of our fees.
Under these arrangements, all revenue is deferred and recognized
as the performance target is achieved and the applicable
contingency is released as evidenced by customer acceptance. All
revenues are fixed and determinable and the applicable service
is rendered prior to recognition in the financial statements in
accordance with SAB 104. We do not defer any related costs
under these types of arrangements.
Subscription
and Implementation Fees
We follow generally accepted accounting principles relating to
software revenue recognition for our SaaS-based solutions. Our
customers are charged upfront fees for implementation and host
subscription fees for access to web-based services. Our
customers have access to our software applications while the
data is hosted and maintained on our servers. Our customers
cannot take physical possession of the software applications.
Revenue from monthly hosting arrangements and services is
recognized on a subscription basis over the period in which our
customers use the product. Implementation fees are typically
billed at the beginning of the arrangement and recognized as
revenue over the greater of the subscription period or the
estimated customer relationship period. We currently estimate
the customer relationship period at four to five years for our
SaaS-based Revenue Cycle Management solutions. Contract
subscription periods range from two to six years from execution.
Transaction
Fees and Contingent Service Fees
We generate revenue from transactional-based service contracts
and contingency-fee based service contracts. Provided all other
elements of revenue recognition are met, revenue under these
arrangements is recognized as services are performed,
deliverables are provided and related contingencies are removed.
All related direct costs are recorded as period costs when
incurred.
Licensed-Software
Fees
We license and market certain software products.
Licensed-software fees are derived from three primary sources:
(i) software licenses, (ii) software support (i.e.
postcontract support, or PCS), and
(iii) services, which include consulting, implementation
and training services. We recognize revenue for our software
arrangements under generally accepted accounting principles
relating to software revenue recognition.
We are unable to establish vendor-specific objective evidence
(VSOE), as defined under U.S. GAAP relating to
software revenue recognition, for the license element of our
software arrangements as the majority of our software licenses
are for a term of one year. In addition, we are unable to
establish VSOE for the service elements of our software
arrangements as the prices vary or the elements are not sold
separately. In the majority of our licensed software
arrangements, the service elements qualify for separate
accounting under generally accepted accounting principles
relating to software revenue recognition as the services do not
involve significant production, customization, or modification,
but entail providing services such as loading of software,
training of customer personnel, and providing implementation
services such as planning, data conversion, building simple
interfaces, running test data, developing documentation, and
software support. However, given that VSOE cannot be determined
for the separate elements of these arrangements, the fees for
the entire arrangement are recognized ratably over the period in
which the services are expected to be
F-12
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
performed or over the software support period, whichever is
longer, beginning with the delivery and acceptance of the
software, provided all other revenue recognition criteria are
met.
Revenue from service elements sold independent of software
arrangements, such as additional training or consulting,
software support renewals, and other services, is recognized as
services are performed.
Combined
Services
We may bundle certain of our service or product offerings into a
single arrangement and market them as an enterprise deal. Our
bundled service and product arrangements are generally sold as
either licensed software arrangements or service arrangements.
Our licensed software arrangements generally include multiple
deliverables or elements such as software licenses, software
support, and services, which include consulting, implementation
and training. Software arrangements and the licensed software
fees are accounted for based on U.S. GAAP relating to software
revenue recognition.
Service arrangements generally include multiple deliverables or
elements such as group purchasing services, consulting services,
and SaaS-based subscription and implementation services.
Multi-element Service Arrangements are accounted for under
generally accepted accounting principles relating to revenue
recognition for multiple-element arrangements. Provided that the
total arrangement consideration is fixed and determinable at the
inception of the arrangement, we allocate the total arrangement
consideration to the individual elements within the arrangement
based on their relative fair values if sufficient objective and
reliable evidence of fair value exists for each element of the
arrangement. We establish objective reliable evidence of fair
value for each element of a service arrangement based on the
price charged for a particular element when it is sold
separately in a standalone arrangement. Revenue is then
recognized for each element according to appropriate revenue
recognition methodology. If the total arrangement consideration
is not fixed and determinable at the inception of the
arrangement or if we are unable to establish objective and
reliable evidence of fair value for each element of the
arrangement, we collapse each element into a single unit of
accounting and recognize revenue as services and products are
delivered. Moreover, revenue can only be recognized provided
there are no refund rights with any product or service already
delivered associated with any undelivered products or services
within the same arrangement.
The majority of our multi-element service arrangements that
include group purchasing services are not fixed and determinable
at the inception of the arrangement as the fee for the
arrangement is earned as administrative fees are reported. As
discussed previously in the revenue recognition footnote,
administrative fees are not fixed and determinable until the
receipt of vendor reports (nor can they be reliably estimated
prior to the receipt of the vendor reports). For these
multi-element service arrangements, we collapse each element
into a single unit of accounting and recognize revenue as
administrative fees are reported to us.
A limited number of multi-element service arrangements that
include group purchasing services are fixed and determinable at
the inception of the arrangement. In these few arrangements the
customer pays a fixed fee for the entire arrangement and is
entitled to receive all of the related administrative fees
associated with their purchases through a 100% revenue share
obligation. In these arrangements, we allocate the total
arrangement fee to each element based on each elements
relative fair value and group purchasing service revenue is
recognized ratably over the contractual term. Consulting revenue
is recognized as services are performed and deliverables are
provided. SaaS-based subscription and implementation service
revenue is recognized ratably over the subscription period or
customer relationship period, whichever is longer.
Certain of our arrangements include performance targets. These
performance targets generally relate to committed financial
improvement to our customers from the use of our services and
software. In the event the
F-13
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
performance targets are not achieved we are obligated to refund
or reduce a portion of our fees. We generally receive customer
acceptance as performance targets are achieved.
In multi-element service arrangements that involve performance
targets, the amount of revenue recognized on a particular
delivered element is limited to the lesser of (a) the
amount otherwise allocable to that element based on using the
relative fair value method, or (b) the allocable amount
that is not contingent upon the delivery of additional elements
or meeting other performance conditions. In all cases, revenue
recognition is deferred on each element until the performance
contingency has been removed and the related revenue is no
longer at risk.
Loss
Contracts
We may determine that certain fixed price contracts could result
in a negative net realizable value. For any given arrangement,
this results if and when we determine that it is both probable
and reasonably estimable that the net present value of the
arrangement consideration will fall below the net present value
of the estimated costs to deliver the arrangement. If negative
net realizable value results, we accrue for the estimated loss.
For the years ended December 31, 2009, 2008 and 2007, we
did not have any contracts with probable or estimable negative
net realizable values.
Other
Other fees are primarily earned for our annual customer and
vendor meeting. Fees for our annual customer and vendor meeting
are recognized when the meeting is held and related obligations
are performed.
Deferred
Implementation Costs
We capitalize direct costs incurred during the implementation of
our SaaS-based solutions. Such deferred costs are limited to the
related nonrefundable implementation revenue. Deferred
implementation costs are amortized into cost of revenue over the
expected period of benefit, which is the greater of the
contracted subscription period or the customer relationship
period. The current and long term portions of deferred
implementation costs are included in Prepaid expense and
other current assets and Other assets,
respectively in the accompanying consolidated balance sheets.
Property
and Equipment
Property and equipment are stated at cost and include the
capitalized portion of internal use product development costs.
Depreciation of property and equipment (which includes
amortization of capitalized internal use software) is computed
on the straight-line method over the estimated useful lives of
the assets which range from three to ten years. The building and
related retail space, described in Note 6 under
Finance Obligation, are amortized over the estimated
useful life of 30 years on a straight-line basis.
We evaluate the impairment or disposal of our property and
equipment in accordance with U.S. GAAP. We evaluate the
recoverability of property and equipment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, or whenever management has
committed to an asset disposal plan. Whenever these indicators
occur, recoverability is determined by comparing the net
carrying value of an asset to its total undiscounted cash flows.
We recognized impairment charges to write down certain software
assets in the years ended December 31, 2008, and 2007. See
Note 2 for further details.
Product
Development Costs
Our product development costs include period expenses
(i) incurred prior to the application development stage;
(ii) prior to technological feasibility being reached; and
(iii) in the post-development or maintenance
F-14
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
stage. Internal-use software development costs are capitalized
in accordance with generally accepted accounting principles
relating to intangible assets. External-use software development
costs are capitalized when the technological feasibility of a
software product has been established in accordance with
generally accepted accounting principles relating to research
and development costs of computer software. Capitalized software
costs are amortized on a straight-line basis over the estimated
useful lives of the related software applications of up to four
years. We periodically evaluate the useful lives of our
capitalized software costs.
Goodwill
and Intangible Assets Indefinite Life
For identified intangible assets acquired in business
combinations, we allocate purchase consideration based on the
fair value of intangible assets acquired in accordance with
generally accepted accounting principles relating to business
combinations.
As of December 31, 2009, 2008 and 2007, intangible assets
with indefinite lives consist of goodwill and a trade name. See
Note 3 for further details.
We account for our intangible assets in accordance with
generally accepted accounting principles relating to intangible
assets. In accordance with the guidance, we do not amortize
goodwill or intangible assets with indefinite lives. We perform
an impairment test of these assets on at least an annual basis
on December 31 and whenever events or changes in circumstances
indicate that the carrying value of these assets may not be
recoverable. If the carrying value of the assets is deemed to be
impaired, the amount of the impairment recognized in the
financial statements is determined by estimating the fair value
of the assets and recording a loss for the amount that the
carrying value exceeds the estimated fair value.
We consider the following to be important factors that could
trigger an impairment review: significant underperformance
relative to historical or projected future operating results;
identification of other impaired assets within a reporting unit;
the more-likely-than not expectation that a reporting unit or a
significant portion of a reporting unit will be sold;
significant adverse changes in business climate or regulations;
significant changes in senior management; significant changes in
the manner of use of the acquired assets or the strategy for the
Companys overall business; significant negative industry
or economic trends; a significant decline in the Companys
stock price for a sustained period or a significant unforeseen
decline in the Companys credit rating.
We did not recognize any goodwill or indefinite-lived intangible
asset impairments in the periods ending December 31, 2009,
2008 and 2007.
Intangible
Assets Definite Life
The intangible assets with definite lives are comprised of our
customer base, developed technology, employment agreements,
non-compete agreements and certain tradename assets. See
Note 4 for further details.
Intangible assets with definite lives are amortized over their
estimated useful lives which have been derived based on an
assessment of such factors as attrition, expected volume and
price changes. We evaluate the useful lives of our intangible
assets with definite lives on an annual basis. Costs related to
our customer base are amortized over the period and pattern of
economic benefit that is expected from the customer
relationship. Customer base intangibles have estimated useful
lives that range from five years to fourteen years. Costs
related to developed technology are amortized on a straight-line
basis over a useful life of three to seven years. Costs related
to employment agreements and non-compete agreements are
amortized on a straight-line basis over the life of the
respective agreements. Costs associated with definite-lived
trade names are amortized over the period of expected benefit of
two to three years.
F-15
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
We evaluate indefinite-lived intangibles for impairment when
events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable.
During 2008, we deemed several intangible assets to be impaired.
We incurred certain impairment expenses (primarily related to
acquired developed technology from prior acquisitions, revenue
cycle management tradenames and internally developed software
product write-offs). See Note 4 for a description of the
impairments.
During 2007, we recognized an impairment of in-process research
and development that had been acquired as part of the XactiMed,
Inc. acquisition on May 18, 2007. The impairment
approximated the value of the purchase price assigned to the
in-process research and development asset in conjunction with
the acquisition. See Note 5 for a description of the
acquisition and subsequent impairment.
Deferred
Revenue
Deferred revenue consists of unrecognized revenue related to
advanced customer invoicing or customer payments received prior
to revenue being realized and earned. Substantially all deferred
revenue consists of (i) deferred administrative fees,
(ii) deferred service fees (iii) deferred software and
implementation fees, and (iv) other deferred fees,
including receipts for our annual meeting prior to the event.
Deferred administrative fees arise when cash is received from
vendors prior to the receipt of vendor reports. Vendor reports
provide detail to the customers purchases and prove that
delivery of product or service occurred. Administrative fees are
also deferred when reported fees are contingent upon meeting a
performance target that has not yet been achieved (see Revenue
Recognition Combined services).
Deferred service fees arise when cash is received from customers
or upon advanced customer invoicing, prior to delivery of
service. When the fees are contingent upon meeting a performance
target that has not yet been achieved, the service fees are
either not invoiced or are deferred on our balance sheet.
Deferred software and implementation fees include
(i) software license fees which result from undelivered
products or specified enhancements, acceptance provisions, or
software license arrangements that lack VSOE and are not
separable from implementation, consulting, or other services;
(ii) software support fees which represent customer
payments made in advance for annual software support contracts;
and (iii) implementation fees that are received at the
beginning of a subscription contract. These fees are deferred
and amortized over the expected period of benefit, which is the
greater of the contracted subscription period or the customer
relationship period. Software and implementation fees are also
deferred when the fees are contingent upon meeting a performance
target that has not yet been achieved.
For the years ended December 31, 2009 and 2008, deferred
revenues recorded that are contingent upon meeting performance
targets were $686 and $1,174, respectively.
F-16
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The following table summarizes the deferred revenue categories
and balances as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Software and implementation fees
|
|
$
|
14,080
|
|
|
$
|
13,839
|
|
Service fees
|
|
|
15,786
|
|
|
|
14,206
|
|
Administrative fees
|
|
|
924
|
|
|
|
1,313
|
|
Other fees
|
|
|
1,088
|
|
|
|
1,333
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, total
|
|
|
31,878
|
|
|
|
30,691
|
|
Less: Deferred revenue, current portion
|
|
|
(24,498
|
)
|
|
|
(24,280
|
)
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current portion
|
|
$
|
7,380
|
|
|
$
|
6,411
|
|
|
|
|
|
|
|
|
|
|
Revenue
Share Obligation and Rebates
We accrue revenue share obligations and rebates for certain
customers according to (i) our revenue share program and
(ii) our vendor rebate programs.
Under our revenue share program, certain hospital and health
system customers receive revenue share payments. This obligation
is accrued according to contractual agreements between the GPO
and the hospital and healthcare customers as the related
administrative fee revenue is recognized. See description of
this accounting treatment under Administrative Fees
in the Revenue Recognition section.
We receive rebates pursuant to the provisions of certain vendor
agreements. The rebates are earned by our hospitals and health
system customers based on the volume of their purchases. We
collect, process, and pay the rebates as a service to our
customers. Substantially all the vendor rebate programs are
excluded from revenue. The vendor rebates are accrued for active
customers when we receive cash payments from vendors.
Advertising
Costs
Advertising costs are expensed as incurred. Advertising expense
for the years ended December 31, 2009, 2008, and 2007 was
$2,224, $2,651 and $2,103, respectively.
Concentration
of Credit Risk
Revenue is earned primarily in the United States. We review our
allowance for doubtful accounts based upon the credit risk of
specific customers, historical experience and other information.
An allowance for doubtful accounts is established for accounts
receivable estimated to be uncollectible and is adjusted
periodically based upon managements evaluation of current
economic conditions, historical experience and other relevant
factors that, in the opinion of management, deserve recognition
in estimating such allowance. Accounts receivable deemed to be
uncollectable are subsequently written down utilizing the
allowance for doubtful accounts.
Additionally, we have a concentration of credit risk arising
from cash deposits held in excess of federally insured amounts
totaling $5,248 as of December 31, 2009.
Share-Based
Compensation
Share-based payment transactions as fully discussed in
Note 10 are accounted for in accordance with generally
accepted accounting principles relating to stock compensation.
