UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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SXC HEALTH SOLUTIONS
CORP.
(Exact name of registrant as
specified in its charter)
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Yukon Territory
(State or other jurisdiction
of
incorporation or organization)
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000-52073
(Commission File
Number)
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75-2578509
(I.R.S. Employer
Identification Number)
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2441 Warrenville Road, Suite 610, Lisle, Illinois
60532-3642
(Address of principal executive offices, zip code)
Registrants phone number, including area code
(800) 282-3232
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Title of each class
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Name of Each Exchange on Which Registered
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Common Stock
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NASDAQ Global Market
Toronto Stock Exchange
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Securities registered pursuant to 12(b) of the
Act: Common Stock, no par value
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes 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
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
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes 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 the 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):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting company
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(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 the voting and non-voting common
equity held by non-affiliates as of June 30, 2009 was
$616,965,414 based on the closing price of $25.42 as reported on
the then NASDAQ Global Market. Solely for the purposes of this
calculation, directors and officers of the registrant are deemed
to be affiliates.
As of February 28, 2010, there were 30,060,594 shares
outstanding of the Registrants no par value common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
As permitted by General Instruction G of
Form 10-K,
the information required by Part III of this
Form 10-K
is incorporated by reference, and will be included either in a
definitive proxy statement or an amendment to this
Form 10-K,
which must be filed with the SEC no later than 120 days
after the end of the fiscal year covered by this
Form 10-K.
Special
Note Regarding Forward Looking Statements
This Annual Report on
Form 10-K
contains certain forward-looking statements, including without
limitation, statements concerning SXC Health Solutions
Corp.s operations, economic performance and financial
condition. These forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are developed by
combining currently available information with SXC Health
Solutions Corp.s beliefs and assumptions and are generally
identified by the words believe, expect,
anticipate and other similar expressions.
Forward-looking statements do not guarantee future performance,
which may be materially different from that expressed in, or
implied by, any such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which
speak only as of their dates.
These forward-looking statements are based largely on SXC
Health Solutions Corp.s current expectations and are
subject to a number of risks and uncertainties, including,
without limitation, those identified under Risk
Factors and elsewhere in this Annual Report on
Form 10-K.
Actual results could differ materially from results referred to
in the forward-looking statements. In addition, important
factors to consider in evaluating such forward-looking
statements include changes in external market factors, changes
in SXC Health Solutions Corp.s business or growth strategy
or an inability to execute its strategy due to changes in its
industry or the economy in general. In light of these risks and
uncertainties, there can be no assurances that the results
referred to in the forward-looking statements contained in this
Annual Report on
Form 10-K
will in fact occur. SXC Health Solutions Corp. undertakes no
obligation to, and expressly disclaims any such obligation to,
update or revise any forward-looking statements to reflect
changed assumptions, the occurrence of anticipated or
unanticipated events, changes to future results over time or
otherwise.
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PART I
THE COMPANY
The following description of the business should be read in
conjunction with the information included elsewhere in this
Annual Report on
Form 10-K
for the year ended December 31, 2009. This description
contains forward-looking statements that involve risks and
uncertainties. Actual results could differ significantly from
the results discussed in the forward-looking statements due to
the factors set forth in Risk Factors and elsewhere
in this Annual Report on
Form 10-K.
References in this Annual Report on
Form 10-K
to we, our, us, or the
Company, refer to SXC Health Solutions Corp.
OVERVIEW
The Company is a leading provider of pharmacy benefit management
(PBM) services and healthcare information technology
(HCIT) solutions to the healthcare benefit
management industry. The Companys product offerings and
solutions combine a wide range of applications and PBM services
designed to assist its customers in reducing the cost and
managing the complexity of their prescription drug programs. The
Companys customers include many of the largest
organizations in the pharmaceutical supply chain, such as
pharmacy benefit managers, managed care organizations,
self-insured employer groups, unions, third party health care
plan administrators, and state and federal government entities.
The Companys PBM services, which are marketed under the
informedRx brand, include electronic
point-of-sale
pharmacy claims management, retail pharmacy network management,
mail service pharmacy claims management, specialty pharmacy
claims management, Medicare Part D services, benefit design
consultation, preferred drug management programs, drug review
and analysis, consulting services, data access, and reporting
and information analysis. The Company owns a mail service
pharmacy and a specialty service pharmacy. In addition, the
Company is a national provider of drug benefits to its customers
under the federal governments Medicare Part D program.
The Companys HCIT solutions include
RxCLAIM®,
an on-line transaction processing system that provides instant
adjudication of prescription drug claims,
RxMAX®,
the Companys rebate management system,
RxTRACK®,
the Companys data warehouse and analysis system, Zynchros,
the Companys suite of on-demand formulary management
tools, the Companys pharmacy management system for retail,
chain, institutional and mail-order pharmacies, as well as a
number of other software products for customers in the
pharmaceutical supply chain. The Companys HCIT solutions
are available on a license basis with on-going maintenance and
support or on a transaction fee basis using an application
service provider (ASP) model.
The Company conducts business in both the United States and
Canada. For the years ended December 31, 2009, 2008 and
2007, the Company recognized revenue of $1,435.8 million,
$859.0 million, and $89.2 million, respectively, from
the United States. Revenue from Canada for the same periods was
$2.8 million in 2009, and $3.9 million in 2008 and
2007.
Effective April 30, 2008, the Company completed its
acquisition of National Medical Health Card Systems, Inc.
(NMHC). The acquisition was funded with a
combination of cash and Company common shares, resulting in a
purchase price of approximately $143.8 million. Effective
with the acquisition of NMHC, the Company operates in two
reportable operating segments, PBM and HCIT, which provide both
recurring and non-recurring revenues from the pharmaceutical
benefits management industry.
In September 2009, the Company issued 5,750,000 shares of
its common stock in an underwritten public offering at a price
to the public of $41.50 per share. The net proceeds to the
Company from the offering were $203.1 million.
The Company exists under the Yukon Business Corporations Act.
The Companys principal executive offices are located at
2441 Warrenville Road, Suite 610, Lisle, Illinois 60532,
and the telephone number for the Companys principal
executive office is
800-282-3232.
The Company maintains a website at www.sxc.com. The information
contained in, or that can be accessed through, the
Companys website is not part of, and is not incorporated
into, this Annual Report on
Form 10-K
or other filings the Company makes with the Securities and
Exchange Commission (the SEC). The Company will make
available free of charge on its website the annual report on
Form 10-K,
future quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the
SEC. The Company will also make available all financial reports
filed in accordance with Canadian GAAP with SEDAR through its
website.
Products,
Solutions and Services
The Companys solutions address the challenges faced by the
two primary participants in the pharmaceutical supply chain:
payors and providers. The Company provides comprehensive
pharmacy benefit management systems and services, pharmacy
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practice management systems and related prescription fulfillment
services. The Company believes it is unique in that it can
deploy its solutions as:
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informedRx®
PBM services such as pharmacy network management can be
provided to the Companys customers using the
Companys own system software and services;
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Web-enabled technology the Company provides
on-line transaction processing solutions through web-enabled,
real-time transaction processing technology; and
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Software solutions licensed software products
can be sold in addition to systems implementation and consulting
services and maintenance.
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Payor
Products and Services Offered by the Company
PBM
Services informedRx
The Companys informedRx offering is a broad suite of
customizable PBM services that provide a flexible and
cost-effective alternative to traditional PBM offerings
typically employed by health plans, government agencies and
employers. The Company provides a broad range of pharmacy spend
management solutions and information technology capabilities.
Its product offerings and solutions combine a wide range of PBM
services designed for managed care organizations, self-insured
employer groups, unions, third party health care plan
administrators, and state and federal government entities. The
Companys clients have gained increased control of their
pharmacy benefit dollars and maximized cost control and quality
of care through a full range of pharmacy spend management
services, including:
Formulary Administration Provide support for
clients existing formularies and preferred drug lists or
collaborate to create
best-in-class
models supported by formulary predictive modeling and impact
analysis. Pharmacist, physician and member-focused intervention
protocols provide quality controls to drive generics, preferred
drug products and appropriate use. Formularies are administered
based on specific plan designs, or by enabling clients with the
tools to maintain their own custom formularies online.
Benefit Plan Design and Management
Accommodate any plan design option required and support an
unlimited number of benefit design variations. The Company
specializes in applying data-driven insights to help clients
understand the medical risk drivers within their population and
take a strategic approach to plan design. The Company provides
benefit design configuration and support to clients, in
accordance with mutually developed processes. Benefit designs
can be modified online, in real time, by the Company or by the
clients staff.
Pharmacy Network Management A wide range of
retail network options, including supporting existing networks
or assisting clients in developing proprietary networks that
meet specific geographic access requirements, desired price
discounts, or other service requirements. A proprietary national
retail network, which consists of pharmacies in all
50 states and in Puerto Rico, Guam and the Virgin Islands,
provides excellent access to the Companys clients.
Drug Utilization Review (DUR)
Pre-dispensing DUR edit checks are performed in an online,
real-time basis between mail and retail pharmacies to encourage
appropriate drug utilization, enhance member outcomes, and
reduce drug costs. All prescriptions are checked for member
eligibility and plan design features and are then compared
against previous histories of prescriptions filled by the same
pharmacy, by other participating retail network pharmacies and
by the mail service pharmacy.
Clinical Services and Consulting Consultative
and technical expertise to augment, develop, deploy, and support
any additional clinical programs. Clients also have the option
of using the Companys clinical programs, which incorporate
complete prescription drug information to reduce the growth rate
of prescription drug costs and increase the quality of care and
member safety. The Company offers comprehensive clinical
management strategies which help reduce undesirable events,
increase medication compliance, decrease medication waste, and
promote plan member well-being.
Reporting and Information Analysis Solutions
Providing two main levels of reporting: A comprehensive
reporting package (which includes a large menu of unique
reports), and an online analytical decision support tool,
RxTRACK®,
designed to meet and exceed the Companys clients
expectations and provide flexibility for customized reporting.
The Company uses client plan data and industry benchmark data to
drive proactive discussions regarding opportunities to increase
savings.
Mail Service informedMAIL gives members
flexibility, privacy, and easy access to their maintenance
medications while offering significant plan savings to the
client. To provide a higher standard of service and to assert
greater control over outcomes for clients, informedMAIL offers a
full-service, state of the art mail service pharmacy that
provides high quality
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service, member support and convenient, easy-to-use mail service
delivery throughout the U.S. Projected savings for mail
service are dependent on plan design features, including
co-payments and incentives, and utilization patterns.