The guidance requires companies to recognize the cost (expense)
of all share-based payment transactions in the financial
statements. We expense employee share-based compensation using
fair value based measurement over an appropriate requisite
service
F-17
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
period on an accelerated basis. Share-based payments to
non-employees must be expensed based on the fair value of goods
or services received, or the fair value of the equity
instruments issued, whichever is more evident. We record this
non-employee share-based compensation at fair value at each
reporting period or until the earlier of (i) the date that
performance by the counterparty is complete or the date that the
counterparty has committed to performance or (ii) the
awards are fully vested. We generally base the fair value of our
stock awards on the appraised or publicly traded market value of
our common stock.
Derivative
Financial Instruments
Derivative instruments are accounted for in accordance with
generally accepted accounting principles relating to derivatives
and hedging. The guidance requires companies to recognize
derivative instruments as either assets or liabilities in the
balance sheet at fair value. See Note 14 for further
discussion regarding our outstanding derivative financial
instruments.
Income
Taxes
In accordance with generally accepted accounting principles
relating to income taxes, we recognize deferred income taxes
based on the expected future tax consequences of differences
between the financial statement basis and the tax basis of
assets and liabilities, calculated using enacted tax rates in
effect for the tax year in which the differences are expected to
be reflected in the tax return.
The carrying value of our net deferred tax assets assumes that
we will be able to generate sufficient future taxable income in
certain tax jurisdictions to realize the value of these assets.
If we are unable to generate sufficient future taxable income in
these jurisdictions, a valuation allowance is recorded when it
is more likely than not that the value of the deferred tax
assets is not realizable. Management evaluates the realizability
of the deferred tax assets and assesses the need for any
valuation allowance adjustment. It is our policy to provide for
uncertain tax positions and the related interest and penalties
based upon managements assessment of whether a tax benefit
is more likely than not to be sustained upon examination by tax
authorities. To the extent that the probable tax outcome of
these uncertain tax positions changes, such changes in estimate
will impact the income tax provision in the period in which such
determination is made. At December 31, 2009, we believe we
have appropriately accounted for any unrecognized tax benefits.
To the extent we prevail in matters for which a liability for an
unrecognized tax benefit is established or we are required to
pay amounts in excess of the liability, our effective tax rate
in a given financial statement period may be affected. On
January 1, 2007, we adopted generally accepted accounting
principles to account for uncertainty in income taxes. See
Note 11.
Sales
Taxes
In accordance with generally accepted accounting principles
relating to principal agent considerations under revenue
recognition, we record any tax assessed by a governmental
authority that is directly imposed on a revenue-producing
transaction between a seller and a customer on a net basis
(excluded from revenues).
Basic
and Diluted Net Income and Loss Per Share
Basic net income or loss per share is calculated in accordance
with generally accepted accounting principles relating to
earnings per share. During 2007, basic earnings per share
(EPS) is calculated using the weighted- average
common shares outstanding under the two-class method. The
two-class method required that we include in our basic EPS
calculation when dilutive, the effect of our convertible
preferred stock as if that stock were converted into common
shares. The convertible preferred shares were not included in
our basic EPS calculation when the effect of inclusion was
antidilutive. On December 18, 2007, the initial public
F-18
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
offering of our common stock effectively converted all
convertible preferred shares held to common shares. We had no
preferred shares outstanding as of December 31, 2009 or
2008.
Diluted EPS assumes the conversion, exercise or issuance of all
potential common stock equivalents, unless the effect of
inclusion would result in the reduction of a loss or the
increase in income per share. For purposes of this calculation,
our stock options, stock warrants, non-vested restricted stock
and stock-settled stock appreciation rights are considered to be
potential common shares and are only included in the calculation
of diluted EPS when the effect is dilutive.
The shares used to calculate basic and diluted EPS represent the
weighted-average common shares outstanding. Our preferred
shareholders had the right to participate with common
shareholders in the dividends and unallocated income. Net losses
were not allocated to the preferred shareholders. Therefore,
when applicable, basic and diluted EPS were calculated using the
two-class method as our convertible preferred shareholders had
the right to participate, or share in the undistributed earnings
with common shareholders. Diluted net loss per common share is
the same as basic net loss per share for the fiscal year ended
December 31, 2007 since the effect of any potentially
dilutive securities was excluded as they were anti-dilutive due
to our net loss attributable to common stockholders.
With the conversion of all participating preferred stock to
common stock at our initial public offering, we are no longer
contractually obligated to pay the associated accrued preferred
dividends, and all rights to accrued and unpaid preferred
dividends were terminated by the former preferred stock
shareholders.
Stock
Splits
In November 2007, our Board of Directors (the Board)
approved a
1-for-1.25
reverse stock split of the Companys outstanding common
stock. The reverse stock split also applied to the conversion
ratios for the Companys preferred stock, outstanding stock
options and warrants. All share and per share information
included in these consolidated financial statements have been
adjusted to reflect the reverse stock split, and all references
to the number of common shares and the per share common share
amounts have been restated to give retroactive effect to the
reverse stock split for all periods presented.
In December 2006, our Board approved a
1-for-2,000
reverse stock split of the Companys outstanding shares of
common stock. The reverse stock split became effective on
December 26, 2006, but was subsequently superseded by a
2000-for-1
stock split that occurred in May 2007.
Recent
Accounting Pronouncements
Accounting
Standards Codification
In June 2009, the Financial Accounting Standards Board
(FASB) made the FASB Accounting Standards
Codification (the Codification) the single source of
U.S. GAAP used by non-governmental entities in the
preparation of financial statements, except for rules and
interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative accounting
guidance for SEC registrants. The Codification is meant to
simplify user access to all authoritative accounting guidance by
reorganizing U.S. GAAP pronouncements into approximately 90
accounting topics within a consistent structure; its purpose is
not to create new accounting and reporting guidance. The
Codification supersedes all existing non-SEC accounting and
reporting standards and was effective for the Company beginning
July 1, 2009. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts; instead, it will issue Accounting
Standards Updates. The FASB will not consider Accounting
Standards Updates as authoritative in their own right; these
updates will serve only to update the Codification, provide
background information about the guidance, and provide the bases
for conclusions on the change(s) in the Codification. As a
result of adopting this standard, we will no longer reference
specific standards under the
F-19
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
pre-codification naming convention and all references to
accounting standards will be made in plain english as defined by
the SEC.
Revenue
Recognition
In October 2009, the FASB issued an accounting standards update
for multiple-deliverable revenue arrangements. The update
addressed the accounting for multiple-deliverable arrangements
to enable vendors to account for products or services separately
rather than as a combined unit. The update also addresses how to
separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting.
The amendments in the update significantly expand the
disclosures related to a vendors multiple-deliverable
revenue arrangements with the objective of providing information
about the significant judgments made and changes to those
judgments and how the application of the relative selling-price
method affects the timing or amount of revenue recognition. The
accounting standards update will be applicable for annual
periods beginning after June 15, 2010, however, early
adoption is permitted. We are currently assessing the impact of
the adoption of this update on our Consolidated Financial
Statements.
Software
In October 2009, the FASB issued an accounting standards update
relating to certain revenue arrangements that include software
elements. The update will change the accounting model for
revenue arrangements that include both tangible products and
software elements. Among other things, tangible products
containing software and nonsoftware components that function
together to deliver the tangible products essential
functionality are no longer within the scope of software revenue
guidance. In addition, the update also provides guidance on how
a vendor should allocate arrangement consideration to
deliverables in an arrangement that includes tangible products
and software. The accounting standards update will be applicable
for annual periods beginning after June 15, 2010, however,
early adoption is permitted. We are currently assessing the
impact of the adoption of this update on our Consolidated
Financial Statements.
Accounting
for Transfers of Financial Assets
In June 2009, the FASB issued an amendment to generally accepted
accounting principles relating to transfers and servicing. The
guidance eliminates the concept of a qualifying special-purpose
entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies
other sale-accounting criteria, and changes the initial
measurement of a transferors interest in transferred
financial assets. The guidance is applicable for annual periods
beginning after November 15, 2009 and interim periods
thereafter. We are currently assessing the impact, if any, of
the adoption of this guidance on our Consolidated Financial
Statements.
Consolidation
of Variable Interest Entities
In June 2009, the FASB issued an amendment to generally accepted
accounting principles relating to consolidation. The guidance
eliminates previous exceptions to consolidating qualifying
special-purpose entities, contains new criteria for determining
the primary beneficiary of a variable interest entity, and
increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable
interest entity. The guidance also contains a new requirement
that any term, transaction, or arrangement that does not have a
substantive effect on an entitys status as a variable
interest entity, a companys power over a variable interest
entity, or a companys obligation to absorb losses or its
right to receive benefits of an entity must be disregarded in
applying the guidance. The guidance is applicable for annual
periods beginning after November 15, 2009 and interim
periods thereafter. We are currently assessing the impact, if
any, of the adoption of this guidance on our Consolidated
Financial Statements.
F-20
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
2.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consists of the following as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Buildings (Note 6)
|
|
|
8,821
|
|
|
|
8,821
|
|
Furniture and fixtures
|
|
|
7,577
|
|
|
|
6,101
|
|
Computers and equipment
|
|
|
26,499
|
|
|
|
20,331
|
|
Leasehold improvements
|
|
|
8,038
|
|
|
|
6,398
|
|
Purchased software
|
|
|
9,849
|
|
|
|
8,257
|
|
Capitalized software development costs (internal use)
|
|
|
32,194
|
|
|
|
18,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,178
|
|
|
|
69,263
|
|
Accumulated depreciation and amortization
|
|
|
(39,218
|
)
|
|
|
(26,846
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
54,960
|
|
|
$
|
42,417
|
|
|
|
|
|
|
|
|
|
|
Software
Internal Use
We classify capitalized costs of software developed for internal
use in property and equipment. Costs capitalized for software to
be sold, leased or otherwise marketed are classified as other
assets. Software acquired in a business combination is
classified as a developed technology intangible asset.
Capitalized costs of software developed for internal use during
the years ended December 31, 2009 and 2008 amounted to
$14,160 and $8,134, respectively. Accumulated amortization
related to capitalized costs of software developed for internal
use was $11,581 and $3,865 at December 31, 2009 and 2008,
respectively.
For the years ended December 31, 2009, 2008 and 2007, we
recognized impairment charges of zero, $243 and $9,
respectively, which relate to all of our segments and were
attributable to the write down of software tools that we were
not able to utilize. We had no other impairment charges related
to property and equipment during the years ended
December 31, 2009, 2008 and 2007. These impairment charges
have been recorded to the impairment line item within our
Consolidated Statements of Operations.
Software
External Use
Capitalized costs of software developed for external use are
classified as other assets in our consolidated balance sheet.
Capitalized costs of software developed for external use during
the years ended December 31, 2009 and 2008 amounted to
$2,242 and $2,994, respectively. Accumulated amortization
related to capitalized costs of software developed for external
use was $3,296 and $870 at December 31, 2009 and 2008,
respectively.
During the years ended December 31, 2009, 2008 and 2007, we
recognized $2,426, $709 and $354 respectively in cost of revenue
related to amortization of software developed for external use.
F-21
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
3.
|
GOODWILL
AND INDEFINITE LIFE ASSETS
|
Goodwill and indefinite life assets consist of the following as
of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Indefinite life intangibles
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
$
|
511,861
|
|
|
$
|
508,748
|
|
Tradename
|
|
|
1,029
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
512,890
|
|
|
$
|
509,777
|
|
The changes in goodwill are summarized as follows, consolidated
and by segment (RCM is our Revenue Cycle Management
segment and SM is our Spend Management segment), for
the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Consolidated
|
|
|
RCM
|
|
|
SM
|
|
|
Balance, December 31, 2007
|
|
$
|
232,822
|
|
|
$
|
148,101
|
|
|
$
|
84,721
|
|
Acquisition of Accuro (Note 5)
|
|
|
275,899
|
|
|
|
275,899
|
|
|
|
|
|
XactiMed acquisition purchase accounting adjustment (Note 5)
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
508,748
|
|
|
$
|
424,027
|
|
|
$
|
84,721
|
|
Accuro acquisition purchase accounting adjustment (Note 5)
|
|
|
3,113
|
|
|
|
3,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
511,861
|
|
|
$
|
427,140
|
|
|
$
|
84,721
|
|
In 2009, we adjusted Goodwill related to the acquisition of
Accuro. See Note 5 for the detail of the adjustments. In
2008, we adjusted Goodwill related to the acquisition of
XactiMed primarily related to adjustments to deferred tax
liability and other accrued liabilities.
|
|
4.
|
OTHER
INTANGIBLE ASSETS
|
Intangible assets with definite lives consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period (Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer base
|
|
|
11 years
|
|
|
$
|
139,259
|
|
|
$
|
(67,559
|
)
|
|
$
|
71,700
|
|
Developed technology
|
|
|
5 years
|
|
|
|
40,556
|
|
|
|
(18,074
|
)
|
|
|
22,482
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
2,322
|
|
|
|
(1,944
|
)
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years
|
|
|
$
|
182,137
|
|
|
$
|
(87,577
|
)
|
|
$
|
94,560
|
|
F-22
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period (Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer base
|
|
|
10 years
|
|
|
$
|
161,128
|
|
|
$
|
(70,139
|
)
|
|
$
|
90,989
|
|
Developed technology
|
|
|
5 years
|
|
|
|
40,556
|
|
|
|
(9,607
|
)
|
|
|
30,949
|
|
Employment agreements
|
|
|
3 years
|
|
|
|
224
|
|
|
|
(153
|
)
|
|
|
71
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
2,322
|
|
|
|
(1,031
|
)
|
|
|
1,291
|
|
Tradename
|
|
|
3 years
|
|
|
|
192
|
|
|
|
(181
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years
|
|
|
$
|
204,422
|
|
|
$
|
(81,111
|
)
|
|
$
|
123,311
|
|
In 2009, we reduced the gross carrying amount and the related
accumulated amortization by approximately $21,869 relating to a
fully amortized customer base asset within our Spend Management
segment.
In 2008, we deemed several intangible assets to be impaired. We
recorded an impairment charge of approximately $1,255 to
write-off tradenames acquired as part of the acquisitions of
MD-X Solutions, Inc on July 2, 2007 and XactiMed, Inc on
May 18, 2007 in connection with a rebranding of our RCM
segment subsequent to the Accuro acquisition. See Note 5
for further discussion regarding these acquisitions. In
addition, we recorded an impairment of approximately $581
related to acquired developed technology and other intangible
assets acquired from previous acquisitions.
These impairment charges have been recorded to the impairment
line item within our consolidated statements of operations.
During the years ended December 31, 2009, 2008 and 2007, we
recognized $28,753, $24,316 and $16,571, respectively in
amortization expense, inclusive of amounts charged to cost of
revenue for amortization of external-use acquired developed
technology, related to definite-lived intangible assets. Future
amortization expense of definite-lived intangibles as of
December 31, 2009, is as follows:
|
|
|
|
|
|
|
Amount
|
|
|
2010
|
|
$
|
23,816
|
|
2011
|
|
|
19,668
|
|
2012
|
|
|
16,327
|
|
2013
|
|
|
10,165
|
|
2014
|
|
|
6,863
|
|
Thereafter
|
|
|
17,721
|
|
|
|
|
|
|
|
|
$
|
94,560
|
|
|
|
|
|
|
F-23
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of
acquisition of all or our acquisitions in 2008 and 2007,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accuro
|
|
|
MD-X
|
|
|
XactiMed
|
|
|
|
June 2,
|
|
|
July 2,
|
|
|
May 18,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Current assets
|
|
$
|
8,989
|
|
|
$
|
6,050
|
|
|
$
|
3,841
|
|
Property and equipment
|
|
|
4,853
|
|
|
|
1,002
|
|
|
|
457
|
|
Other long term assets
|
|
|
169
|
|
|
|
50
|
|
|
|
82
|
|
Goodwill
|
|
|
279,012
|
|
|
|
63,605
|
|
|
|
35,186
|
|
Intangible assets
|
|
|
87,700
|
|
|
|
20,120
|
|
|
|
17,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
380,723
|
|
|
|
90,827
|
|
|
|
57,558
|
|
Current liabilities
|
|
|
17,756
|
|
|
|
2,112
|
|
|
|
1,469
|
|
Other long term liabilities
|
|
|
5,332
|
|
|
|
9,041
|
|
|
|
5,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
23,088
|
|
|
|
11,153
|
|
|
|
7,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
357,635
|
|
|
$
|
79,674
|
|
|
$
|
50,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accuro
Acquisition
In 2009, we finalized the acquisition purchase price and related
purchase price allocation of Accuro Healthcare Solutions, Inc.
(collectively with its subsidiaries, Accuro), which
was acquired on June 2, 2008 (the Accuro
Acquisition).
In connection with the purchase consideration paid upon the
closing of the Accuro Acquisition, which occurred on
June 2, 2008, we recorded an initial liability (or the
deferred purchase consideration) of $18,500 on our
balance sheet, representing the present value of $20,000 in
deferred purchase consideration payable on the first anniversary
date of the closing of the Accuro Acquisition as required by the
purchase agreement. During the years ended December 31,
2009 and 2008, we recognized approximately $639 and $862,
respectively, in imputed interest expense to accrete the Accuro
deferred purchase consideration to its face value by the first
anniversary of the Accuro Acquisition closing date or
June 2, 2009.
On June 2, 2009, we reduced the $20,000 deferred purchase
consideration by approximately $224 due to certain adjustments
allowed for under the purchase agreement and we paid $19,776
(inclusive of $1,501 of imputed interest) in cash to the former
shareholders of Accuro to satisfy the deferred purchase
consideration obligation. We acquired all the outstanding stock
of Accuro for a total purchase price of $357,635 comprised of
$228,248 in cash, including $5,355 in acquisition related costs,
and approximately 8,850,000 unregistered shares of our common
stock valued at $129,387.
Accuro is a provider of SaaS-based revenue cycle management
software and service solutions that help hospitals, health
systems and other ancillary healthcare providers optimize
revenue capture and cash flow. The purchase price paid to
Accuros former shareholders reflects a premium relative to
the value of the identified assets due to the strategic
importance of the transaction to our company and because
Accuros technology and service business model does not
rely intensively on fixed assets. The following factors
contribute to the strategic importance of the transaction:
|
|
|
|
|
The acquisition expands our research and development capability
and general market presence, and increases our revenue cycle
management product and service offerings with well regarded
solutions and recurring revenue streams;
|
F-24
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
|
Accuros business is complementary and a long-term
strategic fit that provides us opportunities to expand market
share and further penetrate our current customer base;
|
|
|
|
The acquisition of Accuro, which was one of our largest and most
scaled Revenue Cycle Management segment competitors, allows us
to compete effectively for hospital and health system
customers; and
|
|
|
|
The acquisition offers us the opportunity to leverage cost and
revenue synergies.
|
Accuro
Purchase Price Allocation
During 2009, we made certain adjustments to finalize the
purchase price allocation of Accuro. These adjustments have been
recognized as assets acquired or liabilities assumed in the
Accuro Acquisition and included in the allocation of the cost to
acquire Accuro and, accordingly, have resulted in a net increase
to goodwill of approximately $3,113. The adjustments primarily
relate to the following:
(1) a $3,463 increase associated with restructuring
activities, consisting of estimated severance costs, facility
lease termination penalties, system migration and
standardization as well as other restructuring costs (as further
described below);
(2) a $224 decrease related to adjustments to the final
deferred purchase consideration; and
(3) a $126 decrease associated with adjusting assets
acquired and liabilities assumed to fair value.
The following table details the final purchase price and
purchase price allocation for the Accuro Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
|
|
|
|
|
|
Final
|
|
|
|
Purchase
|
|
|
|
|
|
Purchase
|
|
|
|
Price
|
|
|
|
|
|
Price
|
|
|
|
Allocation
|
|
|
Adjustments
|
|
|
Allocation
|
|
|
Current assets
|
|
$
|
9,113
|
|
|
$
|
(124
|
)
|
|
$
|
8,989
|
|
Property and equipment
|
|
|
4,853
|
|
|
|
|
|
|
|
4,853
|
|
Other long term assets
|
|
|
169
|
|
|
|
|
|
|
|
169
|
|
Goodwill
|
|
|
275,899
|
|
|
|
3,113
|
|
|
|
279,012
|
|
Intangible assets
|
|
|
87,700
|
|
|
|
|
|
|
|
87,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
377,734
|
|
|
|
2,989
|
|
|
|
380,723
|
|
Current liabilities
|
|
|
14,474
|
|
|
|
3,282
|
|
|
|
17,756
|
|
Other long term liabilities
|
|
|
5,401
|
|
|
|
(69
|
)
|
|
|
5,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
19,875
|
|
|
|
3,213
|
|
|
|
23,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
357,859
|
|
|
$
|
(224
|
)
|
|
$
|
357,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accuro
Intangible Assets
The table below summarizes the acquired identified intangible
assets, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Weighted-Average
|
|
|
|
Value
|
|
|
Useful Lives (Years)
|
|
|
Developed technology
|
|
$
|
23,200
|
|
|
|
5.0
|
|
Customer base
|
|
|
63,200
|
|
|
|
12.5
|
|
Non-compete agreements
|
|
|
1,300
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
$
|
87,700
|
|
|
|
10.4
|
|
F-25
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Additionally, $55,592 of the $279,012 of goodwill is expected to
be deductible for tax purposes.
Accuro
Restructuring Plan
In connection with the Accuro Acquisition, our management
approved, committed and initiated a plan to restructure our
operations resulting in certain management, system and
organizational changes within our Revenue Cycle Management
segment. As a result of the finalization of our purchase price
allocation, we adjusted our preliminary purchase price
allocation by approximately $3,463 comprised of:
(i) facility lease termination costs of approximately
$3,407 in connection with exiting Accuros primary office
facility in Dallas, Texas; (ii) system migration and
standardization costs of approximately $354 to bring certain
Accuro systems up to our standards; (iii) estimated
severance costs of approximately $108 related to involuntary
terminations of acquired employees; and (iv) a reduction of
approximately $406 related to other liabilities assumed in
connection with the acquisition. Any increases or decreases to
the estimates of executing the restructuring plan subsequent to
June 2009 will be recorded as an adjustment to operating
expense. We reduced the operating expense and related accrual by
$82 to adjust certain estimates to actual payments made
subsequent to June 2009.
The changes in the plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued,
|
|
|
|
December 31,
|
|
|
Adjustments
|
|
|
Cash
|
|
|
December 31,
|
|
|
|
2008
|
|
|
to Costs
|
|
|
Payments
|
|
|
2009
|
|
|
Accuro Restructuring Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
$
|
920
|
|
|
$
|
78
|
|
|
$
|
(752
|
)
|
|
$
|
246
|
|
Lease termination penalty and other
|
|
|
709
|
|
|
|
3,303
|
|
|
|
(1,199
|
)
|
|
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Accuro Restructuring Costs
|
|
$
|
1,629
|
|
|
$
|
3,381
|
|
|
$
|
(1,951
|
)
|
|
$
|
3,059
|
|
The remaining severance of $246 is expected to be paid during
the first quarter 2010. The remaining $2,813 is associated with
the Dallas lease termination penalty of which approximately
$1,767 will be paid ratably from January 2010 through January
2011 with a final payment of $1,046 in February 2011.
Accuro
Deferred Revenues and Costs
We have estimated the fair value of the service obligation
assumed from Accuro in connection with the acquisition purchase
price allocation. The service obligation assumed from Accuro
represents our acquired commitment to provide continued
SaaS-based software and services for customer relationships that
existed prior to the acquisition where the requisite service
period has not yet expired. The estimated fair value of the
obligation and other future services was determined utilizing a
cost
build-up
approach, which determines fair value by estimating the costs
related to fulfilling the obligation plus a normal profit
margin. The sum of the costs and operating profit approximates
the amount that we would be required to pay a third party to
assume the service obligation. The estimated costs to fulfill
the obligation were based on the historical direct costs related
to providing the related services. We did not include any costs
associated with selling efforts, research and development or the
related operating margins on these costs. As a result of
allocating the acquisition purchase price, we recorded an
adjustment to reduce the carrying value of Accuros
June 2, 2008 deferred revenue by $7,643 down to $4,200, an
amount representing our estimate of the fair value of service
obligation assumed. In addition, we recorded an adjustment of
$6,974 to eliminate the carrying value of Accuros
June 2, 2008 deferred cost asset associated with the
related deferred revenue.
MD-X
Acquisition
On July 2, 2007, we acquired all of the outstanding common
stock of MD-X Solutions, Inc, MD-X Services, Inc., MD-X
Strategies, Inc. and MD-X Systems, Inc. (aggregately referred to
as MD-X) for a purchase price of $79,674. We paid
$69,981 in cash inclusive of $871 in acquisition-related costs
and we
F-26
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
issued 552,282 shares of Series J Preferred Stock
valued at $9,693. See the table at the beginning of Note 5
for a summary of the estimated fair values of assets acquired
and liabilities assumed at the date of acquisition. MD-Xs
results of operations are included in our consolidated statement
of operations for all periods subsequent to the acquisition date
of July 2, 2007.
MD-X services hospitals with a variety of products designed to
improve the efficiency of a hospitals revenue cycle
specifically in the accounts receivable area and capture lost
revenues due to unauthorized discounts and denied insurance
claims. The MD-X products are primarily service oriented but
include a software element that either interfaces directly with
the client hospital or is used internally to support MD-Xs
service offerings. The primary strategic reason for this
acquisition was to expand the MedAssets revenue cycle management
service offering to include accounts receivable billing,
collection and denials management services which we believe
would be attractive to our existing customer base. As a result
of these factors, combined with a highly competitive sales
auction for MD-X, the purchase price paid to MD-Xs
shareholders reflects a premium relative to the value of
identifiable assets.
Acquired intangible assets totaling $20,120 have a weighted
average useful life of approximately six years. These assets
include developed technology of $4,217 (three-year
weighted-average useful life), customer base of $14,182
(seven-year weighted-average useful life), trade name of $1,299
(three-year weighted-average useful life) and non-compete
agreements of $422 (three-year weighted-average useful life).
None of the $63,605 of goodwill is expected to be deductible for
tax purposes.
XactiMed
Acquisition
On May 18, 2007, through our wholly owned subsidiary
XactiMed Acquisition LLC, we acquired all the outstanding stock
of XactiMed, Inc. (XactiMed) for $21,281 in cash
(including $867 in acquisition related costs) and issued
Series I Preferred Stock valued at $29,140 for a total
purchase price of $50,421. See the table at the beginning of
Note 5 for a summary of the estimated fair values of assets
acquired and liabilities assumed at the date of acquisition.
XactiMed is a provider of web-based revenue cycle solutions that
help hospitals and health systems reduce the cost of managing
the revenue cycle in the area of claims processing and case
management consulting. XactiMeds results of operations are
included in our consolidated statement of operations for all
periods subsequent to the acquisition date of May 18, 2007.
The primary strategic reason for this acquisition was to expand
the MedAssets revenue cycle management service offering to
include claims processing and denials management, which we
believed would be attractive to our existing customer base.
Although several companies have a denials management solution,
XactiMed was one of only a small number of companies with a
large-scale, industry-recognized claims management service
offering. As a result of these factors, combined with a highly
competitive sales auction for XactiMed, the purchase price paid
to XactiMeds shareholders reflects a premium relative to
the value of identifiable assets.
Acquired intangible assets totaling $17,992 have a weighted
average useful life of approximately eight years. These assets
include developed technology of $8,777 (three-year
weighted-average useful life), customer base of $6,800
(eight-year weighted-average useful life), trade name of $620
(three-year weighted-average useful life), non-compete
agreements of $600 (three-year weighted-average useful life) and
in-process research and development (IPR&D) of
$1,195. None of the $35,186 of goodwill is expected to be
deductible for tax purposes.
In the second quarter of 2007, we recognized a charge of $1,195
which represented XactiMeds IPR&D projects that had
not reached a point where the related product or products were
available for general release and had no alternative future use
as of the acquisition date. The value assigned to this
IPR&D was determined by considering the importance of each
project to our overall development plan, estimating costs to
develop the
F-27
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
purchased IPR&D into commercially viable products and
estimating and discounting the net cash flows resulting from the
projects when completed.
The fair value of the service obligation assumed from XactiMed
represents our acquired commitment to provide continued
SaaS-based software and services for customer relationships that
existed prior to the acquisition whereby the requisite service
period has not yet expired. The estimated fair value of the
obligation and other future services was determined utilizing a
cost
build-up
approach, which determines fair value by estimating the costs
related to fulfilling the obligation plus a normal profit
margin. The sum of the costs and operating profit approximates
the amount that we would be required to pay a third party to
assume the service obligation. The estimated costs to fulfill
the obligation were based on the historical direct costs related
to providing the related services. We did not include any costs
associated with selling efforts or research and development or
the related fulfillment margins on these costs. As a result of
allocating the acquisition purchase price, we recorded an
adjustment to reduce the carrying value of XactiMeds
May 18, 2007 deferred revenue by $3,156 to an amount
representing our estimate of the fair value of service
obligation assumed.
Unaudited
Pro Forma Financial Information
The unaudited financial information in the table below
summarizes the combined results of operations of MedAssets and
significant acquired companies (Accuro, MD-X, and XactiMed) on a
pro forma basis. The pro forma information is presented as if
the companies had been combined at the beginning of the period
of acquisition and the immediately preceding comparable period.
The 2008 pro forma results include Accuro as if it were acquired
on January 1, 2008; the 2007 pro forma results include
Accuro, MD-X, and XactiMed as if each were acquired on
January 1, 2007.
The 2008 pro forma results include the following non-recurring
expenses included in Accuros pre-acquisition financial
statements that were directly attributable to the acquisition:
|
|
|
|
|
$1,317 related to transaction costs Accuro incurred in relation
to its potential initial public offering prior to the Accuro
Acquisition;
|
|
|
|
$1,462 related to one-time contractual severance payments made
to certain employees as part of the purchase agreement;
|
|
|
|
$2,222 related to one-time change of control payments made to
certain employees as part of the purchase agreement; and
|
|
|
|
$2,184 related to the one-time acceleration of unvested Accuro
stock options that were repurchased as part of the purchase
agreement.
|
The 2007 pro forma results include the following non-recurring
expenses included in MD-Xs and XactiMeds historical
financial statements that were directly attributable to the
acquisitions:
|
|
|
|
|
$1,490 related to one-time special bonus payments made to
certain XactiMed employees and legal and accounting fees
incurred in connection with the acquisition; and
|
|
|
|
$3,275 related to one-time special bonus payments made to
certain MD-X employees and accounting fees incurred in
connection with the acquisition.
|
F-28
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if the acquisitions
had taken place at the beginning of each of the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue
|
|
$
|
308,196
|
|
|
$
|
274,057
|
|
Net income (loss)
|
|
|
4,806
|
|
|
|
(4,499
|
)
|
Preferred stock dividends and accretion
|
|
|
|
|
|
|
(17,092
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
4,806
|
|
|
$
|
(21,591
|
)
|
Basic and diluted net income (loss) per share attributable to
common stockholders
|
|
$
|
0.09
|
|
|
$
|
(0.99
|
)
|
Notes payable are summarized as follows as of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Notes payable senior
|
|
$
|
215,161
|
|
|
$
|
245,176
|
|
Other
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
215,161
|
|
|
|
245,626
|
|
Less: current portions
|
|
|
(13,771
|
)
|
|
|
(30,277
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term notes payable
|
|
$
|
201,390
|
|
|
$
|
215,349
|
|
|
|
|
|
|
|
|
|
|
The principal amount of our long term notes payable consists of
our senior term loan facility which had an outstanding balance
of $215,161 as of December 31, 2009. We had zero dollars
drawn on our revolving credit facility, and zero dollars drawn
on our swing-line component, resulting in approximately $124,000
of availability under our credit facility inclusive of the
swing-line (after giving effect to $1,000 of outstanding but
undrawn letters of credit on such date) as of December 31,
2009 and 2008, respectively. During the year ended
December 31, 2009, we made payments on our term loan
balance which included an annual excess cash flow payment to our
lender in accordance with our credit facility of approximately
$27,516, scheduled principal payments on our senior term loan
facility of $2,499, and repayments of approximately $450 related
to other notes payable. The applicable weighted average interest
rate (inclusive of the applicable bank margin and impact of our
interest rate collar) on our senior term loan facility at
December 31, 2009 was 5.88%. Total interest paid during the
fiscal years ended December 31, 2009, 2008 and 2007 was
approximately $14,722, $18,032 and $19,133, respectively.