Specialty Service The Company offers clients
the ability to control spending on specialty medications and
ensure patients receive support for complex medications, in the
fastest growing segments of pharmaceutical spending, with Ascend
SpecialtyRx.
The Companys specialty therapy medication management
program uses a highly-trained and specialized clinical staff
organized in disease pods, a patient-centric approach and
evidence based clinical treatment protocols. The patient care
team communicates with the patient, patients physician,
and other caregivers as needed to obtain a complete medical and
pharmacy history and then craft an individualized treatment plan
including patient education, counseling and expected therapy
outcomes. Plan savings are achieved as the cost for specialty
medication using this program is generally lower than retail
pricing.
Web Services A suite of Web Services that
enables clients to interact with the claims processing system
using a standardized protocol in a secure environment. This
method of access provides the Companys clients with the
freedom to build products, tools, and reports that utilize data
throughout their enterprises. Once the raw data is in house, it
can be used by the client as appropriate, thus providing far
greater flexibility and return on investment.
A member website,
RxPORTALtm,
invites members to learn more about their prescription benefit
programs, medication histories, drug information and related
industry news. This site also features a real-time trial
adjudication program that gives members the information they
need to make informed, cost-effective choices regarding their
prescription therapy. This site can be customized with a
clients logo and name, links to the organizations
Internet home site, and
up-to-date
news bulletins about the organization.
RxPROVIDER
PORTALtm
is a web based interface that allows pharmacists and physicians
to obtain information from RxCLAIM on a members plan to
assist in providing more cost effective prescription
medications. The portal gives providers the ability to view
claim details, remittance advice and eligibility, and perform
prior authorizations online.
Healthcare
IT Group
The Companys HCIT operating unit is SXCs technology
driver and provides applications on a license, ASP, or
fee-for-service
basis. SXC has a broad industry footprint by deploying
technology to help healthcare companies manage the rising
prescription drug costs and enhance the level of care they
provide.
The HCIT unit serves a diversified group of payor customers that
include health plans, federal, state and provincial government
programs, pharmacy benefit managers, workers compensation
programs, and long-term
and/or
chronic care facility operators. In addition, SXCs robust
and flexible technology serves as the engine for informedRx, the
Companys full service PBM.
Technology
Products and Services
RxCLAIM®
is an on-line transaction processing system designed to provide
instant on-line adjudication of third-party prescription drug
claims at the point of service, including trouble-free claims
management and cost-effective review, as well as payment and
billing support and real-time functionality for updating
benefit, price, member, provider and drug details. RxCLAIM is
designed to provide the Companys customers with automation
efficiencies, flexibility and control by facilitating the
real-time processing of pharmacy claims and payments against
eligibility, plan benefits, formularies, price, drug utilization
review, prior authorization, and rebates in addition to many
other features.
Other
products
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Integrail
Pathfindertm
PRO is a comprehensive software application that enables a wide
array of users to understand the impact of healthcare resource
allocation and medical decision-making through the incorporation
of risk prediction and episode profiling technologies. The
application offers users an intuitive system for integrating
disparate data sources to pinpoint variations in resource
utilization and quality of care. The tool offers both a
standardized library of reports and robust ad hoc query
capabilities that are designed to provide flexible, easy access
to complex information.
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RxPORTALtm
allows customers to interact with the patients formulary
and drug history in a secure environment allowing patients and
health plans to access industry leading tools and up to date
information.
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RxAUTHtm
is a prior authorization (PA) management solution
which offers flexibility and efficiency in automating the PA
process from
end-to-end.
Built upon the powerful prior authorization capabilities housed
in RxCLAIM, RxAUTH
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supports the entire PA lifecycle, from receipt of the request,
through rules adjudication, to execution of the resulting
decision. RxAUTH is also available in a web based application.
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RxMAX®
is a rebate management system that is designed to assist health
plans in managing their relationships with pharmaceutical
manufacturers through contract management, record keeping,
calculating market share, and creating billing details and
summaries.
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Zynchros provides a suite of on-demand formulary management
tools to help payors effectively manage their formulary
programs, and to maintain Medicare Part D compliance in
their programs.
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The HBS Retail Pharmacy Management System (RPMS) is
designed to save time and eliminate manual calculations for
quick response in a fast paced retail pharmacy environment. For
groups of pharmacies, the HBS Common Profile System offers all
the features of the RPMS in addition to the ability to
centralize the administration of all stores through a single
central processing unit. The HBS Chain-Host System is designed
for multi-site pharmacies that have a need to share central
database information. In addition, HBS provides pharmacy
management systems for institutional and mail-order pharmacies,
as well as a complete suite of services ranging from customer
support and training, third-party data, hardware, and technical
support.
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The
Industry
The Company believes the key market factors that influence
spending on information technology solutions and services by
participants in the pharmaceutical supply chain are the amount
spent on prescription drugs and the associated volume of
prescription drugs dispensed and insurance claims processed each
year. According to IMS Health (IMS), approximately
3.8 billion pharmacy prescriptions were written and filled
in the United States during 2008 representing a
retail value in excess of $290 billion. Based on the
factors described below, the Company expects drug utilization
rates to continue to rise in the future. The Company estimates
that the current market opportunity for its information
technology and services in its industry is significant, and is
growing at a rate in excess of the drug utilization rate alone
due to the following factors:
Aging population. According to the
U.S. Census Bureau, the U.S. population is expected to
age rapidly through 2030, when 19.5% of the population will be
over the age of 65, compared to 12.0% in 2000. Older Americans
require more medications than their younger
counterparts often 20 to 40 prescriptions annually,
according to the Centers for Medicare and Medicaid Services
(CMS). The increase in prescriptions due to an aging
population is expected to drive demand for senior-focused
clinical programs and benefit plans, as well as information
technology decision support tools to facilitate on-line
analytical assessment of specific population trends, which will
address the pharmacy benefit management needs of an aging
population.
Rising drug prices. According to IMS, the
global pharmaceutical market in 2010 is expected to grow 4% to
6%, and continue to grow at a 4% to 7% annual compound rate.
According to AARP, the price for brand name prescriptions
continued to rise in 2009 by more than 9% compared to 2008.
Industry solutions to counter rising drug prices include
supporting clinical programs that help promote generic and
clinically equivalent, lower-cost preferred drug products,
utilization management programs, such as PA and step-therapy, to
help ensure that patients who can benefit from therapies are
identified and that cost-effective treatment is encouraged, and
tools to identify clinically appropriate, cost-saving
opportunities.
Health information technology stimulus. During
2009, the U.S. government introduced an approximately
$20 billion stimulus package to spur the usage of
electronic health records in the U.S. The package provides
incentive payments to providers or hospitals to become
meaningful users of electronic health records. The goal is to
create a national infrastructure of health information
technology to help improve health care quality, reduce health
care costs, and add security to patient health records. The
Company believes this program will fundamentally change the
method and manners in which health information records are
shared, stored, and utilized.
Health care reform. The current reform bill if
passed could provide drug coverage for 20 to 40 million
people in the form of expanded Medicaid coverage. The Company is
active in this market and believes that expansion will create
growth opportunities. In addition, the reform bill provides a
pathway for follow-on biologic development, giving more cost
effective generic options to clients and opportunity for margin
expansion for the Company.
Medicare Part D. The Company believes
that the introduction of the Medicare Part D outpatient
prescription drug benefit was a significant development
affecting prescription drug coverage in the U.S. Medicare
Part D is a program that subsidizes the costs of
prescription drugs for Medicare beneficiaries. While CMS is
currently utilizing technical standards and processes that are
already in common use in the pharmacy claims industry, the
Company believes that significant ongoing regulatory changes
will fuel the future demands of this program. Medicare
Part D has impacted the demand for
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pharmacy benefit management as well as information technology,
as the Companys customers were required to update their
systems, and the Company believes they will continue to require
support to maintain these systems.
Growth in Specialty Drug
Class. Biopharmaceuticals are being rapidly
developed, with 600+ new drugs in the pipeline to help treat
more than 100 diseases, according to Thomson Pharma. There is a
move to shift coverage of these drugs from the medical benefit
to the pharmacy benefit. The Company believes this movement
presents opportunities for its specialty pharmacy program.
Generic Pipeline. According to IMS, over the
next five years, more than $72 billion in brand drugs will
come off patent, fueling growth in availability of generic
equivalents. The Company believes that this presents an
opportunity for client cost savings and Company margin expansion.
Competition
The Company competes with numerous companies that provide the
same or similar services. Its competitors range from large
publicly traded companies to several small and privately owned
companies which compete for a significant part of the market.
The principal competitive factors are quality of service, scope
of available services, and price. The ability to be competitive
is influenced by the Companys ability to negotiate prices
with pharmacies, drug manufacturers, and third party rebate
administrators. Some of the Companys competitors have been
in existence for longer periods of time and are better
established. Some of them also have broader public recognition,
substantially greater financial and marketing resources, and
more experienced management. In addition, some of the
Companys customers and potential customers may find it
desirable to perform for themselves those services now being
rendered by the Company.
The Companys ability to attract and retain customers is
substantially dependent on its capability to provide competitive
pricing, efficient and accurate claims management, utilization
review services and related reporting, and consulting services.
The payor and pharmaceutical supply chain markets require
solutions which address the unique needs of each constituent.
The Companys customers require robust and scaleable
technical solutions, as well as the ability to ensure cost
efficiency for themselves and their customers. The
Companys product offerings include a wide range of PBM
services and software products for managing prescription drug
programs and for drug prescribing and dispensing. The
Companys payor suite of products includes a wide range of
pharmacy benefits management and claims adjudication systems, as
well as informedRx, the Companys suite of PBM services.
The Companys provider suite of products includes pharmacy
practice management systems,
point-of-sale
applications, and related prescription fulfillment services,
which can be integrated with other pharmacy and patient
management systems for full enterprise-wide control.
Competitive
Strengths
The Company believes that the following competitive strengths
are the keys to its success:
Flexible, customized and independent
services: The Company believes a key
differentiator between itself and its competitors is not only
the Companys ability to provide innovative PBM services,
but also to deliver these services on an à la carte basis.
The informedRx suite offers the flexibility of broad product
choice along the entire PBM continuum, enabling enhanced
customer control, solutions tailored to the Companys
customers specific requirements, and flexible pricing. The
market for the Companys products is divided between large
customers that have the sophisticated technology infrastructure
and staff required to operate a
24-hour data
center and other customers that are not able or willing to
operate these sophisticated systems.
The Companys business model allows its large customers to
license the Companys products and operate the
Companys systems themselves (with or without taking
advantage of the Companys significant customization,
consulting and systems implementation services) and allows its
other customers to utilize the Companys systems
capabilities on a
fee-per-transaction
or subscription basis through ASP processing from the
Companys data center.
Leading technology and platform: The
Companys technology is robust, scaleable, and web-enabled.
The Companys payor offerings efficiently supported over
400 million transactions in 2009. The platform is able to
instantly cross-check multiple processes, such as reviewing
claim eligibility, adverse drug reaction and properly
calculating member, pharmacy and payor payments. The
Companys technology is built on flexible, database-driven
rule sets and broad functionality applicable for most any type
of business. The Company believes it has one of the most
comprehensive claims processing platforms in the market.
The Companys technology platform allows it to provide more
comprehensive PBM services through its informedRx brand by
offering customers a selection of services to choose from to
meet their unique needs versus requiring them to accept a
one-size-fits-all solution. The Company believes this à la
carte offering is a key differentiator from its competitors.
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Measurable cost savings for customers: The
Company provides its customers with increased control over
prescription drug costs and drug benefit programs. The
Companys pricing model and flexible product offerings are
designed to deliver measurable cost savings to the
Companys customers. The Company believes its pricing model
is a key differentiator from its competitors for the
Companys customers who want to gain control of their
prescription drug costs. For example, the Companys
pharmacy network contracts and manufacturer rebate agreements
are made available by the Company to each customer. For
customers who select the Companys pharmacy network and
manufacturer rebate services on a fixed fee per transaction
basis, there is clarity to the rebates and other fees payable by
the pharmaceutical manufacturer or third party rebate
administrator to the client. The Company believes that its
pricing model together with the flexibility to select from a
broad range of customizable services helps the customers realize
measurable results and cost savings.
Business
Strategy
The Company seeks to enhance its position as a leading provider
of technology-enabled PBM services to the pharmaceutical supply
chain in North America. The Companys primary strategies
are:
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Expand the breadth of the Companys informedRx services
for health plans, self-insured employers and government agencies
that sponsor pharmacy benefit plans: Within the
Companys informedRx suite of products, it has several key
initiatives underway which the Company believes will help it to
expand its revenue per claim and make the Company more
competitive in the broader market. The Company combines its
claims processing capabilities with a full suite of pharmacy
benefit management services to offer competitively priced
pharmacy networks, specialty drug and mail order programs,
manufacturer rebate contracts and clinical programs, to enable
the Companys customers to have more control over their
drug spending. With the Companys diversified product
portfolio and the market demand for greater transparency in
pricing of prescription drugs, the Company believes it is in an
attractive market environment for informedRx to prosper.
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Provide additional informedRx services to the Companys
existing payor customer base: Based on the
success the Company has had to date with informedRx, the Company
intends to sell additional services to the Companys
existing customers through its informedRx suite of products
which include the Companys mail and specialty pharmacies,
as well as the Companys competitive pharmacy network and
clinical offerings. The Company may also make capital
investments in technology to further improve the quality of its
products. By providing a broader range of services, the Company
believes that it can increase its customer base and the breadth
of products utilized by each customer, thereby increasing the
Companys revenue base.
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Target large public sector
fee-for-service
opportunities: Based on the success the Company
has had to date with public sector opportunities, it intends to
sell additional services to state, federal, and provincial
Medicaid plans. The Company sells PBM technology solutions to
support pharmacy claims processing, Medicaid rebate management,
and sophisticated pharmacy claims prior authorization workflow
and processing, among other services.
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Aggressively pursue large health plan technology
upgrades: The Companys goal is to be the
industrys leading provider of tools, technology and
services to help its customers better manage pharmacy programs,
and in turn, to reduce the cost of drug delivery and enhance the
healthcare experience for their plan members.
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Sell HCIT solutions throughout the LTC/institutional pharmacy
market: The long-term care (LTC)
market often faces the challenge of balancing the conflicting
goals of containing healthcare costs, while maintaining and even
improving the health of nursing home residents. The dynamics of
the nursing home facility/pharmacy/resident relationship, in
addition to regulatory restrictions governing the health,
safety, and well-being of residents, drive this markets
need for efficient pharmacy benefit management. LTC
facilities including assisted living and skilled
nursing facilities are looking for integrated
systems that offer efficient claims processing and adjudication
services, cost-saving clinical opportunities, census management
and business analysis capabilities.
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Pursue strategic acquisition
opportunities: The Company actively evaluates
opportunities to expand its product offerings and customer base
through strategic acquisitions. The Companys acquisition
strategy focuses on identifying acquisitions that expand its
core footprint in the PBM market, add new products and services
in potential high growth areas and provide additional scale in
areas such as specialty pharmacy management, oncology or public
sector pharmacy (including state Medicare). The Company believes
that its management teams proven ability to successfully
identify acquisition opportunities that are complementary and
synergistic to its business and to integrate them into its
existing operations with minimal disruption has played, and will
continue to play, an important role in the expansion of its
business.
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Broaden the Companys services, technology and markets
through next generation growth opportunities: The
Company continues to pursue next generation growth opportunities
through proprietary development of new technology applications
and new PBM services. The Company currently has a number of
tools that are available to its HCIT
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customers to facilitate
e-prescribing
and other electronic health recordkeeping. The Company believes
that this market will continue to grow and offers an excellent
opportunity to complement the Companys PBM services and
further enhance its product offerings. In addition, the Company
believes that the current healthcare reform efforts, which
contemplate an expansion of coverage and emphasis on technology
improvements in healthcare services (such as
e-prescribing),
offer a number of potential growth opportunities.
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REGULATORY
DEVELOPMENTS
Foreign Private Issuer Status: The Company is
traded on both the Toronto Stock Exchange and the Nasdaq Global
Market. In connection with the acquisition of NMHC, a majority
of the Companys outstanding common shares became held by
U.S. residents. As a result, the Company ceased to be a
foreign private issuer (as defined in
Rule 3b-4(c)
of the Securities Exchange Act of 1934) and is required to
file its financial statements prepared in accordance with
accounting principles generally accepted in the United States
(U.S. GAAP) with the SEC, with a reconciliation
of significant differences from accounting principles generally
accepted in Canada (CDN GAAP) with the Ontario
Securities Commission (OSC). The Company was
required to include a reconciliation to CDN GAAP to the OSC for
two years. This requirement ends with the filing of this 2009
Annual Report on
Form 10-K,
and the related filing with the OSC.
GOVERNMENT
REGULATION
Various aspects of the Companys business are governed by
federal and state laws and regulations. Because sanctions may be
imposed for violations of these laws, compliance is a
significant operational requirement. The Company believes it is
in substantial compliance with all existing legal requirements
material to the operation of its business. There are, however,
significant uncertainties involving the application of many of
these legal requirements to its business. In addition, at any
given time, there are numerous proposed health care laws and
regulations at the federal and state levels, many of which could
adversely affect the Companys business, results of
operations, and financial condition. The Company is unable to
predict what additional federal or state legislation or
regulatory initiatives may be enacted in the future relating to
its business or the health care industry in general, or what
effect any such legislation or regulations might have on the
Company. The Company also cannot provide any assurance that
federal or state governments will not impose additional
restrictions or adopt interpretations of existing laws or
regulations that could have a material adverse effect on its
business or financial performance.
Some of the state laws described below may be preempted in whole
or in part by the Employee Retirement Income Security Act of
1974 (ERISA), which provides for comprehensive
federal regulation of employee benefit plans. However, the scope
of ERISA preemption is uncertain and is subject to conflicting
court rulings. The Company also provides services to certain
clients, such as governmental entities, that are not subject to
the preemption provisions of ERISA.
Federal
Laws and Regulations Affecting the PBM Industry
The following descriptions identify various federal laws and
regulations that affect or may affect aspects of the
Companys PBM business:
Legislation
and Litigation Affecting Drug Prices
Average wholesale price (AWP) is a standard pricing
unit published by third party data sources and currently used
throughout the pharmacy benefits industry as the basis for
determining drug pricing under contracts with clients,
pharmacies, and pharmaceutical manufacturers. The calculation
and reporting of AWP have been the subject of investigations by
federal and state governments and litigation brought against
pharmaceutical manufacturers and data services that report AWP.
The Company is not responsible for calculations, reports or
payments of AWP; however, such investigations or lawsuits could
impact its business because many of its customer contracts,
pharmaceutical purchase agreements, retail network contracts and
other agreements use AWP as a pricing benchmark. In March 2009,
a federal district court gave final approval to settlement of
class action lawsuits brought against First DataBank
(FDB) and Medi-Span, two primary sources of AWP
reporting. Under the terms of the settlement, FDB and Medi-Span
agreed, among other things, to reduce the reported AWP of
certain prescription drugs by four percent effective
September 26, 2009. FDB and Medi-Span also announced that
they would discontinue publishing AWP within two years of the
settlement.
In response to this action, the Company, as authorized in most
of the Companys standard customer contracts, adopted a
revised pricing benchmark to assure cost neutrality for the
Company, its customers, and pharmacies as to what they paid or
received, as applicable, for prescription drug products using
the AWP pricing benchmark before September 26, 2009 and
what they would pay or receive on or after September 26,
2009. While that transition has been accomplished to date with
no material adverse effect on the Company, there can be no
assurances that customers and pharmacies in reviewing the
results of the transition may not challenge the way in which the
transition occurred
and/or
whether it preserved cost neutrality as intended, or
10
that the results of such challenges will not have a material
adverse effect on the Companys financial performance,
results of operations and financial condition in future periods.
These changes, as well as any changes proposed by the federal
government and the states regarding the reimbursement for drugs
by Medicaid and Medicare, could impact the Companys
pricing to customers and other payors and could impact its
ability to negotiate discounts with manufacturers, wholesalers,
or retail pharmacies.
Medicare
Prescription Drug, Improvement, and Modernization Act of
2003.