As of December 31, 2009, we had approximately $5,930 of
debt issuance costs related to our credit agreement which will
be amortized into interest expense using the effective interest
method until the maturity date. For the years ended
December 31, 2009 and 2008, we recognized approximately
$1,841 and $1,374 in interest expense related to the
amortization of debt issuance costs.
On September 11, 2009, we entered into an assignment
agreement with Lehman Commercial Paper Inc. (Lehman)
and Barclays Bank PLC (Barclays) whereby Lehman
assigned their extended commitments of $15,000 under our
revolving credit facility to Barclays. As a result of
Lehmans bankruptcy in September 2008, Lehman had not
funded any of its pro rata share of our request to borrow under
the revolving credit facility post bankruptcy. Upon the
assignment, Barclays funded approximately $2,400 to us
representing the pro rata share of unfunded revolver borrowing
requests not fulfilled by Lehman. We believe that Barclays has
the ability to fund its pro rata share of any future borrowing
requests and therefore the commitments outstanding under the
revolving credit facility have been increased to the original
commitment amount of
F-29
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
$125,000. This assignment did not change the existing terms,
conditions or covenants under our credit agreement nor did we
incur any fees associated with the execution of this assignment
agreement.
As a result of the bankruptcy described above and the inability
to assign the $15,000 revolving credit facility commitments to a
substitute lender prior to the assignment agreement in September
2009, we recorded an impairment charge of approximately $193 to
write-off the unamortized portion of debt issuance costs
relating to the $15,000 commitments under our revolving credit
facility. This impairment charge has been recorded to the
impairment line item within our 2008 Consolidated Statements of
Operations.
Our credit agreement contains certain provisions that require us
to pay a portion of our outstanding obligations one quarter
subsequent to the end of each fiscal year in the form of an
excess cash flow payment on the term loan. The amount is
determined based on defined percentages of excess cash flow
required in the credit agreement. The current portion of our
notes payable includes $11,272 related to our mandatory excess
cash flow payment required to be paid in 2010 in connection with
the provisions or our covenant compliance report as defined in
our credit agreement. The amount is significantly less than the
prior year because the improvement in our consolidated leverage
ratio provided for a step-down to 25% from 50% of calculated
free cash flow, as defined in our credit agreement, for the year
ended December 31, 2009.
Future maturities of principal of notes payable as of
December 31, 2009 are as follows:
|
|
|
|
|
|
|
Amount
|
|
|
2010
|
|
$
|
13,771
|
|
2011
|
|
|
2,499
|
|
2012
|
|
|
2,499
|
|
2013
|
|
|
196,392
|
|
|
|
|
|
|
|
|
$
|
215,161
|
|
|
|
|
|
|
July
2008 Credit Agreement Amendment
In July 2008, we entered into the fourth amendment to our
existing credit agreement (or the Fourth Amendment).
The Fourth Amendment increased the swing-line loan sublimit from
$10,000 to $30,000. The balance outstanding under our swing-line
loan is a component of the revolving credit commitments. The
total commitments under the credit facility, including the
aggregate revolving credit commitments, were not increased as a
result of the Fourth Amendment.
Subsequent to the July 2008 credit agreement amendment, we
instituted an auto borrowing plan whereby our excess cash
balances are voluntarily used by the credit agreement
administrative agent to pay down outstanding loan balances under
the swing-line loan on a daily basis. We initiated this auto
borrowing plan in order to reduce the amount of interest expense
incurred.
May
2008 Financing
In May 2008, we entered into the third amendment to our existing
credit agreement (or the Third Amendment) in
connection with the completion of the Accuro Acquisition. The
Third Amendment increased our term loan facility by $50,000 and
the commitments to loan amounts under our revolving credit
facility from $110,000 to $125,000 (before giving effect to
$1,000 of outstanding but undrawn letters of credit on such date
and the effective $15,000 commitments reduction resulting from
the defaulting lender affiliated with Lehman Brothers as
described above). The Third Amendment became effective upon the
closing of the Accuro transaction on June 2, 2008. We
borrowed approximately $100,000 to fund a portion of the
purchase price of Accuro.
F-30
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The Third Amendment also increased the applicable margins on the
rate of interest we pay under our credit agreement for both the
term loan and revolving credit facilities.
As a result of this increased indebtedness, our equal principal
reduction payments increased to $625 beginning on June 30,
2008 and will be paid quarterly throughout the term with a
balloon payment due at maturity. The maturity dates of the
revolving credit facility and term loan remain October 23,
2011 and October 23, 2013, respectively. Other significant
terms of the credit agreement remained unchanged from the prior
amended credit agreement.
Interest payments are calculated at the current LIBOR plus an
applicable margin. The applicable margin on our term loan debt
was 2.75% at December 31, 2008. We entered into an interest
rate collar to hedge our interest rate exposure on a notional
$155,000 of term loan debt in June 2008. The collar sets a
maximum interest rate of 6.00% and a minimum interest rate of
2.85% on the
3-month
LIBOR applicable to a notional $155,000 of term loan debt. See
Note 14.
In connection with the Third Amendment, we capitalized
approximately $6,167 of debt issuance costs related to the
additional debt borrowing.
Initial
Public Offering
On December 18, 2007, we closed on our initial public
offering of common stock and received $216,574 (net of offering
costs) in proceeds and subsequently paid down $120,000 of our
term loan facility on the same date. We incurred no prepayment
penalties or extinguishment charges with respect to this
prepayment. Due to the prepayment, our principal reduction
payments were recalculated to be equal payments of $498 (each
representing 0.25% of the loan) and are paid quarterly
throughout the term beginning March 31, 2008, with a
balloon payment due at maturity or October 23, 2013.
Interest payments are calculated at the current LIBOR plus an
applicable margin. The applicable margin was 2.50% at
December 31, 2007. The base LIBOR rate was swapped for a
fixed rate of 4.98% and 5.36% on a notional amount of the debt
in November 2006 and again in July 2007, respectively. See
Note 14. Our effective interest rates on the notional
$80,000 and $75,000 term loan portions hedged at
December 31, 2007 were 7.48% and 7.86%, respectively. The
applicable interest rate on the unhedged portion of our term
loan was 7.39% at December 31, 2007.
We are required to prepay the additional debt based on a
percentage of free cash flow generated in each preceding fiscal
year. In December 2007, we exercised the accordion feature of
the facility and amended the amounts available under the
revolving credit facility by $50,000, increasing the capacity of
the revolving credit facility to $110,000. We also recorded an
additional $175 of debt issuance costs in relation to the
accordion and are amortizing these costs over the life of the
revolver, or through October 2013.
July
2007 Amendment
On July 2, 2007, we amended our existing credit agreement
and added $150,000 in additional debt. The proceeds of the
additional debt were used to (i) purchase all of the
outstanding stock of MD-X, and XactiMed; (ii) for the
dividend discussed in Note 8; and (iii) the paydown of
$10,000 outstanding under our revolving credit facility. The
additional debt was treated as senior for purposes of meeting
certain financial covenants of the amended credit agreement. The
amended agreement also includes certain modifications to
existing financial covenant calculations. The maturity date of
the additional debt is the same as in the existing credit
agreement, or October 23, 2013. The additional debt is
collateralized by substantially all of the Companys assets.
F-31
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
In connection with the July 2007 amendment, we capitalized
$1,415 of debt issuance costs related to the additional debt
borrowing. The debt issuance cost will be amortized into
interest expense using the effective interest method until the
maturity date. We recognized $520 in total debt issuance cost
amortization for the year ended December 31, 2007.
Finance
Obligation
We entered into a lease agreement for a certain office building
in Cape Girardeau, Missouri with an entity owned by the former
owner of a company that was acquired in May 2001 (the
Lease Agreement). Under the terms of the Lease
Agreement, we were required to purchase the office building and
adjoining retail space on January 7, 2004 for $9,274. The
fair value of the office building and related retail space at
the acquisition date was $6,000 and $2,900, respectively.
In August 2003, we facilitated the sale of the office building
and related retail space under the Lease Agreement. We entered
into a new lease with the new owner of the office building and
provided a $1,000 letter of credit and eight months of prepaid
rent in connection with the new lease. The lease agreement was
for ten years. The letter of credit and prepaid rent constitute
continuing involvement as defined in generally accepted
accounting principles relating to leases, and as such the
transaction did not qualify for sale and leaseback accounting.
In accordance with the guidance, the Company recorded the
transaction as a financing obligation. As such, the book value
of the assets and related obligation remain on the
Companys consolidated financial statements. We recorded a
$501 commission on the sale of the building as an increase to
the corresponding financing obligation. In addition, we deferred
$386 in financing costs that will be amortized into expense over
the life of the obligation. Subsequent to the date of sale
(August 2003), we decreted the finance obligation in accordance
with a policy that would match the amortization of the
corresponding asset. The amount of the financial obligation
decretion for the years ended December 31, 2009 and 2008
was $152 and $128, respectively.
In July 2007, we extended the lease terms of the Lease Agreement
an additional four years through July 2017. The terms of the
lease extension were substantially similar to that of the
original lease term, and our outstanding letter of credit
continues to constitute continuing involvement as defined by the
guidance previously described. The lease extension effectively
increased our outstanding finance obligation and corresponding
office building asset by $1,121 at the time of the amendment.
The lease payments on the office building are charged to
interest expense in the periods they are due. The lease payments
included as interest expense in the accompanying statement of
operations for the years ended December 31, 2009, 2008 and
2007 were $658, $647 and $647, respectively.
Rental income and additional interest expense is imputed on the
retail space of $438 annually. Both the income and the expense
are included in Other income (expense) in the
accompanying consolidated statement of operations for each of
the years ended
December 31, 2009, 2008 and 2007 with no effect to net
income. Under the Lease Agreement, we are not entitled to actual
rental income on the retail space, nor do we have legal title to
the building.
When we have no further continuing involvement with the building
as defined under generally accepted accounting principles
relating to leases, we will remove the net book value of the
office building, adjoining retail space, and the related finance
obligation and account for the remainder of our payments under
the Lease Agreement as an operating lease. Under the Lease
Agreement, we will not obtain title to the office building and
retail space. Our future commitment is limited to the payments
required by the ten year Lease Agreement. At December 31,
2009, the future undiscounted payments under the Lease Agreement
aggregate to $5,098.
F-32
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Future payments of the finance obligation as of
December 31, 2009 are as follows:
|
|
|
|
|
|
|
Obligations
|
|
|
|
Under
|
|
|
|
Capital Lease
|
|
|
2010
|
|
$
|
1,096
|
|
2011
|
|
|
1,103
|
|
2012
|
|
|
1,114
|
|
2013
|
|
|
1,114
|
|
2014
|
|
|
1,114
|
|
Thereafter
|
|
|
10,828
|
|
|
|
|
|
|
|
|
|
16,369
|
|
Less: Amounts representing interest
|
|
|
(6,512
|
)
|
|
|
|
|
|
Net present value of capital lease obligation
|
|
|
9,857
|
|
Less: Amount representing current portion
|
|
|
(163
|
)
|
|
|
|
|
|
Finance obligation, less current portion
|
|
$
|
9,694
|
|
|
|
|
|
|
|
|
7.
|
COMMITMENTS
AND CONTINGENCIES
|
We lease certain office space and office equipment under
operating leases. Some of our operating leases include rent
escalations, rent holidays, and rent concessions and incentives.
However, we recognize lease expense on a straight-line basis
over the related minimum lease term utilizing total future
minimum lease payments. Future minimum rental payments under
operating leases with initial or remaining non-cancelable lease
terms of one year as of December 31, 2009 are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Lease
|
|
|
2010
|
|
$
|
8,133
|
|
2011
|
|
|
6,965
|
|
2012
|
|
|
7,035
|
|
2013
|
|
|
6,802
|
|
2014
|
|
|
6,071
|
|
Thereafter
|
|
|
19,875
|
|
|
|
|
|
|
|
|
$
|
54,881
|
|
|
|
|
|
|
Rent expense for the years ended December 31, 2009, 2008
and 2007, was approximately $8,102, $6,651 and $4,714
respectively.
Performance
Targets
In the ordinary course of contracting with our customers, we may
agree to make some or all of our fees contingent upon the
customers achievement of financial improvement targets
from the use of our services and software. These contingent fees
are not recognized as revenue until the customer confirms
achievement of the performance targets. We generally receive
customer acceptance as and when the performance targets are
achieved. Prior to customer confirmation that a performance
target has been achieved, we record invoiced contingent fees as
deferred revenue on our consolidated balance sheet. Often,
recognition of this revenue occurs in periods subsequent to the
recognition of the associated costs.
F-33
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Legal
Proceedings
In August 2007, the former owner of Med-Data Management, Inc.
(or Med-Data) disputed our earn-out calculation made
under the Med-Data Asset Purchase Agreement and alleged that we
failed to fulfill our obligations with respect to the earn-out.
In November 2007, the former owner filed a complaint alleging
that we failed to act in good faith with respect to the
operation of Med-Data subsequent to the acquisition which
affected the earn-out calculation. The Company refutes these
allegations and is vigorously defending itself against these
allegations. On March 21, 2008 we filed an answer, denying
the plaintiffs allegations and also filed a counterclaim,
alleging that the plaintiffs fraudulently induced us to enter
into the purchase agreement by intentionally concealing the
status of their relationship with their largest customer.
Discovery has been completed and briefing has been completed on
MedAssets and plaintiffs dispositive motions, but we
currently cannot estimate any probable outcome and have not
recorded a loss contingency in our Consolidated Statement of
Operations. The maximum earn-out payable under the Asset
Purchase Agreement is $4,000. In addition, the plaintiffs claim
that Ms. Hodges, one of the plaintiffs, is entitled to the
accelerated vesting of options to purchase 140,000 shares
of our common stock that she received in connection with her
employment agreement with the Company.
As of December 31, 2009, we have not recorded a liability
related to the Med-Data acquisition contingency on our balance
sheet. Other than the Med-Data dispute noted above, as of
December 31, 2009, we are not presently involved in any
other legal proceedings, the outcome of which, if determined
adversely to us, would have a material adverse affect on our
business, operating results or financial condition.
|
|
8.
|
REDEEMABLE
CONVERTIBLE PREFERRED STOCK
|
Conversion
of Preferred Stock to Common Stock
As a result of the closing of our initial public offering, all
outstanding Preferred Stock converted into approximately
17,317,000 shares of common stock based on the applicable
conversion rate for each series. As a result of the conversion,
all rights of the holders of such shares to receive accrued
dividends terminated therefore all accrued and unpaid dividends
totaling $80,320 were deemed contributed to paid in capital. We
had no Preferred Stock outstanding as of December 31, 2009
and 2008.