The Medicare voluntary outpatient prescription drug benefit
(Part D) established under the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) became effective on January 1, 2006. The
MMA also created new guidelines for Medicare HMOs, termed
Medicare Advantage Plans, which offer both an outpatient
prescription drug benefit and health care coverage.
Medicare beneficiaries who elect Part D coverage pay a
monthly premium for the covered outpatient drug benefit.
Assistance with premiums and cost sharing are provided to
eligible low-income beneficiaries. The voluntary outpatient
prescription drug benefit requires coverage of essentially the
same pharmaceuticals that are approved for the Medicaid program,
although selection may be restricted through a formulary. The
new outpatient prescription drug benefit is offered on an
insured basis by prescription drug plans (PDPs) in
34 regions across the United States and by Medicare Advantage
Plans, along with health care coverage, in 26 regions across the
United States.
As a PDP plan sponsor and in its capacity as a subcontractor
with certain Part D Plan clients, the Company is subject to
certain federal rules, regulations, and
sub-regulatory
guidance pertaining to the operation of Medicare Part D. If
CMS determines that the Company has not performed satisfactorily
as a subcontractor, CMS may request the Companys PDP or
Medicare Advantage Plan client to revoke its Part D
activities or responsibilities. While the Company believes that
it provides an appropriate level of service under its respective
contract and subcontracts, it can give no assurances that CMS or
a Part D Plan will not terminate its business relationships
insofar as they pertain to Medicare Part D.
PDPs and Medicare Advantage Plans are subject to provisions of
the MMA intended to deter fraud, waste and abuse and
are strictly monitored by CMS and its contracted Medicare Drug
Integrity Contractors (MEDICs) to ensure that
Part D program funds are not spent inappropriately. In
April 2006, CMS issued a chapter 9 to the Medicare
Prescription Drug Benefit Manual interpreting the fraud, waste
and abuse provisions of Part D, referred to as the
FWA Guidance. Among other things, the FWA Guidance
cites the following examples of potential PBM fraud, waste and
abuse risks in connection with Part D: prescription drug
switching, unlawful remuneration, inappropriate formulary
decisions, prescription drug splitting or shorting, and failure
to offer negotiated prices. CMS has offered additional
sub-regulatory
guidance regarding some of these risk areas, particularly with
respect to the Part D formulary decision making process
which is highly regulated by CMS. No assurance can be given that
the Company will not be subject to scrutiny or challenge under
one or more of the underlying laws by the government enforcers
or private litigants.
Also in 2006, CMS issued guidance to PDPs and Medicare Advantage
Plans requiring that such plans report 100% of all price
concessions received for PBM services. This CMS guidance
suggests that best practices would require PDPs and Medicare
Advantage Plans to contractually require the right to audit
their PBMs, as well as require 100% transparency as to
manufacturer rebates paid for drugs provided under the
sponsors plan, including the portion of such rebates
retained by the PBM as part of the price concession for the
PBMs services. In 2009, CMS codified this guidance in
regulations, effective January 1, 2010, that will require
Part D drug plan sponsors to use the amount paid to a
pharmacy as the basis for determining cost sharing for
beneficiaries and for reporting a plans drug costs to CMS.
The Company does not anticipate that such disclosures will have
a materially adverse effect on its business, results of
operations, financial condition, or cash flows.
Federal
Anti-Remuneration/Fraud and Abuse Laws.
The federal healthcare Anti-Kickback Statute prohibits, among
other things, an entity from paying or receiving, subject to
certain exceptions and safe harbors, any remuneration, directly
or indirectly, to induce the referral of individuals covered by
federally funded health care programs, including Medicare,
Medicaid and the Civilian Health and Medical Program of the
Uniformed Services (CHAMPUS) or the purchase, or the
arranging for or recommending of the purchase, of items or
services for which payment may be made in whole or in part under
Medicare, Medicaid, CHAMPUS or other federally funded health
care programs. Sanctions for violating the Anti-Kickback Statute
may include imprisonment, criminal and civil fines, and
exclusion from participation in the federally funded health care
programs.
The federal healthcare Anti-Kickback Statute has been
interpreted broadly by courts, the Office of Inspector General,
referred to as the OIG within the
U.S. Department of Health & Human Services
(DHHS) and other administrative bodies. Because of
the statutes broad scope and the limited statutory
exceptions, federal regulations establish certain safe harbors
from liability. For example, safe harbors exist for certain
properly disclosed and reported discounts received from vendors,
certain
11
investment interests, certain properly disclosed payments made
by vendors to group purchasing organizations, certain personal
services arrangements, and certain discount and payment
arrangements between PBMs and HMO risk contractors serving
Medicaid and Medicare members. A practice that does not fall
within an exception or a safe harbor is not necessarily
unlawful, but may be subject to scrutiny and challenge. In the
absence of an applicable exception or safe harbor, a violation
of the statute may occur even if only one purpose of a payment
arrangement is to induce patient referrals or purchases of
products or services that are reimbursed by federal health care
programs. Among the practices that have been identified by the
OIG as potentially improper under the statute are certain
product conversion programs in which benefits are given by drug
manufacturers to pharmacists or physicians for changing a
prescription, or recommending or requesting such a change, from
one drug to another. The Anti-Kickback Statute has been cited as
a partial basis, along with state consumer protection laws
discussed below, for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers
to retail pharmacies as well as to PBMs in connection with such
programs.
Additionally, it is a crime under the Public Contractor
Anti-Kickback Statute, for any person to knowingly and willfully
offer or provide any remuneration to a prime contractor to the
United States, including a contractor servicing federally funded
health programs, in order to obtain favorable treatment in a
subcontract. Violators of this law also may be subject to civil
monetary penalties.
In April 2003, the OIG published Final OIG Compliance
Program Guidance for Pharmaceutical Manufacturers referred
to as Compliance Guidance. The Compliance Guidance
is voluntary and is directly aimed at the compliance efforts of
pharmaceutical manufacturers. This Compliance Guidance
highlights several transactions as potential risks, including
the provision of grants, prebates and upfront
payments to PBMs to support disease management programs
and therapeutic interchanges. The Compliance Guidance also
indicates that the provision of rebates or other payments to
PBMs by pharmaceutical manufacturers may potentially trigger
liability under the Anti-Kickback Statute, if not properly
structured and disclosed.
The Company believes that it is in substantial compliance with
the legal requirements imposed by such anti-remuneration laws
and regulations. However, there can be no assurance that the
Company will not be subject to scrutiny or challenge under such
laws or regulations. Any such challenge could have a material
adverse effect on its business, results of operations, financial
condition or cash flows.
Federal
Statutes Prohibiting False Claims.
The Federal False Claims Act imposes liability for knowingly
making or causing to be made false claims with respect to
governmental programs, such as Medicare and Medicaid, for
services not rendered, or for misrepresenting actual services
rendered, in order to obtain higher reimbursement. Private
individuals may bring qui tam or whistleblower suits
against providers under the Federal False Claims Act, which
authorizes the payment of a portion of any recovery to the
individual bringing suit. Such actions are initially required to
be filed under seal pending their review by the Department of
Justice. Federal district courts have interpreted the Federal
False Claims Act as applying to claims for reimbursement that
violate the anti-kickback statute or federal physician
self-referral law under certain circumstances. The Federal False
Claims Act generally provides for the imposition of civil
penalties and for treble damages, resulting in the possibility
of substantial financial penalties for small billing errors that
are replicated in a large number of claims, as each individual
claim could be deemed to be a separate violation of the Federal
False Claims Act. Criminal provisions that are similar to the
Federal False Claims Act provide that a corporation may be fined
if it is convicted of presenting to any federal agency a claim
or making a statement that it knows to be false, fictitious or
fraudulent to any federal agency.
In 2009, the Company did directly contract with the federal
government to provide services to beneficiaries of federally
funded health programs. Therefore, the Company did directly
submit claims to the federal government. In addition, the
Company does contract with and provide services to entities or
organizations that are federal government contractors, such as
Medicare Part D PDPs. There can be no assurance that the
government would not potentially view one or more of the
Companys actions in providing services to federal
government contractors as causing or assisting in the
presentment of a false claim particularly in light of the April
2009 amendment of the law to expand the scope of liability. The
Company does not believe it is in violation of the Federal False
Claims Act and it has a corporate compliance and ethics program,
policies and procedures and internal controls in place to help
maintain an organizational culture of honesty and integrity.
ERISA
Regulation.
ERISA regulates certain aspects of employee pension and health
benefit plans, including self-funded corporate health plans. The
Company has agreements with self-funded corporate health plans
to provide PBM services, and therefore, it is a service provider
to ERISA plans. ERISA imposes duties on any person or entity
that is a fiduciary with respect to the ERISA plan. The Company
administers pharmacy benefits for ERISA plans in accordance with
plan design choices made by the ERISA plan sponsors. The Company
does not believe that the general conduct of its business
subjects it to the fiduciary obligations set forth by ERISA,
except when it has specifically contracted with an ERISA plan
sponsor to accept fiduciary responsibility and be
12
named as a fiduciary for certain functions. In those cases where
the Company has not accepted fiduciary status, there can be no
assurance that the U.S. Department of Labor, which is the
agency that enforces ERISA, or a private litigant would not
assert that the fiduciary obligations imposed by the statute
apply to certain aspects of the Companys operations.
Numerous lawsuits have been filed against various PBMs by
private litigants, including Plan participants on behalf of an
ERISA plan and by ERISA Plan sponsors, alleging that the PBMs
are ERISA fiduciaries and that, in such capacity, they allegedly
violated ERISA fiduciary duties in connection with certain
business practices related to their respective contracts with
retail pharmacy networks
and/or
pharmaceutical manufacturers.
ERISA also imposes civil and criminal liability on service
providers to health plans and certain other persons if certain
forms of illegal remuneration are made or received. These
provisions of ERISA are similar, but not identical, to the
federal healthcare Anti-Kickback Statute discussed above. In
particular, ERISA does not provide the statutory and regulatory
safe harbor exceptions incorporated into the federal healthcare
Anti-Kickback Statute. Like the health care anti-kickback laws,
the corresponding provisions of ERISA are written broadly and
their application to particular cases is often uncertain. The
Company has implemented policies regarding, among other things,
disclosure to health plan sponsors with respect to any
commissions paid by or to it that might fall within the scope of
such provisions and accordingly believe it is in substantial
compliance with any applicable provisions of ERISA. However, the
Company can provide no assurance that its policies in this
regard would be found by the appropriate enforcement authorities
and potential private litigants to meet the requirements of
ERISA.
FDA
Regulation.
The U.S. Food and Drug Administration (FDA)
generally has authority to regulate drug promotional materials
that are disseminated by or on behalf of a drug manufacturer. In
January 1998, the FDA issued a Notice and Draft Guidance
regarding its intent to regulate certain drug promotion and
switching activities of PBMs that are controlled, directly or
indirectly, by drug manufacturers. After extending the comment
period due to numerous industry objections to the proposed
draft, the FDA has taken no further action on the Notice and
Draft Guidance. However, there can be no assurance that the FDA
will not attempt again to assert jurisdiction over aspects of
the Companys PBM business in the future and, although it
is not controlled directly or indirectly by any drug
manufacturer, the future impact of the FDA regulation could
materially adversely affect the Companys business, results
of operations, financial condition or cash flows.
Antitrust
Regulation.
The federal antitrust laws regulate trade and commerce and
prohibit unfair competition as defined by those laws.
Section One of the Sherman Antitrust Act prohibits
contracts, combinations or conspiracies in restraint of trade or
commerce. Despite its sweeping language, however,
Section One of the Sherman Act has been interpreted to
prohibit only unreasonable restraints on competition.
Section Two of the Sherman Act prohibits monopolization and
attempts at monopolization. Similarly, Section Seven of the
Clayton Act prohibits unlawful mergers and acquisitions. In
addition, the Robinson Patman Act, which is part of the Clayton
Act, prohibits a variety of conduct relating to the sale of
goods, including prohibiting practices the statute defines as
price discrimination. One section of the Robinson Patman Act
prohibits a seller from selling goods of like grade or quality
to different customers at different prices if the favorable
prices are not available to all customers competing in the same
class of trade. Successful plaintiffs in antitrust actions are
allowed to recover treble damages for the damage sustained as a
result of the violation.
Numerous lawsuits have been filed against PBMs and
pharmaceutical manufacturers under various state and federal
antitrust laws by retail pharmacies throughout the United States
challenging certain branded drug pricing practices. The
complaints allege, in part, that the defendant PBMs accepted
rebates and discounts from pharmaceutical manufacturers on
purchases of brand-name prescription drugs and conspired with
other PBMs to fix prices in violation of the Robinson Patman Act
and the Sherman Antitrust Act. The suits seek unspecified
monetary damages, including treble damages, and injunctive
relief.
The Company believes that it is in substantial compliance with
the legal requirements imposed by such antitrust laws. However,
there can be no assurance that the Company will not be subject
to scrutiny or challenge under such legislation. To the extent
that it appears to have actual or potential market power in a
relevant market, the Companys business arrangements and
practices may be subject to heightened scrutiny under the
antitrust laws. Any such challenge could have a material adverse
effect on the Companys business, results of operations,
financial condition or cash flows.
State
Laws and Regulations Affecting the PBM Industry
The following descriptions identify various state laws and
regulations that affect or may affect aspects of the
Companys PBM business.
13
State
Anti-Remuneration/False Claims Laws.
Several states have laws
and/or
regulations similar to the federal healthcare Anti-Kickback
Statute and Federal False Claims Act described above, while
several others are currently considering passing or
strengthening false claims laws. Such state laws are not
necessarily limited to services or items for which federally
funded health care program payments may be made. Such state laws
may be broad enough to include improper payments made in
connection with services or items that are paid by commercial
payors. Sanctions for violating these state anti-remuneration
and false claims laws may include injunction, imprisonment,
criminal and civil fines and exclusion from participation in the
state Medicaid programs. Additionally, under the Deficit
Reduction Act of 2005, discussed in greater detail below, states
are incentivized to pass broad false claims legislation similar
to the Federal False Claims Act and there has been activity in
several states during the past several years to do so.
The Company believes that it is in substantial compliance with
the legal requirements imposed by such laws and regulations.
However, there can be no assurance that the Company will not be
subject to scrutiny or challenge under such laws or regulations.
Any such challenge could have a material adverse effect on the
Companys business, results of operations, financial
condition or cash flows.
State
Consumer Protection Laws.
Most states have enacted consumer protection and deceptive trade
laws that generally prohibit payments and other broad categories
of conduct deemed harmful to consumers. These statutes may be
enforced by states
and/or
private litigants. Such laws have been and continue to be the
basis for investigations, prosecutions, and settlements of PBMs,
initiated by state prosecutors as well as by private litigants.
The Company believes that it is in substantial compliance with
the legal requirements imposed by such laws and regulations.
However, there can be no assurance that the Company will not be
subject to scrutiny or challenge under one or more of these
laws, or under similar consumer protection theories.
State
Comprehensive PBM Regulation.
Legislation directly regulating PBM activities in a
comprehensive manner has been introduced in a number of states.
In addition, legislation has been proposed in some states
seeking to impose fiduciary obligations or disclosure
requirements on PBMs. If enacted in a state in a form that is
applicable to the operations it conducts there, this type of
legislation could materially adversely impact the Company. Maine
and the District of Columbia have each enacted a statute
imposing fiduciary and disclosure obligations on PBMs.
Similarly, both North Dakota and South Dakota have relatively
comprehensive PBM laws that, among other things, increase
financial transparency and regulate therapeutic interchange
programs.
Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including
preferred provider organizations, TPAs, companies that provide
utilization review services and companies that engage in the
practices of a pharmacy. The scope of these laws differs
significantly from state to state, and the application of such
laws to the activities of PBMs often is unclear.
In addition, certain quasi-regulatory organizations, including
the National Association of Boards of Pharmacy and the National
Association of Insurance Commissioners (NAIC) have
issued model regulations or may propose future regulations
concerning PBMs
and/or PBM
activities, and the National Committee for Quality Assurance
(NCQA), the Utilization Review Accreditation
Commission (URAC), or other credentialing
organizations may provide voluntary standards regarding PBM
activities. In 2007, for example, URAC finalized PBM
accreditation standards for PBMs serving the commercially
insured market. While the actions of these quasi-regulatory
organizations do not have the force of law, they may influence
states to adopt their requirements or recommendations and
influence customer requirements for PBM services. Moreover, any
standards established by these organizations could also impact
the Companys health plan customers
and/or the
services it provides to them.
The Company believes that it is in substantial compliance with
all such laws and requirements where required, and continue to
monitor legislative and regulatory developments. In 2009, the
Company was awarded full pharmacy benefit management
accreditation from URAC. There can be no assurance, however,
regarding the future interpretation of these laws and their
applicability to the activities of the Companys PBM
business. Future legislation or regulation, or interpretations
by regulatory and quasi-regulatory authorities of existing laws
and regulations, could materially affect the cost and nature of
the Companys business as currently conducted.
Network
Access Legislation.
A majority of states now have some form of legislation affecting
the Companys ability to limit access to a pharmacy
provider network, referred to as any willing provider
legislation, or removal of a network provider, referred to as
due process
14
legislation. Such legislation may require the Company or its
clients to admit any retail pharmacy willing to meet the
plans price and other terms for network participation, or
may provide that a provider may not be removed from a network
except in compliance with certain procedures. Similarly, there
are any willing pharmacy provisions applicable to Medicare
Part D plans. These statutes have not materially affected
the Companys business.
State
Legislation Affecting Plan or Benefit Design.
Some states have enacted legislation that prohibits certain
types of managed care plan sponsors from implementing certain
restrictive design features, and many states have legislation
regulating various aspects of managed care plans, including
provisions relating to the pharmacy benefits. For example, some
states, under so-called freedom of choice legislation, provide
that members of the plan may not be required to use network
providers, but must instead be provided with benefits even if
they choose to use
non-network
providers. Other states have enacted legislation purporting to
prohibit health plans from offering members financial incentives
for use of mail service pharmacies. Legislation has been
introduced in some states to prohibit or restrict therapeutic
intervention, to require coverage of all FDA-approved drugs or
to require coverage for off-label uses of drugs where those uses
are recognized in peer-reviewed medical journals or reference
compendia. Other states mandate coverage of certain benefits or
conditions and require health plan coverage of specific drugs,
if deemed medically necessary by the prescribing physician. Such
legislation does not generally apply to the Company directly,
but may apply to certain of its clients, such as HMOs and health
insurers. If legislation were to become widely adopted, it could
have the effect of limiting the economic benefits achievable
through PBMs. This development could have a material adverse
effect on the Companys business, results of operations,
financial condition or cash flows.
State
Regulation of Financial Risk Plans.
Fee-for-service
prescription drug plans are generally not subject to financial
regulation by the states. However, if a PBM offers to provide
prescription drug coverage on a capitated basis or otherwise
accepts material financial risk in providing the benefit, laws
in various states may regulate the plan. Such laws may require
that the party at risk establish reserves or otherwise
demonstrate financial responsibility. Laws that may apply in
such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. Currently, the Company does not
believe that its PBM business currently incurs financial risk of
the type subject to such regulation. However, if it chooses to
become a regional PDP for the Medicare outpatient prescription
drug benefit at some time in the future, the Company would need
to comply with state laws governing risk-bearing entities in the
states where it operates a PDP.
State
Discount Drug Card Regulation.
Numerous states have laws
and/or
regulations regulating the selling, marketing, promoting,
advertising or distributing of commercial discount drug cards
for cash purchases. Such laws and regulations provide,
generally, that any person may bring an action for damages or
seek an injunction for violations. The Company administers a
limited commercial discount drug card program that it does not
consider material to its business. The Company believes its
administration of the commercial discount drug card program is
in compliance with various state laws. However, there can be no
assurance that the existence of such laws will not materially
impact the Companys ability to offer certain new
commercial products
and/or
services in the future.
Combined
Federal and State Laws, Regulations and Other Standards
Affecting the PBM Industry
Certain aspects of the Companys PBM business are or may be
affected by bodies of law that exist at both the federal and
state levels and by other standard setting entities. Among these
are the following:
Pharmacy
Licensure and Regulation.