At the initial public offering in December 2007, the conversion
rate for each share of Series A, F, G, H, I and J was
.80 shares of common stock for one share of Series A,
F, G, H, I and J Preferred Stock. The conversion rate for each
share of Series B, B-2, C, and C-1 Preferred Stock was
.81 shares of common stock; each share of Series D
Preferred Stock was .81 shares of common stock; and each
share of Series E Preferred Stock was .80 shares of
common stock.
In connection with our initial public offering we amended and
restated our Certificate of Incorporation
(Certificate) authorizing us to issue
50,000,000 shares of undesignated preferred stock, par
value $0.01 per share. The preferred stock could be issued from
time to time in one or more series, each of which series had
distinctive designation or title and such number of shares as
was fixed by the Board prior to the issuance of any shares
thereof. Each such series of preferred stock had voting powers,
full or limited, or no voting powers, and such preferences and
relative, participating optional or other special rights and
such qualifications, limitations or restrictions thereof, as had
to be stated and expressed in the resolution or resolutions
providing for the issue of such series of preferred stock.
F-34
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Other
Stock Transactions Prior to Conversion
Series G
Preferred Stock
On July 30, 2007, the holders of the Series G
Preferred Stock exercised their rights as allowed under the
Certificate of Incorporation and converted all 833,333
outstanding shares of Series G Preferred Stock into shares
of common stock at a conversion ratio of .80 shares of
common stock for each share of Series G Preferred Stock.
Series J
Preferred Stock
On July 2, 2007, we amended and restated the provisions of
our Certificate authorizing 625,920 shares of Series J
Convertible Preferred Stock. The Certificate created redemption
and other rights for the holders of the Series J Preferred
Stock. We issued 552,282 shares of Series J Preferred
Stock in connection with the acquisition of MD-X. See
Note 5 for further discussion regarding the acquisition of
MD-X.
Subsequent to the acquisition, we sold approximately
73,000 shares of our Series J Preferred Stock to an
officer of MD-X for proceeds of $1,000.
Series I
Preferred Stock
In May 2007, we amended and restated the provisions of our
Certificate authorizing 1,712,076 shares of Series I
Convertible Preferred Stock. The Certificate created redemption
and other rights for the holders of the Series I Preferred
Stock. The Series I Preferred Stock was subsequently issued
in May 2007 to former owners of XactiMed. See Note 5 for
further discussion regarding the acquisition of XactiMed.
Preferred
Dividends and Accretion
As of December 31, 2007 and as a result of our initial
public offering, all rights of the former Preferred Stock
shareholders to accrued dividends were terminated upon
conversion to common shares. Additionally the shareholders
received no Preferred Stock dividends during 2007 other than
with respect to the special cash dividends described below.
Based on the rights of the Preferred Shareholders prior to
our initial public offering, We recorded approximately $15,802
in Preferred Stock dividends during the fiscal year ended
December 31, 2007. The accrued dividends were recorded as a
reduction of our reported net income on the Consolidated
Statements of Operations to arrive at net income attributable to
common stockholders.
The accretion expense is recorded as a reduction of our reported
net income on the Consolidated Statements of Operations to
arrive at net income (loss) attributable to common stockholders.
Cash
Dividends
On July 23, 2007, our Board declared a special cash
dividend in the aggregate amount of $70,000 payable to the
holders of (i) shares of our common stock and
(ii) shares of our Series A, Series B,
Series B-2,
Series C,
Series C-1,
Series D, Series E, Series F, Series H,
Series I, and Series J Preferred Stock on an
as-converted-to-common stock basis (collectively the
Participating Stockholders). The dividend declared
was payable to Participating Stockholders of record on
August 13, 2007, and paid to those Participating
Stockholders on August 30, 2007. As defined in the
Certificate of Incorporation, the Series I and
Series J Preferred Stock were excluded from participating
in the first $45,700 of the dividend. On August 13, 2007,
the total number of common shares and Preferred Stock shares
participating in the dividend, on an as-converted-to-common
stock basis was 27,643,921 excluding the Series I and
Series J Preferred Stock and 29,514,318 including the
Series I and Series J Preferred Stock equating to a
per-share dividend payable of approximately $2.48 a share for
the
F-35
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
common and Series A, B, B2, C, C1, D, E, F, and H Preferred
stockholders and a per-share dividend payable of approximately
$.83 a share for the Series I and Series J
stockholders. The dividends were paid to the Participating
Stockholders on August 30, 2007. The dividend increased our
accumulated deficit as the additional paid-in capital carried no
balance. The dividend did not reduce the liquidation value of
the Companys Preferred Stock.
Common
Stock
During 2009, 2008, and 2007, we issued shares of common stock in
connection with employee share-based payment arrangements. See
Note 10 to the Consolidated Financial Statements.
During the fiscal year ended December 31, 2008, we issued
approximately 8,850,000 unregistered shares of our common stock
in connection with our acquisition of Accuro. We valued this
equity issuance at $14.62 per share, which was computed using
the five-day
average of our closing share price for the period beginning two
days before the April 29, 2008 announcement of the Accuro
Acquisition and ending two days after the announcement.
During the fiscal year ended December 31, 2008, we issued
approximately 20,000 shares of our common stock to an
unrelated charitable foundation. The market value of the common
stock on the date of issuance was approximately $348, which has
been recorded as non-cash, non-employee share-based expense in
our accompanying Consolidated Statement of Operations for the
fiscal year ended December 31, 2008.
On December 18, 2007, we closed on our initial public
offering of common stock. As a result of the offering, we issued
14,781,781 shares of common stock for proceeds of $216,574
(net of underwriting fees of $16,556 and other offering costs of
$3,379). In connection with our initial public offering, we
amended and restated our certificate of incorporation
authorizing us to issue 150,000,000 shares of common stock
with a par value of $0.01 per share.
Common
Stock Warrants
As of December 31, 2009, we had approximately 38,000
warrants outstanding that were exercisable into common stock at
a weighted average exercise price of $2.29 with a weighted
average remaining life of 3.5 years. During the fiscal year
ended December 31, 2008, we issued approximately 190,000
unregistered shares of our common stock in connection with a
cashless exercise of a warrant. During 2007, we issued
approximately 44,000 shares of common stock in connection
with common stock warrant exercises for aggregate exercise
proceeds of $84.
Shareholder
Notes Receivable
During 2008, we settled all outstanding notes receivable issued
by certain stockholders. The notes were collateralized by
pledged shares of our common stock. In lieu of cash payment, we
accepted a number of the pledged shares as payment in full for
amounts owed under the notes receivable. The number of shares
paid was determined by dividing the total principal and interest
due under each note receivable by the closing market price of
our common stock on the date prior to the effective date of each
respective transaction. We received approximately
33,000 shares of our common stock in lieu of cash to settle
$585 in principal and interest outstanding under the notes
receivable. The shares were subsequently retired and are no
longer outstanding. For the years ended December 31, 2008
and 2007, we recorded a mark to market adjustment to (decrease)
increase non-cash share-based compensation expense of $(645) and
$1,005, respectively, related to the underlying shares pledged
as collateral for the notes.
F-36
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
10.
|
SHARE-BASED
COMPENSATION
|
As of December 31, 2009, we had restricted common stock,
stock-settled stock appreciation rights (or SSARs)
and common stock option equity awards outstanding under three
share-based compensation plans.
The share-based compensation cost related to equity awards that
has been charged against income was $16,652, $8,550 and $5,611
for the fiscal years ended December 31, 2009, 2008 and
2007, respectively. The total income tax benefit recognized in
the income statement for share-based compensation arrangements
related to equity awards was $6,302, $3,227 and $2,146 for the
fiscal years ended December 31, 2009, 2008 and 2007,
respectively. There were no capitalized share-based compensation
costs at December 31, 2009, 2008 or 2007.
Total share-based compensation expense (inclusive of restricted
common stock, common stock options, and SSARs) for the fiscal
years ended December 31, 2009, 2008 and 2007 is reflected
in our Consolidated Statements of Operations as noted below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cost of revenue
|
|
$
|
3,063
|
|
|
$
|
1,983
|
|
|
$
|
877
|
|
Product development
|
|
|
866
|
|
|
|
721
|
|
|
|
350
|
|
Selling and marketing
|
|
|
2,920
|
|
|
|
1,894
|
|
|
|
1,050
|
|
General and administrative
|
|
|
9,803
|
|
|
|
3,952
|
|
|
|
3,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
16,652
|
|
|
$
|
8,550
|
|
|
$
|
5,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Incentive Plans
In 2008, the Board approved and the Companys stockholders
adopted the MedAssets Inc. Long-Term Performance Incentive Plan
(the 2008 Plan). The 2008 Plan provides for the
grant of non-qualified stock options, incentive stock options,
restricted stock awards, restricted stock unit awards,
performance awards, stock appreciation rights and other
stock-based awards. An aggregate of 5,500,000 underlying shares
of our common stock was reserved for issuance to the
Companys directors, employees, and others under the 2008
Plan. As of December 31, 2009, we had approximately
1,837,000 shares remaining under our 2008 Plan available
for grant. The 2008 Plan was designed to replace and succeed the
MedAssets, Inc. 2004 Long-Term Incentive Plan and the 1999 Stock
Incentive Plan. Equity awards issued under the 2008 Plan consist
of common stock options, restricted stock (both service-based
and performance-based), and SSARs (both service-based and
performance-based).
Option awards issued under the 2008 Plan generally vest based
over five years of continuous service and have seven-year
contractual terms. Service-based share awards generally vest
over one to four years. However, specific vesting criteria have
been established for certain equity awards issued to employees
which are comprised of the following:
|
|
|
|
|
Performance-based SSARs vest upon the achievement of a 25%
compounded annual growth rate of diluted cash EPS for the
three-year period ending December 31, 2011. None of the
performance-based SSARs will vest unless the Company achieves
the 25% diluted cash EPS growth rate.
|
|
|
|
Performance-based restricted common stock will vest as follows:
|
|
|
|
|
i.
|
50% vesting based on achievement of a 15% compounded annual
growth rate of diluted cash EPS for the three-year period ending
December 31, 2011;
|
F-37
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
ii.
|
Pro rata vesting of between 50% and 100% based on achievement of
a compounded annual growth rate of diluted cash EPS between 15%
and 25% for the three-year period ending December 31,
2011; and
|
|
|
iii.
|
100% vesting based on achievement of a 25% compounded annual
growth rate of diluted cash EPS for the three-year period ending
December 31, 2011.
|
The compensation committee resolved that the Companys cash
earnings per share growth, or diluted cash EPS growth, will be
used as the performance criteria for the SSARs and restricted
common stock awards subject to performance-based vesting.
Diluted cash EPS, a non-GAAP measure, is defined as the
Companys fully-diluted net income per share excluding
non-cash acquisition-related intangible amortization, non-cash
share-based compensation expense and certain Board approved
non-recurring items on a tax-adjusted basis. The Companys
management team and Board believe the use of diluted cash EPS as
the measure for vesting terms is appropriate as it can be used
to analyze the Companys operating performance on a
consistent basis by removing the impact of certain non-cash and
non-recurring items from the Companys operations, and by
reflecting organic growth and accretive business transactions.
However, as diluted cash EPS is a non-GAAP measure, it may not
be the sole or best measure for investors to gauge the
Companys overall financial performance. The audit
committee of the Board will be responsible for validating the
calculation of diluted cash EPS growth over the relevant period.
In addition to meeting the performance targets as discussed
above, the grantees must be employed by the Company for a
continuous four year period through December 31, 2012 in
order for the awards that are subject to performance-based
vesting criteria to vest.
|
|
|
|
|
Service-based SSARs vest 25% annually beginning on
December 31, 2009.
|
|
|
|
Service-based restricted stock vest 100% on December 31,
2012.
|
Option awards issued under the 2004 Long Term Equity Incentive
Plan generally vest based over five years of continuous service
and have ten-year contractual terms. Service-based share awards
generally vest over three years. We will not issue any
additional awards under this plan and all future shares that are
canceled or forfeited that were initially issued under this plan
will be added back to our 2008 plan.
Option awards issued under the 1999 Stock Incentive Plan
generally vest based over three to four years of continuous
service and have ten-year contractual terms. Service-based share
awards generally vest over three years. We will not issue any
additional awards under this plan and all future shares that are
canceled or forfeited that were initially issued under this plan
will be added back to our 2008 plan.
Under all plans, our policy is to grant equity awards with an
exercise price (or base price in the case of SSARs) equal to the
fair market price of our stock on the date of grant.
Equity
Award Valuation
Under generally accepted accounting principles for stock
compensation, we calculate the grant-date estimated fair value
of share-based awards using a Black-Scholes valuation model.
Determining the estimated fair value of share-based awards is
judgmental in nature and involves the use of significant
estimates and assumptions, including the expected term of the
share-based awards, risk-free interest rates over the vesting
period, expected dividend rates, the price volatility of the
Companys shares and forfeiture rates of the awards. The
guidance requires forfeitures to be estimated at the time of
grant and adjusted, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The forfeiture
rate is estimated based on historical experience. We base fair
value estimates on assumptions we believe to be reasonable but
that are inherently uncertain. Actual future results may differ
from those estimates.
F-38
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The fair value of each option grant has been estimated as of the
date of grant using the Black-Scholes option-pricing model with
the following assumptions for the fiscal years ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Range of calculated volatility
|
|
|
31.21% - 34.73%
|
|
|
|
32.2% - 36.1%
|
|
|
|
38.1% - 42.6%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Range of risk free interest rate
|
|
|
1.36%-2.46%
|
|
|
|
1.6% - 3.6%
|
|
|
|
4.1% - 4.7%
|
|
Range of expected term
|
|
|
4.0-5.0 years
|
|
|
|
5 - 6.5 years
|
|
|
|
6 - 6.5 years
|
|
It is not practicable for us to estimate the expected volatility
of our share price given our limited history as a publicly
traded company. Once we have sufficient history as a public
company, we will estimate the expected volatility of our share
price, which may impact our future share-based compensation. In
accordance with generally accepted accounting principles for
stock compensation, we have estimated grant-date fair value of
our shares using volatility calculated (calculated
volatility) from an appropriate industry sector index of
comparable entities using the simplified method as
prescribed in Staff Accounting Bulletin No. 107,
Share-based Payment, to calculate expected term. Dividend
payments were not assumed, as we did not anticipate paying a
dividend at the dates in which the various option grants
occurred during the year. The risk-free rate of return reflects
the weighted average interest rate offered for zero coupon
treasury bonds over the expected term of the options. The
expected term of the awards represents the period of time that
options granted are expected to be outstanding.
Equity
Award Expense Attribution
For service-based equity awards, compensation cost is recognized
using an accelerated method over the vesting or service period
and is net of estimated forfeitures. For performance-based
equity awards, compensation cost is recognized using a
straight-line method over the vesting or performance period and
is adjusted each reporting period in which a change in
performance achievement is determined and is net of estimated
forfeitures. We evaluate the probability of performance
achievement each reporting period and, if necessary, adjust
share-based compensation expense based on expected performance
achievement.
Restricted
Common Stock Awards
We have issued restricted common stock awards to employees, our
Board and our senior advisory board. During 2009, 2008 and 2007,
we issued approximately 1,074,000 (or 1,049,000 shares net
of forfeitures), 6,000 and 8,000 shares, respectively.