The Company is subject to state and federal statutes and
regulations governing the operation of mail service pharmacies
and the dispensing of controlled substances. The Companys
pharmacies deliver prescription drugs and supplies to
individuals in all 50 states. The practice of pharmacy is
generally regulated at the state level by state boards of
pharmacy. Each of the Companys pharmacies must be licensed
in the state in which it is located. Also, many of the states
where the Company delivers pharmaceuticals, including controlled
substances, have laws and regulations that require
out-of-state
mail service pharmacies to register with that states board
of pharmacy or similar regulatory body. Federal statutes and
regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of
controlled substances. Federal controlled substance laws require
the Company to register its pharmacies with the United States
Drug Enforcement Administration and to comply with security,
recordkeeping, inventory control and labeling standards in order
to dispense controlled substances. The Company is also subject
to certain federal and state laws affecting on-line pharmacies
because it dispenses prescription drugs pursuant to refill
orders received through its Internet websites, among other
methods. Several states have proposed new laws to regulate
on-line pharmacies, and federal regulation of on-line pharmacies
by the FDA or another federal agency has also been
15
proposed. Other statutes and regulations may affect our mail
service operations. For example, the Federal Trade Commission
(FTC) requires mail service sellers of goods
generally to engage in truthful advertising, to stock a
reasonable supply of the products to be sold, to fill mail
service orders within thirty days and to provide clients with
refunds when appropriate. In addition, the United States Postal
Service has statutory authority to restrict the transmission of
drugs and medicines through the mail. The Companys
pharmacists are subject to state regulation of the profession of
pharmacy and employees engaged in a professional practice must
satisfy applicable state licensing requirements.
Deficit
Reduction Act of 2005.
The Deficit Reduction Act of 2005 (DRA) came into
law on February 8, 2006 enacting significant changes to the
Medicaid system, a state and federally funded program, with
respect to prescription drugs. Among other things, the DRA
revises the methodology used to determine federal upper payment
limits, the maximum amount a state can reimburse for generic
drugs under Medicaid, permits stronger cost-sharing requirements
applicable to Medicaid prescription drugs, and contains
provisions intended to reduce fraud, waste and abuse in the
Medicaid program. The DRAs fraud, waste and abuse
provisions, among other things, incentivize states to enact
their own false claims acts, mirrored on the Federal False
Claims Act, described above, and appropriate federal funding to
increase scrutiny of the Medicaid program. The fraud, waste and
abuse provisions also include a provision intended to strengthen
Medicaids status as payor of last resort relative to
private health insurance by specifying that PBMs and
self-insured plans may be liable third parties. The provisions
in the DRA have the potential to impact the PBM industry by
means of increased prosecutorial and private litigant scrutiny
of the pharmaceutical industry in general, which may include
PBMs. Additionally, the DRA mandates the public availability of
pharmaceutical manufacturer average manufacturer prices
(AMPs) and creates incentives to states to use AMPs
for Medicaid reimbursement, potentially paving the way for a
more general market shift in reimbursement mechanisms from
AWP-based methodologies to AMP-based methodologies, discussed in
more detail above, under Legislation and Litigation
Affecting Drug Prices. Additionally, the third party
recovery provisions in the DRA may lead to greater financial
recoveries from third party PBMs in cases where Medicaid was not
properly a primary payor on a drug claim, even where a PBM is
not financially at risk.
Privacy
and Confidentiality Legislation.
The Companys activities involve the receipt, use and
disclosure of confidential health information, including
disclosure of the confidential information to a
participants health benefit plan, as permitted in
accordance with applicable federal and state privacy laws. In
addition, the Company uses and discloses de-identified data for
analytical and other purposes. Many state laws restrict the use
and disclosure of confidential medical information, and similar
new legislative and regulatory initiatives are underway in
several states. To date, no such laws adversely impact the
Companys ability to provide its services, but there can be
no assurance that federal or state governments will not enact
such legislation, impose restrictions or adopt interpretations
of existing laws that could have a material adverse effect on
its business, results of operations, financial condition or cash
flows.
The Health Insurance Portability and Accountability Act of 1996
and the regulations issued thereunder (collectively
HIPAA) impose extensive requirements on the way in
which health plans, healthcare providers, healthcare
clearinghouses (known as covered entities) and their
business associates use, disclose and safeguard protected health
information (PHI), including requirements to protect
the integrity, availability and confidentiality of electronic
PHI. Many of these obligations were expanded under the Health
Information Technology for Economic and Clinic Health Act (the
HITECH Act), passed as part of the American Recovery
and Reinvestment Act of 2009.
The final privacy regulations (Privacy Rule) issued
by the DHHS pursuant to HIPAA, gives individuals the right to
know how their PHI is used and disclosed, as well as the right
to access, amend and obtain information concerning certain
disclosures of PHI. Covered entities, such as pharmacies and
health plans, are required to provide a written Notice of
Privacy Practices to individuals that describes how the entity
uses and discloses PHI, and how individuals may exercise their
rights with respect to their PHI. For most uses and disclosures
of PHI other than for treatment, payment, healthcare operations
or certain public policy purposes, HIPAA generally requires that
covered entities obtain a valid written individual
authorization. In most cases, use or disclosure of PHI must be
limited to the minimum necessary to achieve the purpose of the
use or disclosure.
The Company is itself a covered entity under HIPAA in connection
with its operation of a mail service pharmacy and specialty
pharmacy. In connection with its other PBM activities, the
Company is not considered a covered entity. However, the
Companys health plan clients and pharmacy customers are
covered entities, and are required to enter into business
associate agreements with vendors, such as PBMs, that perform a
function or activity for the covered entity that involves the
use or disclosure of individually identifiable health
information. The business associate agreements mandated by the
Privacy Rule create a contractual obligation for the PBM to
perform its duties for the covered entity in compliance with the
Privacy Rule, and as of February 17, 2010, also create a
statutory obligation for the PBM to satisfy certain aspects of
the Privacy Rule and the final HIPAA security regulations.
Criminal penalties and civil sanctions may be imposed for
failing to comply with HIPAA standards, and these penalties and
sanctions have significantly increased under the HITECH Act.
16
The final transactions and code sets regulation (the
Transaction Rule) promulgated under HIPAA requires
that all covered entities that engage in electronic transactions
use standardized formats and code sets. It is incumbent upon
PBMs to conduct all such transactions in accordance with the
Transaction Rule to satisfy the obligations of their covered
entity clients. DHHS promulgated a National Provider Identifiers
(NPI) Final Rule which requires health plans to
utilize NPIs in all Standard Transactions. NPIs replaced
National Association of Boards of Pharmacy numbers for
pharmacies, Drug Enforcement Agency numbers for physicians and
similar identifiers for other health care providers. The Company
has undertaken the necessary arrangements to ensure that its
standard transactions remain compliant with the Transaction Rule
subsequent to the implementation of NPI Final Rule.
The final security regulations (the Security Rule)
issued pursuant to HIPAA mandate the use of administrative,
physical, and technical safeguards to protect the
confidentiality of electronic health care information. Similarly
to the other two rules issued pursuant to HIPAA, the Security
Rule applies to covered entities. As of February 17, 2010,
aspects of the Security Rule will also apply to business
associates. The Company has made the necessary arrangements to
ensure compliance with the Security Rule for all aspects of its
business.
The Company must also comply with the recently promulgated
breach notification regulations, which implement
provisions of the HITECH Act. Under these regulations, covered
entities must promptly notify affected individuals in the case
of a breach of unsecured PHI, as well as the HHS
Secretary and the media in cases where a breach affects more
than 500 individuals. Breaches affecting fewer than 500
individuals must be reported to the HHS Secretary on an annual
basis. The regulations also require business associates of
covered entities to notify the covered entity of breaches at or
by the business associate. The Company is taking reasonable
steps to reduce the amount of unsecured PHI it handles.
While new and future regulatory interpretations could alter the
Companys assessment of its efforts to comply with HIPAA,
the HITECH Act, and implementing regulations and guidance, the
Company currently believes that compliance with these legal
authorities should not have a material adverse effect on its
business operations.
Pursuant to HIPAA, state laws that are more protective of
medical information are not pre-empted by HIPAA. Therefore, to
the extent states enact more protective legislation, the Company
could be required to make significant changes to its business
operations.
Independent of any regulatory restrictions, individual health
plan sponsor clients could increase limitations on the
Companys use of medical information, which could prevent
it from offering certain services.
Future
Regulation.
The Company is unable to predict accurately what additional
federal or state legislation or regulatory initiatives may be
enacted in the future relating to its businesses or the health
care industry in general, or what effect any such legislation or
regulations might have on it. For example, the federal
government and several state governments have considered
Patients Bill of Rights and other similar legislation
aimed primarily at improving quality of care provided to
individuals in managed care plans. Some of the initiatives would
provide greater access to drugs not included on health plan
formularies, giving participants the right to sue their health
plan for malpractice, and mandating an appeals or grievance
process. There can be no assurance that federal or state
governments will not impose additional restrictions, via a
Patients Bill of Rights or otherwise, or adopt
interpretations of existing laws that could have a material
adverse effect on the Companys business, results of
operations, financial condition or cash flows.
EMPLOYEES
As of December 31, 2009, the Company had
935 employees, primarily located in Lisle, Illinois, and
Scottsdale, Arizona, whose services are devoted full time to SXC
Health Solutions Corp. and its subsidiaries. The Company has
never had a work stoppage. The Companys personnel are not
represented by any collective bargaining unit and are not
unionized. The Company considers its relations with its
personnel to be good. The Companys future success will
depend, in part, on its ability to continue to attract, retain,
and motivate highly qualified technical and managerial
personnel, for whom competition is intense.
FINANCIAL
INFORMATION ABOUT SEGMENTS
Effective with the acquisition of NMHC in April 2008, the
Company operates in two reportable operating segments, PBM and
HCIT, which provide both recurring and non-recurring revenues
from the pharmaceutical benefits management industry. The
Company conducts business in both the United States and Canada.
Financial information about the Companys two segments and
two geographical areas is described in Notes 9 and 14 to
Item 8, Financial Statements and Supplementary
Data, to this Annual Report on
Form 10-K.
17
CUSTOMERS
The Company generates a significant portion of its revenue from
a small number of customers and for the year ended
December 31, 2009, the State of Hawaii accounted for 11.7%
of revenue and Boston Medical Health Center accounted for 12.6%
of revenue. The loss of, or substantial changes in the services
provided to, these significant customers, or the loss of other
customers that could be significant in the aggregate, could have
a material adverse effect on the Companys results of
operations.
INDUSTRY
RISKS
Our
future growth is dependent on further market acceptance and
increased market penetration of our products.