During 2009, 2008 and 2007, the weighted-average grant date fair
value of each restricted common stock share was $15.02, $16.04,
and $10.44, respectively. The fair value of shares vested during
the fiscal years ended December 31, 2009, 2008 and 2007 was
$747, $107 and $133, respectively.
F-39
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
A summary of changes in restricted shares during the fiscal year
ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Performance-
|
|
|
|
|
|
Grant
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Service-
|
|
|
based
|
|
|
|
|
|
Date Fair
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
based Shares
|
|
|
Shares
|
|
|
Total Shares
|
|
|
Value
|
|
|
Term
|
|
|
Value
|
|
|
Non-vested restricted shares outstanding as of January 1,
2009
|
|
|
13,000
|
|
|
|
|
|
|
|
13,000
|
|
|
$
|
11.30
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
385,000
|
|
|
|
689,000
|
|
|
|
1,074,000
|
|
|
|
15.02
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(45,000
|
)
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
16.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(10,000
|
)
|
|
|
(15,000
|
)
|
|
|
(25,000
|
)
|
|
|
14.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted shares outstanding as of December 31,
2009
|
|
|
343,000
|
|
|
|
674,000
|
|
|
|
1,017,000
|
|
|
$
|
14.92
|
|
|
|
6 years
|
|
|
$
|
21,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there was $10,069 of total
unrecognized compensation cost related to unvested restricted
common stock awards that will be recognized over a weighted
average period of 1.9 years.
SSARs
We have issued SSARs to employees, our Board and our senior
advisory board. During 2009, we issued approximately 2,765,000
SSARs (or 2,696,000 SSARs net of forfeitures). The
weighted-average grant date fair value of each SSAR was $4.66.
The fair value of SSARs vested during the fiscal year ended
December 31, 2009 was $1,802.
A summary of changes in SSARs during the fiscal year ended
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Service-
|
|
|
Performance-
|
|
|
|
|
|
Grant
|
|
|
Grant
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
based
|
|
|
based
|
|
|
|
|
|
Date Base
|
|
|
Date Fair
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
SSARs
|
|
|
SSARs
|
|
|
Total SSARs
|
|
|
Price
|
|
|
Value
|
|
|
Term
|
|
|
Value
|
|
|
SSARs outstanding as of January 1, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,370,000
|
|
|
|
1,395,000
|
|
|
|
2,765,000
|
|
|
|
14.90
|
|
|
|
4.66
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(41,000
|
)
|
|
|
(28,000
|
)
|
|
|
(69,000
|
)
|
|
|
14.74
|
|
|
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs outstanding as of December 31, 2009
|
|
|
1,329,000
|
|
|
|
1,367,000
|
|
|
|
2,696,000
|
|
|
$
|
14.91
|
|
|
$
|
4.66
|
|
|
|
6 years
|
|
|
$
|
17,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs exercisable as of December 31, 2009
|
|
|
410,000
|
|
|
|
|
|
|
|
410,000
|
|
|
$
|
14.28
|
|
|
$
|
4.40
|
|
|
|
6 years
|
|
|
$
|
2,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there was $7,658 of total
unrecognized compensation cost related to unvested SSARs that
will be recognized over a weighted average period of
1.8 years.
Common
Stock Option Awards
During the fiscal years ended December 31, 2009, 2008 and
2007, we granted service-based stock options for the purchase of
approximately 543,000, 1,904,000 and 2,706,000 shares,
respectively. The stock options granted during the fiscal year
ended December 31, 2009 have a weighted average exercise
price of $20.01 and
F-40
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
have a service vesting period of five years. The options granted
during 2008 have a weighted average exercise price of $15.70 and
have a service vesting period of five years with the exception
of 41,000 which vest over a ten-month period. The options
granted during 2007 have a weighted average exercise price of
$10.33 and have a service vesting period of three years (300,000
options) and five years (2,406,000 options).
The exercise price of all stock options described above was
equal to the market price of our common stock on the date of
grant (or common stock grant-date fair value), and
therefore the intrinsic value of each option grant was zero. The
common stock grant-date fair value of options granted during the
fiscal years ended December 31, 2009 and 2008 represents
the market value of our common stock as of the close of market
on the date prior to the grant date. The common stock grant-date
fair value of options granted during 2007 represents valuation
ascribed to our common stock from a contemporaneous valuation
performed on or near each grant date.
The weighted-average grant-date fair value of each option
granted during the fiscal years ended December 31, 2009,
2008 and 2007 was $6.54, $6.41 and $4.88, respectively.
A summary of changes in outstanding options during the fiscal
year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Options outstanding as of January 1, 2009
|
|
|
7,995,000
|
|
|
$
|
8.63
|
|
|
|
7 years
|
|
|
|
|
|
Granted
|
|
|
543,000
|
|
|
|
20.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,749,000
|
)
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(345,000
|
)
|
|
|
15.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2009
|
|
|
6,444,000
|
|
|
$
|
9.93
|
|
|
|
7 years
|
|
|
$
|
73,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of December 31, 2009
|
|
|
2,604,000
|
|
|
$
|
8.09
|
|
|
|
7 years
|
|
|
$
|
34,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of stock options vested during the fiscal
years ended December 31, 2009, 2008 and 2007 was $6,195,
$7,095 and $2,547, respectively.
During the fiscal years ended December 31, 2009, 2008 and
2007, we issued approximately 1,749,000, 455,000 and
859,000 shares of common stock, respectively, in connection
with employee stock option exercises for aggregate exercise
proceeds of $10,407, $1,862 and $3,441, respectively.
The total intrinsic value of stock options exercised during the
fiscal years ended December 31, 2009, 2008 and 2007 was
$22,448, $5,592 and $6,352, respectively. Our policy for issuing
shares upon stock option exercise is to issue new shares of
common stock.
As of December 31, 2009, there was $8,919 of total
unrecognized compensation cost related to outstanding stock
option awards that will be recognized over a weighted average
period of 1.7 years.
F-41
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The following table summarizes the exercise price range,
weighted average exercise price, and remaining contractual lives
for the number of stock options outstanding as of
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Range of exercise prices
|
|
$
|
0.63 - $23.60
|
|
|
$
|
0.63 - $17.86
|
|
|
$
|
0.63 - $16.00
|
|
Number of options outstanding
|
|
|
6,444,000
|
|
|
|
7,995,000
|
|
|
|
6,974,000
|
|
Weighted average exercise price
|
|
$
|
9.93
|
|
|
$
|
8.63
|
|
|
$
|
6.49
|
|
Weighted average remaining contractual life
|
|
|
6.7 years
|
|
|
|
7.3 years
|
|
|
|
7.9 years
|
|
The provision for income tax expense is as follows for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,518
|
|
|
$
|
1,349
|
|
|
$
|
3,610
|
|
Foreign
|
|
|
58
|
|
|
|
|
|
|
|
|
|
State
|
|
|
1,738
|
|
|
|
1,008
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense
|
|
|
8,314
|
|
|
|
2,357
|
|
|
|
4,149
|
|
Deferred expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,147
|
|
|
|
5,229
|
|
|
|
2,453
|
|
State
|
|
|
365
|
|
|
|
(84
|
)
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense
|
|
|
4,512
|
|
|
|
5,145
|
|
|
|
3,237
|
|
Change in valuation allowance
|
|
|
|
|
|
|
(13
|
)
|
|
|
(2,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
12,826
|
|
|
$
|
7,489
|
|
|
$
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between reported income tax expense and the
amount computed by applying the statutory federal income tax
rate of 35 percent is as follows at December 31, 2009,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Computed tax expense
|
|
$
|
11,471
|
|
|
$
|
6,415
|
|
|
$
|
3,784
|
|
State taxes (net of federal benefit)
|
|
|
1,679
|
|
|
|
606
|
|
|
|
(1,735
|
)
|
Other permanent items
|
|
|
91
|
|
|
|
73
|
|
|
|
30
|
|
Meals & entertainment related to operations
|
|
|
695
|
|
|
|
565
|
|
|
|
705
|
|
Write-off related to In-process R&D impairment
|
|
|
|
|
|
|
|
|
|
|
418
|
|
Research & Development Credits
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
Uncertain tax positions
|
|
|
(145
|
)
|
|
|
(152
|
)
|
|
|
1,277
|
|
Net operating loss adjustments
|
|
|
(22
|
)
|
|
|
(36
|
)
|
|
|
|
|
Alternative minimum tax
|
|
|
(57
|
)
|
|
|
18
|
|
|
|
|
|
Other
|
|
|
(4
|
)
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
12,826
|
|
|
$
|
7,489
|
|
|
$
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Deferred income taxes reflect the net effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets and liabilities are as
follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax asset, current
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
3,516
|
|
|
$
|
3,617
|
|
Accounts receivable
|
|
|
1,586
|
|
|
|
1,406
|
|
Returns and allowances
|
|
|
175
|
|
|
|
133
|
|
Deferred revenue
|
|
|
3,108
|
|
|
|
1,765
|
|
Net operating loss carryforwards
|
|
|
3,387
|
|
|
|
7,757
|
|
AMT credit
|
|
|
1,311
|
|
|
|
|
|
Research and development credit
|
|
|
1,409
|
|
|
|
|
|
Foreign tax credit
|
|
|
61
|
|
|
|
|
|
Prepaid expenses
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, current
|
|
|
14,600
|
|
|
|
14,678
|
|
Valuation allowance
|
|
|
(177
|
)
|
|
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset, current
|
|
|
14,423
|
|
|
|
14,549
|
|
Deferred tax liability, current
|
|
|
|
|
|
|
|
|
Change in accounting method deferred revenue
|
|
|
|
|
|
|
(237
|
)
|
Prepaid expenses
|
|
|
|
|
|
|
(291
|
)
|
Deferred interest expense
|
|
|
|
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability, current
|
|
|
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset, current
|
|
$
|
14,423
|
|
|
$
|
13,780
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, non-current
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
9,793
|
|
|
$
|
5,563
|
|
Net operating loss carryforwards
|
|
|
167
|
|
|
|
3,286
|
|
Capital lease
|
|
|
811
|
|
|
|
755
|
|
Deferred revenue
|
|
|
936
|
|
|
|
1,156
|
|
Financial hedges
|
|
|
962
|
|
|
|
1,268
|
|
AMT credit
|
|
|
|
|
|
|
1,253
|
|
Research and development credit
|
|
|
|
|
|
|
409
|
|
Other
|
|
|
111
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, non-current
|
|
|
12,780
|
|
|
|
13,769
|
|
Valuation allowance
|
|
|
(545
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset, non-current
|
|
|
12,235
|
|
|
|
13,647
|
|
Deferred tax liability, non-current
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
(710
|
)
|
Intangible assets
|
|
|
(17,611
|
)
|
|
|
(21,025
|
)
|
Prepaid expenses
|
|
|
(39
|
)
|
|
|
(70
|
)
|
Fixed assets
|
|
|
(3,604
|
)
|
|
|
(893
|
)
|
Capitalized software costs
|
|
|
(10,220
|
)
|
|
|
(6,766
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability, non-current
|
|
|
(31,474
|
)
|
|
|
(29,464
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred liability, non-current
|
|
$
|
(19,239
|
)
|
|
$
|
(15,817
|
)
|
|
|
|
|
|
|
|
|
|
We have historically maintained a valuation allowance on certain
deferred tax assets. In assessing the ongoing need for a
valuation allowance, we consider recent operating results, the
scheduled reversal of
F-43
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
deferred tax liabilities, projected future taxable benefits and
tax planning strategies. As a result of this assessment, we
recorded a $471 increase to our valuation allowance on certain
deferred tax assets for the year ended December 31, 2009.
This increase to the valuation allowance was related to our
expectations of utilization of state net operating loss carry
forwards in future periods. As a result of the increase of the
valuation allowance of $471, we realized a state expense of $458
included in Income tax expense on the accompanying
Consolidated Statement of Operations. We will continue to
evaluate on an annual basis, in accordance with generally
accepted accounting principles for income taxes, whether or not
a continued valuation allowance is necessary.
We have gross federal net operating loss carry forwards
available to offset future taxable income of $1,779 and $23,459
at December 31, 2009 and 2008, respectively. These carry
forwards expire at various dates beginning in 2018 through 2028.
Previous changes to ownership as defined by Section 382 of
the Internal Revenue Code have limited the amount of net
operating loss carry forwards we can utilize in any one year. In
addition to previous ownership changes, our initial public
offering and acquisition of Accuro, triggered ownership changes
with regard to MedAssets net operating losses as well as
our acquired net operating losses from Accuro. These limitations
have not changed our opinion regarding the utilization of
federal net operating losses prior to their respective
expiration. Section 382 limitations also impact our state
net operating losses. We analyzed the impact of Section 382
on our state net operating loss carryforwards, as these rules
differ from the federal rules in certain instances. Our
valuation allowance is primarily driven by our Section 382
limitation.
Cash paid for income taxes amounted to $749 and $3,502 for the
years ended December 31, 2009 and 2008, respectively.
We adopted generally accepted accounting principles relating to
the accounting for uncertainty in income taxes, on
January 1, 2007. As a result of the implementation of this
guidance, we recognized a cumulative-effect adjustment by
reducing the January 1, 2007 balance of retained earnings
by $1,316 and increasing our liability for unrecognized tax
benefits, interest, and penalties by $314 and reducing
noncurrent deferred tax assets by $1,002.
Upon adoption of this guidance, we elected an accounting policy
to also classify accrued penalties and interest related to
unrecognized tax benefits in our income tax provision.
Previously, our policy was to classify penalties and interest as
operating expenses in arriving at pretax income. During the year
ended December 31, 2009 and December 31, 2008, we
reversed $82 and zero, respectively, for the potential payment
of interest and penalties.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at January 1, 2008
|
|
$
|
2,380
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
|
|
Reductions for tax positions of prior years
|
|
|
(2,002
|
)
|
Settlements and lapse of statue of limitations
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
378
|
|
Additions based on tax positions related to the current year
|
|
|
79
|
|
Additions for tax positions of prior years
|
|
|
77
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Settlements and lapse of statue of limitations
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
534
|
|
F-44
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Included in our unrecognized tax benefits are $477 of uncertain
positions that would impact our effective rate if recognized. We
do not expect unrecognized tax benefits to materially change in
the next 12 months.
Our consolidated U.S. federal income tax returns for tax
years 1999 to 2002 remain subject to examination by the Internal
Revenue Service (or IRS) for net operating loss
carryforward and credit carryforward purposes. For years 1999 to
2004 the statute for assessments and refunds has expired. The
statute of limitations on our 2005 federal income tax return for
assessments and refunds expired on September 15, 2009.
Separate state income tax returns for our parent company and
certain consolidated state returns remain subject to examination
for net operating loss carryforward purposes. Separate state
income tax returns for our most significant subsidiary for tax
years 2005 to 2007 remains open. The statute of limitations on
these 2005 state returns expired on September 15, 2009.
|
|
12.
|
INCOME
(LOSS) PER SHARE
|
We calculate earnings per share (or EPS) in
accordance with the generally accepted accounting principles
relating to earnings per share. Basic EPS is calculated by
dividing reported net income (loss) available to common
shareholders by the weighted-average number of common shares
outstanding for the reported period following the two-class
method. The effect of our participating convertible preferred
stock was included in basic EPS, if dilutive, under the
two-class method in accordance with generally accepted
accounting principles relating to earnings per share. Diluted
EPS reflects the potential dilution that could occur if our
stock options and stock warrants were exercised and converted
into our common shares during the reporting periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator for basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
19,947
|
|
|
$
|
10,841
|
|
|
$
|
6,296
|
|
Preferred stock dividends and accretion
|
|
|
|
|
|
|
|
|
|
|
(16,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
|
19,947
|
|
|
|
10,841
|
|
|
|
(9,798
|
)
|
Denominator for basic income (loss) per share weighted average
shares
|
|
|
54,841,000
|
|
|
|
49,843,000
|
|
|
|
12,984,000
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,416,000
|
|
|
|
2,444,000
|
|
|
|
|
|
Stock settled stock appreciation rights
|
|
|
193,000
|
|
|
|
|
|
|
|
|
|
Restricted stock and stock warrants
|
|
|
415,000
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per share
adjusted weighted average shares and assumed conversions
|
|
|
57,865,000
|
|
|
|
52,314,000
|
|
|
|
12,984,000
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) attributable to common stockholders from
continuing operations
|
|
$
|
0.36
|
|
|
$
|
0.22
|
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) attributable to common stockholders
from continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
(0.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our participating preferred stock converted to common stock on
December 18, 2007 as the result of our initial public
offering. With this conversion, we are no longer contractually
obligated to pay the associated accrued preferred dividends, and
all rights to accrued and unpaid preferred dividends were
terminated by the former preferred stock shareholders.