Our business model depends on our ability to sell our products
and services. Achieving increased market acceptance of our
products and services will require substantial sales and
marketing efforts and the expenditure of significant financial
and other resources to create awareness and demand by
participants in the pharmaceutical supply chain. Additionally,
pharmaceutical providers and payors, which may have invested
substantial resources in other methods of conducting business
and exchanging information, may be reluctant to purchase our
products and services.
We cannot be assured that pharmaceutical providers and payors
will purchase our products and services. If we fail to achieve
broad acceptance of our products and services by pharmaceutical
providers, payors, and other healthcare industry participants,
or if we fail to position our services as a preferred method for
information management and pharmaceutical healthcare delivery,
our business, financial condition, and results of operations
will be materially adversely affected.
The electronic healthcare information market is rapidly
evolving. A number of market entrants have introduced or
developed products and services that are competitive with one or
more components of our offerings. We expect that additional
companies will continue to enter this market. In new and rapidly
evolving industries, there is significant uncertainty and risk
as to the demand for, and market acceptance of, products and
services. Because the markets for our products and services are
evolving, we are not able to predict the size and growth rate of
the markets with any certainty. We cannot be assured that the
markets for our products and services will continue to grow or,
if they do, that they will be strong and continue to grow at a
sufficient pace. If markets fail to grow, grow more slowly than
expected or become saturated with competitors, our business,
financial condition, and results of operations could be
materially adversely affected.
Competition
in our industry is intense and could reduce or eliminate our
profitability.
The PBM industry is very competitive. If we do not compete
effectively, our business, results of operations, financial
condition or cash flows could suffer. The industry is highly
consolidated and dominated by a few large companies with
significant resources, purchasing power, and other competitive
advantages, which we do not have. A limited number of firms,
including national PBM companies such as Medco, Express Scripts,
Inc., and CVS/Caremark Rx, Inc., have significant market share
of the prescription volume. Our competitors also include drug
retailers, physician practice management companies, and
insurance companies/health maintenance organizations. We may
also experience competition from other sources in the future.
PBM companies compete primarily on the basis of price, service,
reporting capabilities and clinical services. In most cases, our
competitors are large, profitable, and well-established
companies with substantially greater financial and marketing
resources than our resources.
Consolidation
in the healthcare industry could materially adversely affect our
business, financial condition and results of
operations.
Many healthcare industry participants are consolidating to
create integrated healthcare delivery systems with greater
market power. As provider networks and managed care
organizations consolidate, thereby decreasing the number of
market participants, competition to provide products, and
services like ours will become more intense, and the importance
of establishing relationships with key industry participants
will become greater. In the past we have lost customers as a
result of industry consolidation. In addition, industry
participants may try to use their market power to negotiate
price reductions for our products and services. Further,
consolidation of management and billing services through
integrated delivery systems may decrease demand for our
products. If we are forced to reduce prices as a result of
either an imbalance of market power or decreased demand for our
products, revenue would be reduced and we could become
significantly less profitable.
Future
changes in laws or regulations in the healthcare industry could
adversely affect our business.
The healthcare industry is highly regulated and is subject to
changing political, economic, and regulatory influences. For
example, the Balanced Budget Act of 1997 (Public Law
105-32)
contained significant changes to Medicare and Medicaid and had
an impact for several years on healthcare providers
ability to invest in capital intensive systems. In addition,
HIPAA and
18
Canadian privacy statutes directly impact the healthcare
industry by requiring various security and privacy measures in
order to ensure the protection of patient health information.
More recently, increased government involvement in healthcare,
such as the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (which introduced the Medicare
Part D benefit effective January 1, 2006), the Deficit
Reduction Act of 2005, the Medicare Improvements for Patients
and Providers Act of 2008 (MIPPA), the American
Recovery and Reinvestment Act of 2009, and other
U.S. initiatives at both the federal and state level could
lower reimbursement rates and otherwise change the business
environment of our customers and the other entities with which
we have a business relationship. Further, existing laws and
regulations are subject to changing interpretation by courts,
regulatory agencies, and agency officials. PBMs have also
increasingly become the target of federal and state litigation
over practices relating to drug switching, handling of rebates,
and fiduciary duties.
These factors affect PBMs directly, as well as impacting the
purchasing practices and operation of healthcare organizations.
U.S. federal and state legislatures are currently
considering programs to reform or amend the U.S. healthcare
system and to change healthcare financing and reimbursement
systems. Those reforms, if enacted, may increase the number of
individuals who have health insurance coverage and expand the
market for pharmaceutical products. However, healthcare industry
participants may also respond by reducing their investments or
postponing investment decisions, including investments in our
product offerings. The healthcare industry is expected to
continue to undergo significant changes for the foreseeable
future, and we cannot predict the effect of possible future
legislation and regulation on our business, financial condition
and results of operations.
BUSINESS
RISKS
Demands
by our customers for enhanced service levels or possible loss or
unfavorable modification of contracts with our customers could
negatively affect our profitability.
As our customers face the continued rapid growth in prescription
drug costs, they may demand additional services and enhanced
service levels to help mitigate the increase in spending. We
operate in a very competitive environment, and as a result, may
not be able to increase our fees to compensate for these
increased services which could negatively affect our
profitability.
Due to
the term of our contracts with customers, if we are unable to
renew those contracts at the same service levels previously
provided, or at all, or replace any lost customers, our future
business and results of operation would be adversely
affected.
Our contracts with customers generally do not have terms longer
than three years and, in some cases, are terminable by the
customer on relatively short notice. Our larger customers
generally seek bids from other PBM providers in advance of the
expiration of their contracts. In addition, we believe the
managed care industry is undergoing substantial consolidation,
and another party that is not our customer could acquire some of
our managed care customers. In such a case, the likelihood such
customer would renew its PBM contract with us could be reduced,
and the likelihood of a reduction in services would increase.
We are
dependent on key customers.
We generate a significant portion of our revenue from a small
number of customers. One of our customers accounted for 12.6%
and another accounted for 11.7% of our total revenue for the
year ended December 31, 2009, respectively. If our existing
customers elect not to renew their contracts with us at the
expiry of the current terms of those contracts, or reduce the
level of service offerings the Company provides, our recurring
revenue base will be reduced, which could have a material
adverse effect on our results of operations. Furthermore, we
sell most of our computer software and services to PBM
organizations, Blue Cross/Blue Shield organizations, managed
care organizations and retail/mail-order pharmacy chains. If the
healthcare benefits industry or our customers in the healthcare
benefits industry experience problems, they may curtail spending
on our products and services and our business and financial
results could be materially adversely affected. For example, we
may suffer a loss of customers if there is any significant
consolidation among firms in the healthcare benefits industry or
other participants in the pharmaceutical supply chain or if
demand for pharmaceutical claims processing services should
decline.
Many of our clients put their contracts out for competitive
bidding prior to expiration. Competitive bidding requires costly
and time-consuming efforts on our behalf and, even after we have
won such bidding processes, we can incur significant expense in
proceedings or litigation contesting the adequacy or fairness of
these bidding processes. We could lose clients if they cancel
their agreements with us, if we fail to win a competitive bid at
the time of contract renewal, if the financial condition of any
of our clients deteriorates or if our clients are acquired by,
or acquire, companies with which we do not have contracts. Over
the past several years, self-funded employers, third party
administrators and other managed care companies have experienced
significant consolidation. Consolidations by their very nature
reduce the number of clients who may need our services. A client
involved in a merger or acquisition by a company that is not a
client of ours may not renew, and in some instances may
terminate, its contract with us. Our clients have been and may
continue to be, subject to consolidation pressure.
19
Our
business strategy of expansion through acquisitions may result
in unexpected integration costs and challenges, loss of acquired
business and/or dilution to existing shareholders.
We look to the acquisition of other businesses, such as the
acquisition of NMHC, as a way to achieve our strategy of
expanding our product offerings and customer base. The
successful implementation of this acquisition strategy depends
on our ability to identify suitable acquisition candidates,
acquire companies on acceptable terms, integrate the acquired
companys operations and technology successfully with our
own, and maintain the goodwill of the acquired business. We are
unable to predict whether or when we will be able to identify
any suitable additional acquisition candidates or, the
likelihood that any potential acquisition will be completed. It
is also possible that a potential acquisition will be dilutive
to existing shareholders. In addition, while we believe we have
the experience and know-how to integrate acquisitions, such
efforts entail significant risks including, but not limited to:
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a diversion of managements attention from other business
concerns;
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failure to successfully integrate the operations, services,
products and personnel of an acquired company;
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failure to realize expected synergies from an acquired company;
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possible inconsistencies in standards, controls, procedures and
policies among the companies being combined or assimilated,
which would make it more difficult to implement and harmonize
company-wide financial, accounting, billing, information
technology and other systems;
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possible difficulties maintaining the quality of products and
services that acquired companies have historically provided;
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required amortization of the identifiable intangible assets of
an acquired business, which will reduce our net income in the
years following its acquisition, and we also would be required
to reduce our net income in future years if we were to
experience an impairment of goodwill or other intangible assets
attributable to an acquisition;
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the potential loss of key employees or customers from either our
current business or the business of the acquired company;
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coordinating businesses located in different geographic
regions; and
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the assumption of significant
and/or
unknown liabilities of the acquired company.
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Our
future success depends upon the ability to grow, and if we are
unable to manage our growth effectively, we may incur unexpected
expenses and be unable to meet our customers
requirements.
An important part of our business strategy is to expand the
scope of our operations, both organically and through
acquisitions. We cannot be certain that our systems, procedures,
controls, and space will be adequate to support expansion of our
operations, and we may be unable to expand and upgrade our
systems and infrastructure to accommodate any future growth.
Growth in operations will place significant demands on our
management, financial and other resources. Our future operating
results will depend on the ability of our management and key
employees to successfully manage changing business conditions
and to implement and improve our technical, administrative,
financial control and reporting systems. Our inability to
finance future growth, manage future expansion or hire and
retain the personnel needed to manage our business successfully
could have a material adverse effect on our business, financial
condition and results of operations.
Changes
in the industry pricing benchmarks could adversely affect our
financial performance.
Contracts in the prescription drug industry, including our
contracts with our retail network pharmacies and with our PBM
customers, have traditionally used certain published benchmarks
to establish pricing for prescription drugs. These benchmarks
include Average Wholesale Price (AWP), Average Sales
Price (ASP), Average Manufacturer Price, Wholesale
Acquisition Cost, and Direct Price. Most of our contracts with
pharmacies and customers historically utilized the AWP standard.