F-45
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The following table provides a summary of those potentially
dilutive securities that have been excluded from the calculation
of basic and diluted EPS because inclusion would have an
anti-dilutive effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
16,013,000
|
|
Stock options
|
|
|
110,000
|
|
|
|
355,000
|
|
|
|
1,833,000
|
|
Stock settled stock appreciation rights
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
Restricted stock and stock warrants
|
|
|
1,000
|
|
|
|
|
|
|
|
124,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
135,000
|
|
|
|
355,000
|
|
|
|
17,970,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We deliver our solutions and manage our business through two
reportable business segments, Revenue Cycle Management and Spend
Management:
|
|
|
|
|
Revenue Cycle Management. Our Revenue Cycle
Management segment provides a comprehensive suite of software
and services spanning the hospital, health system and other
ancillary healthcare provider revenue cycle workflow
from patient admission and financial responsibility, patient
financial liability estimation, charge capture, case management,
contract management and health information management through
claims processing and accounts receivable management. Our
workflow solutions, together with our data management and
business intelligence tools, increase revenue capture and cash
collections, reduce accounts receivable balances and increase
regulatory compliance.
|
|
|
|
Spend Management. Our Spend Management segment
provides a comprehensive suite of technology-enabled services
that help our customers manage their non-labor expense
categories. Our solutions lower supply and medical device
pricing and utilization by managing the procurement process
through our group purchasing organization portfolio of
contracts, consulting services and business intelligence tools.
|
Generally accepted accounting principles relating to segment
reporting, defines reportable segments as components of an
enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing financial performance. The guidance indicates that
financial information about segments should be reported on the
same basis as that which is used by the chief operating decision
maker in the analysis of performance and allocation of
resources. Management of the Company, including our chief
operating decision maker, uses what we refer to as Segment
Adjusted EBITDA as its primary measure of profit or loss to
assess segment performance and to determine the allocation of
resources. We define Segment Adjusted EBITDA as segment net
income (loss) before net interest expense, income tax expense
(benefit), depreciation and amortization (EBITDA) as
adjusted for other non-recurring, non-cash or non-operating
items. Our chief operating decision maker uses Segment Adjusted
EBITDA to facilitate a comparison of our operating performance
on a consistent basis from period to period. Segment Adjusted
EBITDA includes expenses associated with sales and marketing,
general and administrative and product development activities
specific to the operation of the segment. General and
administrative corporate expenses that are not specific to the
segments are not included in the calculation of Segment Adjusted
EBITDA. These expenses include the costs to manage our corporate
offices, interest expense on our credit facilities and expenses
related to being a publicly-held company. All reportable segment
revenues are presented net of inter-segment eliminations and
represent revenues from external customers.
F-46
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
The following tables present Segment Adjusted EBITDA and
financial position information as utilized by our chief
operating decision maker. A reconciliation of Segment Adjusted
EBITDA to consolidated net income is included. General corporate
expenses are included in the Corporate column.
RCM represents the Revenue Cycle Management segment
and SM represents the Spend Management segment.
Other assets and liabilities are included to provide a
reconciliation to total assets and total liabilities.
The following tables represent our results of operations, by
segment, for the fiscal years ended December 31, 2009, 2008
and 2007. The results of operations of Accuro are included in
our Revenue Cycle Management segment from the date of
acquisition, or June 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
RCM
|
|
|
SM
|
|
|
Corporate
|
|
|
Total
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative fees
|
|
$
|
|
|
|
$
|
163,454
|
|
|
$
|
|
|
|
$
|
163,454
|
|
Revenue share obligation
|
|
|
|
|
|
|
(55,231
|
)
|
|
|
|
|
|
|
(55,231
|
)
|
Other service fees
|
|
|
205,918
|
|
|
|
27,140
|
|
|
|
|
|
|
|
233,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
205,918
|
|
|
|
135,363
|
|
|
|
|
|
|
|
341,281
|
|
Total operating expenses
|
|
|
183,876
|
|
|
|
77,042
|
|
|
|
29,893
|
|
|
|
290,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
22,042
|
|
|
|
58,321
|
|
|
|
(29,893
|
)
|
|
|
50,470
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(18,112
|
)
|
|
|
(18,114
|
)
|
Other (expense) income
|
|
|
(219
|
)
|
|
|
149
|
|
|
|
487
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
21,822
|
|
|
$
|
58,469
|
|
|
$
|
(47,518
|
)
|
|
$
|
32,773
|
|
Income tax expense (benefit)
|
|
|
8,540
|
|
|
|
22,882
|
|
|
|
(18,596
|
)
|
|
|
12,826
|
|
Net income (loss)
|
|
|
13,282
|
|
|
|
35,587
|
|
|
|
(28,922
|
)
|
|
|
19,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
64,257
|
|
|
$
|
68,265
|
|
|
$
|
(21,084
|
)
|
|
$
|
111,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
RCM
|
|
|
SM
|
|
|
Corporate
|
|
|
Total
|
|
|
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
54,401
|
|
|
$
|
37,886
|
|
|
$
|
(24,670
|
)
|
|
$
|
67,617
|
|
Other assets
|
|
|
567,126
|
|
|
|
93,886
|
|
|
|
49,915
|
|
|
|
710,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
621,527
|
|
|
|
131,772
|
|
|
|
25,245
|
|
|
|
778,544
|
|
Accrued revenue share obligation
|
|
|
|
|
|
|
31,948
|
|
|
|
|
|
|
|
31,948
|
|
Deferred revenue
|
|
|
28,400
|
|
|
|
3,478
|
|
|
|
|
|
|
|
31,878
|
|
Other liabilities
|
|
|
36,850
|
|
|
|
33,131
|
|
|
|
207,365
|
|
|
|
277,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
65,250
|
|
|
$
|
68,557
|
|
|
$
|
207,365
|
|
|
$
|
341,172
|
|
F-47
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
RCM
|
|
|
SM
|
|
|
Corporate
|
|
|
Total
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative fees
|
|
$
|
|
|
|
$
|
158,618
|
|
|
$
|
|
|
|
$
|
158,618
|
|
Revenue share obligation
|
|
|
|
|
|
|
(52,853
|
)
|
|
|
|
|
|
|
(52,853
|
)
|
Other service fees
|
|
|
151,717
|
|
|
|
22,174
|
|
|
|
|
|
|
|
173,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
151,717
|
|
|
|
127,939
|
|
|
|
|
|
|
|
279,656
|
|
Total operating expenses
|
|
|
142,854
|
|
|
|
73,108
|
|
|
|
22,172
|
|
|
|
238,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
8,863
|
|
|
|
54,831
|
|
|
|
(22,172
|
)
|
|
|
41,522
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(21,266
|
)
|
|
|
(21,271
|
)
|
Other income (expense)
|
|
|
58
|
|
|
|
21
|
|
|
|
(2,000
|
)
|
|
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
8,917
|
|
|
$
|
54,851
|
|
|
$
|
(45,438
|
)
|
|
$
|
18,330
|
|
Income tax expense (benefit)
|
|
|
5,165
|
|
|
|
21,786
|
|
|
|
(19,462
|
)
|
|
|
7,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,752
|
|
|
|
33,065
|
|
|
|
(25,976
|
)
|
|
|
10,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
43,375
|
|
|
$
|
64,175
|
|
|
$
|
(17,834
|
)
|
|
$
|
89,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
RCM
|
|
|
SM
|
|
|
Corporate
|
|
|
Total
|
|
|
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
43,384
|
|
|
$
|
40,540
|
|
|
$
|
(28,876
|
)
|
|
$
|
55,048
|
|
Other assets
|
|
|
577,650
|
|
|
|
96,915
|
|
|
|
44,247
|
|
|
|
718,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
621,034
|
|
|
|
137,455
|
|
|
|
15,371
|
|
|
|
773,860
|
|
Accrued revenue share obligation
|
|
|
|
|
|
|
29,698
|
|
|
|
|
|
|
|
29,698
|
|
Deferred revenue
|
|
|
26,607
|
|
|
|
4,084
|
|
|
|
|
|
|
|
30,691
|
|
Other liabilities
|
|
|
28,689
|
|
|
|
41,546
|
|
|
|
260,297
|
|
|
|
330,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
55,296
|
|
|
$
|
75,328
|
|
|
$
|
260,297
|
|
|
$
|
390,921
|
|
F-48
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
RCM
|
|
|
SM
|
|
|
Corporate
|
|
|
Total
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative fees
|
|
$
|
|
|
|
$
|
142,320
|
|
|
$
|
|
|
|
$
|
142,320
|
|
Revenue share obligation
|
|
|
|
|
|
|
(47,528
|
)
|
|
|
|
|
|
|
(47,528
|
)
|
Other service fees
|
|
|
80,512
|
|
|
|
13,214
|
|
|
|
|
|
|
|
93,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
80,512
|
|
|
|
108,006
|
|
|
|
|
|
|
|
188,518
|
|
Total operating expenses
|
|
|
76,445
|
|
|
|
66,974
|
|
|
|
17,011
|
|
|
|
160,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,067
|
|
|
|
41,032
|
|
|
|
(17,011
|
)
|
|
|
28,088
|
|
Interest income (expense)
|
|
|
14
|
|
|
|
(2
|
)
|
|
|
(20,403
|
)
|
|
|
(20,391
|
)
|
Other income
|
|
|
400
|
|
|
|
79
|
|
|
|
2,636
|
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
4,481
|
|
|
$
|
41,109
|
|
|
$
|
(34,778
|
)
|
|
$
|
10,812
|
|
Income tax expense (benefit)
|
|
|
1,918
|
|
|
|
13,680
|
|
|
|
(11,082
|
)
|
|
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2,563
|
|
|
|
27,429
|
|
|
|
(23,696
|
)
|
|
|
6,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA
|
|
$
|
22,711
|
|
|
$
|
50,632
|
|
|
$
|
(12,772
|
)
|
|
$
|
60,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
RCM
|
|
|
SM
|
|
|
Corporate
|
|
|
Total
|
|
|
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
20,213
|
|
|
$
|
12,008
|
|
|
$
|
1,458
|
|
|
$
|
33,679
|
|
Other assets
|
|
|
225,817
|
|
|
|
116,894
|
|
|
|
149,989
|
|
|
|
492,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
246,030
|
|
|
|
128,902
|
|
|
|
151,447
|
|
|
|
526,379
|
|
Accrued revenue share obligation
|
|
|
|
|
|
|
29,998
|
|
|
|
|
|
|
|
29,998
|
|
Deferred revenue
|
|
|
14,473
|
|
|
|
8,547
|
|
|
|
|
|
|
|
23,020
|
|
Other liabilities
|
|
|
28,018
|
|
|
|
21,974
|
|
|
|
193,854
|
|
|
|
243,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
42,491
|
|
|
$
|
60,519
|
|
|
$
|
193,854
|
|
|
$
|
296,864
|
|
F-49
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
Generally accepted accounting principles relating to segment
reporting requires that the total of the reportable
segments measures of profit or loss be reconciled to the
Companys consolidated operating results. The following
table reconciles Segment Adjusted EBITDA to consolidated net
income for each of the fiscal years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
RCM Adjusted EBITDA
|
|
$
|
64,257
|
|
|
$
|
43,375
|
|
|
$
|
22,711
|
|
SM Adjusted EBITDA
|
|
|
68,265
|
|
|
|
64,175
|
|
|
|
50,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable Segment Adjusted EBITDA
|
|
|
132,522
|
|
|
|
107,550
|
|
|
|
73,343
|
|
Depreciation
|
|
|
(10,982
|
)
|
|
|
(8,139
|
)
|
|
|
(5,619
|
)
|
Amortization of intangibles
|
|
|
(28,012
|
)
|
|
|
(23,442
|
)
|
|
|
(15,778
|
)
|
Amortization of intangibles (included in cost of revenue)
|
|
|
(3,166
|
)
|
|
|
(1,582
|
)
|
|
|
(1,145
|
)
|
Interest expense, net of interest income(1)
|
|
|
17
|
|
|
|
24
|
|
|
|
29
|
|
Income tax
|
|
|
(31,422
|
)
|
|
|
(26,951
|
)
|
|
|
(15,598
|
)
|
Impairment of intangibles(2)
|
|
|
|
|
|
|
(1,916
|
)
|
|
|
(1,195
|
)
|
Share-based compensation expense(3)
|
|
|
(10,113
|
)
|
|
|
(6,278
|
)
|
|
|
(2,914
|
)
|
Accuro, XactiMed & Avega purchase accounting
adjustments(4)
|
|
|
25
|
|
|
|
(2,449
|
)
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment net income
|
|
|
48,869
|
|
|
|
36,817
|
|
|
|
29,992
|
|
Corporate net (loss)
|
|
|
(28,922
|
)
|
|
|
(25,976
|
)
|
|
|
(23,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income
|
|
$
|
19,947
|
|
|
$
|
10,841
|
|
|
$
|
6,296
|
|
|
|
|
(1) |
|
Interest income is included in other income (expense) and is not
netted against interest expense in our Consolidated Statement of
Operations. |
|
(2) |
|
Impairment of intangibles during 2008 primarily relates to
acquired developed technology from prior acquisitions, revenue
cycle management tradenames and internally developed software
products, mainly due to the integration of Accuros
operations and products. Impairment of intangibles during 2007
and prior primarily relates to the write-off of in-process
research and development from XactiMed at the time of
acquisition. |
|
(3) |
|
Represents non-cash share-based compensation to both employees
and directors. We believe excluding this non-cash expense allows
us to compare our operating performance without regard to the
impact of share-based compensation, which varies from period to
period based on amount and timing of grants. |
|
(4) |
|
These adjustments include the effect on revenue of adjusting
acquired deferred revenue balances, net of any reduction in
associated deferred costs, to fair value as of the respective
acquisition dates for Accuro, XactiMed and Avega. The reduction
of the deferred revenue balances materially affects period-to-
period financial performance comparability and revenue and
earnings growth in periods subsequent to the acquisition and is
not indicative of the changes in the underlying results of
operations. In 2010, these adjustments will no longer be
reconciling items related to acquired deferred revenue balances
because the amounts were fully amortized in 2009. We may have
this adjustment in future periods if required by purchase
accounting. |
|
|
14.
|
DERIVATIVE
FINANCIAL INSTRUMENTS
|
Effective January 1, 2009, we adopted generally accepted
accounting principles for derivatives and hedging which requires
companies to provide enhanced qualitative and quantitative
disclosures about how and why an entity uses derivative
instruments and how derivative instruments and related hedged
items are
F-50
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
accounted for under generally accepted accounting principles. As
of December 31, 2009, we had an interest rate swap, an
interest rate collar and a par forward contract as described
below. These derivatives were highly effective and, as a result,
we did not record any gain or loss from ineffectiveness in our
Consolidated Statements of Operations for the year ended
December 31, 2009.
Interest
Rate Swap
On May 21, 2009, we entered into a London Inter-bank
Offered Rate (or LIBOR) interest rate swap with a
notional amount of $138,276 beginning June 30, 2010, which
effectively converts a portion of our variable rate term loan
credit facility to a fixed rate debt. The notional amount
subject to the swap has pre-set quarterly step downs
corresponding to our anticipated principal reduction schedule.
The interest rate swap converts the three-month LIBOR rate on
the corresponding notional amount of debt to an effective fixed
rate of 1.99% (exclusive of the applicable bank margin charged
by our lender). The interest rate swap terminates on
March 31, 2012 and qualifies as a highly effective cash
flow hedge under U.S. GAAP.
As such, the fair value of the derivative will be recorded in
our Consolidated Balance Sheet. Accordingly, as of
December 31, 2009, we recorded the fair value of the swap
on our balance sheet as a liability of approximately $610 in
other long-term liabilities, and the offsetting loss
($379 net of tax) was recorded in accumulated other
comprehensive loss in our stockholders equity. If we
assess any portion of this to be ineffective, we will reclassify
the ineffective portion to current period earnings or loss
accordingly.
We determined the fair values of the swap using Level 2
inputs as defined under generally accepted accounting principles
for fair value measurements and disclosures because our
valuation techniques included inputs that are considered
significantly observable in the market, either directly or
indirectly. Our valuation technique assessed the swap by
comparing each fixed interest payment, or cash flow, to a
hypothetical cash flow utilizing an observable market
3-month
floating LIBOR rate as of December 31, 2009. Future
hypothetical cash flows utilize projected market-based LIBOR
rates. Each fixed cash flow and hypothetical cash flow is then
discounted to present value utilizing a market observable
discount factor for each cash flow. The discount factor
fluctuates based on the timing of each future cash flow. The
fair value of the swap represents a cumulative total of the
differences between the discounted cash flows that are fixed
from those that are hypothetical using floating rates.
We considered the credit worthiness of the counterparty of the
hedged instrument. Given the recent events in the credit markets
and specific challenges related to financial institutions, the
Company continues to believe that the size, international
presence and US government cash infusion, and track record of
the counterparty will allow them to perform under the
obligations of the contract and are not a risk of default that
would change the highly effective status of the hedged
instruments.
Interest
Rate Collar
On June 24, 2008 (effective June 30, 2008), we entered
into an interest rate collar to hedge our interest rate exposure
on a notional $155,000 of our outstanding term loan credit
facility of $215,161. The collar sets a maximum interest rate of
6.00% and a minimum interest rate of 2.85% on the
3-month
London Inter-bank Offered Rate (or LIBOR) applicable
to a notional $155,000 of term loan debt. This collar
effectively limits our LIBOR interest exposure on this portion
of our term loan debt to within that range (2.85% to 6.00%). The
collar also does not hedge the applicable margin payable to our
lenders on our indebtedness. Settlement payments are made
between the hedge counterparty and us on a quarterly basis,
coinciding with our term loan installment payment dates, for any
rate overage on the maximum rate and any rate deficiency on the
minimum
F-51
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
rate on the notional amount outstanding. The collar terminates
on June 30, 2010 and no consideration was exchanged with
the counterparty to enter into the hedging arrangement.
The collar is a highly effective cash flow hedge under generally
accepted accounting principles relating to derivatives and
hedging, as the payment and interest rate terms of the
instrument coincide with that of our term loan and the
instrument was designed to perfectly hedge our variable cash
flow risk. Accordingly as of December 31, 2009 and 2008, we
recorded the fair value of the collar on our balance sheet as a
liability of approximately $1,965 and $3,660 in Other long-term
liabilities, and the offsetting loss of ($1,221 net of tax)
and ($2,279 net of tax) was recorded in Accumulated other
comprehensive loss in our Stockholders equity. If we
assess any portion of any of this to be ineffective, we will
reclassify the ineffective portion to current period earnings or
loss accordingly.
We determined the fair values of the collar using Level 2
inputs as defined under generally accepted accounting principles
for fair value measurements and disclosures because our
valuation technique included inputs that are considered
significantly observable in the market, either directly or
indirectly. Our valuation technique assesses the present value
of future expected cash flows using a market observable discount
factor that is based on a
3-month
LIBOR yield curve adjusted for interest rate volatility. The
assumptions utilized to assess volatility are also observable in
the market.
We considered the credit worthiness of the counterparty of our
hedged instrument. The Company believes that given the size of
the hedged instrument and the likelihood that the counterparty
would have to perform under the contract (i.e. LIBOR goes above
6.00%) mitigates any potential credit risk and risk of
non-performance under the contract. In addition, the Company
understands the counterparty has been acquired by a much larger
financial institution. We believe that the creditworthiness of
buyer mitigates risk and would allow the counterparty to be able
to perform under the terms of the contract.
Par
Forward Contract
We have a series of par forward contracts to lock in the rate of
exchange in U.S. dollar terms at a specific par forward
exchange rate of Canadian dollars to one U.S. dollar, with
respect to one specific Canadian customer contract. This
three-year customer contract extends through April 30,
2010. The combination of options is considered purchased options
under implementation guidance under generally accepted
accounting principles for derivatives and hedging. The hedged
instruments are classified as cash flow hedges and are designed
to be highly effective at minimizing exchange risk on the
contract. We designated this hedge as effective and recorded the
fair value of this instrument as a liability of approximately $8
in Other long-term liabilities as of December 31, 2009 and
as an asset of $304 in other long-term assets as of
December 31, 2008. The offsetting unrealized loss of ($5
net of tax) and gain of ($191 net of tax) is recorded as
Accumulated other comprehensive loss or income in our
Stockholders equity as of December 31, 2009 and 2008.
If we assess any material portion of this to be ineffective, we
will reclassify that ineffective portion to current period
earnings or loss accordingly.
We determined the fair values of the par forward contracts using
Level 2 inputs as defined under generally accepted
accounting principles relating to fair value measurements and
disclosures because our valuation techniques included inputs
that are considered significantly observable in the market,
either directly or indirectly. However, these instruments are
not traded in active markets, thus they are not valued using
Level 1 inputs. Our valuation technique assessed the par
forward contract by comparing each fixed cash flow to a
hypothetical cash flow utilizing an observable market spot
exchange rate as of December 31, 2009 and 2008, and then
discounting each of those cash flows to present value utilizing
a market observable discount factor for each cash flow. The
discount factor fluctuates based on the timing of each future
cash flow. The fair value represents a cumulative total of each
par forward contract calculated fair value.
F-52
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
We considered the credit worthiness of the counterparty of the
hedged instrument. Given the current situation in the credit
markets and specific challenges related to financial
institutions, the Company continues to believe that the
underlying size, international presence and US government cash
infusion, and track record of the counterparty will allow them
to perform under the obligations of the contract and are not a
risk of default that would change the highly effective status of
the hedged instruments.
Interest
rate swap termination
On June 24, 2008, we terminated two
floating-to-fixed
rate LIBOR-based interest rate swaps, originally entered into in
November 2006 and July 2007. The swaps were originally set to
fully terminate by July 2010. Such early termination with the
counterparty was deemed to be a termination of all future
obligations between us and the counterparty. In consideration of
the early termination, we paid $3,914 to the counterparty on
June 26, 2008 plus $903 of accrued interest. Prior to the
termination, the fair values of the swaps were recorded in other
long-term liabilities and accumulated other comprehensive loss
on our balance sheet. The termination of the swaps resulted in
the payment of such liability and the reclassification of the
related accumulated other comprehensive loss to current period
expense. The result was a charge to expense for the fiscal year
ended December 31, 2008 of $3,914.
A summary of fair values of our derivatives as of
December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
Balance Sheet
|
|
|
|
|
Balance Sheet
|
|
|
|
Derivatives Designated as Hedging Instruments Under Generally
Accepted Accounting Principles
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
$
|
|
|
|
Other long
term liabilities
|
|
$
|
2,575
|
|
Foreign exchange contracts
|
|
Other long
term assets
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
|
|
|
|
|
$
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Effect of Derivative Instruments on the Consolidated Statement
of Operations
for the Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of Gain or (Loss)
|
|
|
Reclassified from
|
|
|
Reclassified from
|
|
|
|
Recognized in OCI on
|
|
|
Accumulated OCI into
|
|
|
Accumulated OCI into
|
|
Derivatives in Cash Flow
|
|
Derivative
|
|
|
Income
|
|
|
Income
|
|
Hedging Relationships
|
|
(Effective Portion) 2009
|
|
|
(Effective Portion)
|
|
|
(Effective Portion) 2009
|
|
|
Interest rate contracts
|
|
$
|
679
|
|
|
|
n/a
|
|
|
$
|
|
|
Foreign exchange contracts
|
|
|
(196
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain recognized in other comprehensive income
|
|
$
|
483
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
FAIR
VALUE MEASUREMENTS
|
We measure fair value for financial instruments, such as
derivatives and non-financial assets, when a valuation is
necessary, such as for impairment of long-lived and
indefinite-lived assets when indicators of impairment exist in
accordance with generally accepted accounting principles for
fair value measurements and disclosures. This defines fair
value, establishes a framework for measuring fair value and
enhances disclosures
F-53
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
about fair value measures required under other accounting
pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. We
adopted the provisions of generally accepted accounting
principles for fair value measurements and disclosures for
financial instruments effective January 1, 2008 and for
non-financial assets effective January 1, 2009.
Refer to Note 14 for information and fair values of our
derivative instruments measured on a recurring basis under
generally accepted accounting principles for fair value
measurements and disclosures.
In estimating our fair value disclosures for financial
instruments, we use the following methods and assumptions:
|
|
|
|
|
Cash and cash equivalents: The carrying
value reported in the Consolidated Balance Sheets for these
items approximates fair value due to the high credit standing of
the financial institutions holding these items and their liquid
nature;
|
|
|
|
Accounts receivable, net: The carrying
value reported in the Consolidated Balance Sheets is net of
allowances for doubtful accounts which includes a degree of
counterparty non-performance risk;
|
|
|
|
Accounts payable and current
liabilities: The carrying value reported in
the Consolidated Balance Sheets for these items approximates
fair value, which is the likely amount for which the liability
with short settlement periods would be transferred to a market
participant with a similar credit standing as the Company;
|
|
|
|
Finance obligation: The carrying value
of our finance obligation reported in the Consolidated Balance
Sheets approximates fair value based on current interest rates;
and,
|
|
|
|
Notes payable: The carrying value of
our long-term notes payable reported in the Consolidated Balance
Sheets approximates fair value since they bear interest at
variable rates or fixed rates which contain an element of
default risk. Refer to Note 6.
|
|
|
16.
|
VALUATION
AND QUALIFYING ACCOUNTS
|
We maintain an allowance for doubtful accounts that is recorded
as a contra asset to our accounts receivable balance; a sales
return reserve related to our administrative fee revenues that
is recorded as a contra revenue account; and, a self insurance
accrual related to the medical and dental insurance provided to
our employees. The following table sets forth the change in each
of those reserves for the years ended December 31, 2009,
2008, and 2007.
Valuation
and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Writeoffs
|
|
Balance at
|
|
|
Beginning
|
|
|
|
Charged to
|
|
Net of
|
|
End
|
Allowance for Doubtful Accounts
|
|
of Year
|
|
Acquisitions(1)
|
|
Bad Debt(2)
|
|
Recoveries(3)
|
|
of Year
|
|
Year ended December 31, 2009
|
|
$
|
2,247
|
|
|
$
|
|
|
|
$
|
5,753
|
|
|
$
|
(3,811
|
)
|
|
$
|
4,189
|
|
Year ended December 31, 2008
|
|
|
3,506
|
|
|
|
|
|
|
|
1,906
|
|
|
|
(3,165
|
)
|
|
|
2,247
|
|
Year ended December 31, 2007
|
|
|
964
|
|
|
|
1,690
|
|
|
|
1,076
|
|
|
|
(224
|
)
|
|
|
3,506
|
|
|
|
|
(1) |
|
Includes allowance for doubtful accounts of acquired companies. |
|
(2) |
|
Additions to the allowance account through the normal course of
business are charged to expense. |
|
(3) |
|
Write-offs reduce the balance of accounts receivable and the
related allowance for doubtful accounts indicating
managements belief that specific balances are not
recoverable. |
F-54
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Net Charged to
|
|
Balance at
|
|
|
Beginning
|
|
Administrative Fee
|
|
End
|
Administrative Fee Sales Return Reserve
|
|
of Year
|
|
Revenue(1)
|
|
of Year
|
|
Year ended December 31, 2009
|
|
$
|
352
|
|
|
$
|
110
|
|
|
$
|
462
|
|
Year ended December 31, 2008
|
|
|
253
|
|
|
|
99
|
|
|
|
352
|
|
Year ended December 31, 2007
|
|
|
245
|
|
|
|
8
|
|
|
|
253
|
|
|
|
|
(1) |
|
Includes allowance for administrative fee sales returns.
Additions to the allowance through the normal course of business
reduces administrative fee revenue. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
Beginning
|
|
Charged to
|
|
Claims
|
|
End
|
Self Insurance Accrual(1)
|
|
of Year
|
|
expense(2)
|
|
Payments(3)
|
|
of Year
|
|
Year ended December 31, 2009
|
|
$
|
993
|
|
|
$
|
10,756
|
|
|
$
|
(10,211
|
)
|
|
$
|
1,538
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
6,963
|
|
|
|
(5,970
|
)
|
|
|
993
|
|
|
|
|
(1) |
|
During 2008, we implemented a self insurance policy to cover our
employees medical and dental insurance (2008 was exclusive
of acquired employees related to the Accuro acquisition). |
|
(2) |
|
Estimates of insurance claims expected to be incurred through
the normal course of business are charged to expense. |
|
(3) |
|
Actual insurance claims payments reduce the self insurance
accrual. |
|
|
17.
|
QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)
|
Unaudited summarized financial data by quarter for the years
ended December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
78,984
|
|
|
$
|
84,209
|
|
|
$
|
82,393
|
|
|
$
|
95,695
|
|
Gross profit
|
|
|
62,239
|
|
|
|
66,596
|
|
|
|
60,921
|
|
|
|
76,874
|
|
Net income
|
|
|
1,905
|
|
|
|
2,175
|
|
|
|
5,896
|
|
|
|
9,971
|
|
Net income per basic share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
58,758
|
|
|
$
|
61,235
|
|
|
$
|
75,972
|
|
|
$
|
83,691
|
|
Gross profit
|
|
|
50,296
|
|
|
|
50,547
|
|
|
|
58,871
|
|
|
|
68,394
|
|
Net income (loss)
|
|
|
2,699
|
|
|
|
(1,576
|
)
|
|
|
3,686
|
|
|
|
6,032
|
|
Net income (loss) per basic share
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
RELATED
PARTY TRANSACTION
|
We have an agreement with John Bardis, our chief executive
officer, for the use of an airplane owned by JJB Aviation, LLC
(JJB), a limited liability company, owned by
Mr. Bardis. We pay Mr. Bardis at market-
F-55
MedAssets,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
(in
thousands, except share and per share amounts)
based rates for the use of the airplane for business purposes.
The audit committee of the board of directors reviews such usage
of the airplane annually. During the years ended
December 31, 2009 and 2008, we incurred charges of $1,813
and $782, respectively, related to transactions with
Mr. Bardis.
We have evaluated subsequent events through February 26,
2010 for the filing on this Form
10-K and
determined there has not been any event that has occurred that
would require an adjustment to our Consolidated Financial
Statements.
F-56