In March 2009, class action litigation settlements with the two
primary entities that publish AWP, First DataBank
(FDB) and Medi-Span, have raised uncertainties as to
whether payors, pharmacy providers, PBMs and others in the
prescription drug industry will continue to utilize AWP as it
has previously been calculated or whether other pricing
benchmarks will be adopted for establishing prices within the
industry.
In March 2009, a federal district court gave final approval to
settlements of class action lawsuits brought against FDB and
Medi-Span, two primary sources of AWP price reporting. Under the
terms of the settlements, FDB and Medi-Span have agreed, among
other things to reduce the reported AWP of certain drugs by four
percent, and FDB and Medi-Span also announced that they would
discontinue publishing AWP within two years of the settlements.
On September 3, 2009, a federal appeals court rejected
challenges to the settlements, clearing the way for the AWP
reductions to take effect on September 26, 2009. In
response to this action, the Company, as authorized in most of
the Companys standard customer contracts, adopted a
revised pricing
20
benchmark to ensure cost neutrality for the Company, its
customers and pharmacies as to what they paid or received, as
applicable, for prescription drug products using the AWP pricing
benchmark before September 26, 2009 and what they would pay
or receive on or after September 26, 2009. While that
transition has been accomplished to date with no material
adverse effect on the Company, there can be no assurances that
customers and pharmacies in reviewing the results of the
transition may not challenge the way in which the transition
occurred
and/or
whether it preserved cost neutrality as intended, or that the
results of such challenges will not have a material adverse
effect on our financial performance, results of operations and
financial condition in future periods.
Further, changes in the reporting of any applicable pricing
benchmarks, including the expected introduction of a new pricing
benchmark in place of AWP by FDB and Medi-Span, or in the basis
for calculating reimbursements proposed by the federal
government and certain states, and other legislative or
regulatory adjustments that may be made regarding the
reimbursement of payments for drugs by Medicaid and Medicare,
could impact our pricing to customers and other payors and could
impact our ability to negotiate discounts with manufacturers,
wholesalers, or retail pharmacies. In some circumstances, such
changes could also impact the reimbursement that we receive in
our mail order and specialty pharmacies or that we receive from
Medicare or Medicaid programs for drugs covered by such programs
and from managed care organizations that contract with
government health programs to provide prescription drug
benefits. In addition, it is possible that payors and pharmacy
providers will disagree with the use or application of the
changes we have put in place or begin to evaluate other pricing
benchmarks as the basis for contracting for prescription drugs
and PBM services in the future, and the effect of this
development on our business cannot be predicted at this time.
Due to these and other uncertainties, we can give no assurance
that the short or long-term impact of changes to industry
pricing benchmarks will not have a material adverse effect on
our financial performance, results of operations and financial
condition in future periods.
If we
lose relationships with one or more key pharmaceutical
manufacturers or if rebate payments we receive from
pharmaceutical manufacturers and rebate processing service
providers decline, our business, results of operations,
financial condition or cash flows could be negatively
impacted.
We receive fees from our clients for administering a rebate
program with pharmaceutical manufacturers based on the use of
selected drugs by members of health plans sponsored by our
clients, as well as fees for other programs and services. We
believe our business, results of operations, financial condition
or cash flows could suffer if:
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we lose relationships with one or more key pharmaceutical
manufacturers;
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we are unable to finalize rebate contracts with one or more key
pharmaceutical manufacturers in the future, or are unable to
negotiate interim arrangements;
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rebates decline due to the failure of our health plan sponsors
to meet market share or other thresholds;
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legal restrictions are imposed on the ability of pharmaceutical
manufacturers to offer rebates or purchase our programs or
services;
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pharmaceutical manufactures choose not to offer rebates or
purchase our programs or services; or
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rebates decline due to contract branded products losing their
patents.
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Over the next few years, as patents expire covering many brand
name drugs that currently have substantial market share, generic
products will be introduced that may substantially reduce the
market share of these brand name drugs. Historically,
manufacturers of generic drugs have not offered formulary
rebates on their drugs. Our profitability could be adversely
affected if the use of newly approved, brand name drugs added to
formularies, does not offset any decline in use of brand name
drugs whose patents expire.
Government
efforts to reduce health care costs and alter health care
financing practices could lead to a decreased demand for our
services or to reduced rebates from manufacturers.
Congress is currently considering proposals to reform the
U.S. healthcare system, including healthcare reform
legislation proposed at the end of 2009. Some proposals could
impact PBMs directly (e.g. requiring disclosure of information
about pricing and product switches), while others would have an
indirect effect (e.g. modifying reimbursement rates for
pharmaceutical manufacturers participating in government
programs). These proposals may increase government involvement
in healthcare and regulation of PBM or pharmacy services, or
otherwise change the way we do business. These proposals may
also increase governmental regulation of managed care plans.
Some of these initiatives would, among other things, require
that health plan members have greater access to drugs not
included on a plans formulary and give health plan members
the right to sue their health plans for malpractice when they
have been denied care. Health plan sponsors may react to these
proposals and the uncertainty surrounding them by cutting back
or delaying the purchase of our PBM services, and manufacturers
may react by
21
reducing rebates or reducing supplies of certain products. These
proposals could lead to a decreased demand for our services or
to reduced rebates from manufacturers. We cannot predict what
effect, if any, these proposals may have on our businesses.
Other legislative or market-driven changes in the healthcare
system that we cannot anticipate could also materially adversely
affect our business, financial condition and results of
operations.
If we
are unable to compete successfully, our business, financial
condition and results of operations will be adversely
affected.
The market for our products and services is fragmented,
intensely competitive and is characterized by rapidly changing
technology, evolving industry standards and user needs and the
frequent introduction of new products and services. We compete
on the basis of several factors, including: breadth and depth of
services; reputation; reliability, accuracy and security of our
software programs; ability to enhance existing products and
services; ability to introduce and gain market acceptance of new
products and services quickly and in a cost-effective manner;
customer service; price and cost-saving measures; and industry
expertise and experience.
Some of our competitors are more established, benefit from
greater name recognition and have substantially greater
financial, technical and marketing resources than us.
Furthermore, we expect that competition will continue to
increase as a result of consolidation in both the information
technology and healthcare industries. If our competitors or
potential competitors were to merge or partner with one another,
the change in the competitive landscape could adversely affect
our ability to compete effectively.
In addition, the HCIT market is characterized by rapid
technological change and increasingly sophisticated and varied
customer needs. To successfully compete in this market, we must
continue to enhance our existing products and services,
anticipate and develop new technology that addresses the needs
of our existing and prospective customers and keep pace with
changing industry standards on a timely and cost-effective
basis. The development of our proprietary technology entails
significant technical and business risks, and we may not be
successful in using new technologies effectively or in adapting
our proprietary technology to evolving customer requirements or
industry practice. Moreover, competitors may develop products
that are more efficient, less costly, or otherwise better
received by the market than us. We cannot be assured that we
will be able to introduce new products in a timely manner, or at
all, or that such products will achieve market acceptance.
There can be no assurance that we will be able to compete
successfully against current and future competitors or that the
competitive pressures that we face will not materially adversely
affect our business, financial condition, and results of
operations.
Our
software products are susceptible to undetected errors or
similar problems, which may cause our systems to fail to perform
properly.
Complex software such as ours often contains defects or errors
that are difficult to detect, even through testing, and despite
testing by us, our existing and future software products may
contain errors. We strive to regularly introduce new solutions
and enhancements to our products and services. If we detect any
errors before introducing a product, we may have to delay
commercial release for an extended period of time while the
problem is addressed and in some cases may lose sales as a
result of the delay. If we do not discover software errors that
affect our products until after they are sold and become
operational, we would need to provide enhancements to correct
such errors, which would result in unexpected additional expense
and diversion of resources to remedy such errors.
Any errors in our software or enhancements, regardless of
whether or when they are detected or remedied, may result in
harm to our reputation, product liability claims, license
terminations or renegotiations, or delays in, or loss of, market
acceptance of our product offerings.
Furthermore, our customers might use our software together with
products from other companies. As a result, when problems occur,
it might be difficult to identify the source of the problem.
Even when our software does not directly cause these problems,
the existence of these errors might cause us to incur
significant costs, divert the attention of our technical
personnel from development efforts, impact our reputation or
cause significant customer relations problems.
We may
be liable for the consequences of the use of incorrect or
incomplete data that we provide.
We provide data, including patient clinical information, to
pharmaceutical providers for their use in dispensing
prescription drugs to patients. Third-party contractors provide
us with most of this data. If this data is incorrect or
incomplete, adverse consequences, including severe injury or
death, may occur and give rise to product liability and other
claims against us. In addition, a court or government agency may
take the position that our delivery of health information
directly, including through pharmaceutical providers, or
delivery of information by a third-party site that a consumer
accesses through our websites, exposes
22
us to personal injury liability, or other liability for wrongful
delivery or handling of healthcare services or erroneous health
information. While we maintain product liability insurance
coverage in an amount that we believe is sufficient for our
business, we cannot be assured that this coverage will prove to
be adequate or will continue to be available on acceptable
terms, if at all. A claim brought against us that is uninsured
or under-insured could materially harm our business, financial
condition and results of operations. Even unsuccessful claims
could result in substantial costs and diversion of management
resources.
It is
difficult to predict the length of the sales cycle for our
healthcare software solutions.
The length of the sales cycle for our healthcare software
solutions is difficult to predict, as it depends on a number of
factors, including the nature and size of the potential customer
and the extent of the commitment being made by the potential
customer. Our sales and marketing efforts with respect to
pharmaceutical providers and payors generally involve a lengthy
sales cycle due to these organizations complex
decision-making processes. Additionally, in light of increased
government involvement in healthcare and related changes in the
operating environment for healthcare organizations, our current
and potential customers may react by curtailing or deferring
investments, including those for our services. In many cases,
our acquisition of new business is dependent on us successfully
bidding pursuant to a competitive bidding process. If potential
customers take longer than we expect to decide whether to
purchase our solutions, our selling expenses could increase and
our revenues could decrease or be delayed, which could
materially harm our business, financial condition and results of
operations.
Due to
complex calculations within our customer contracts, we may be
required to issue significant credit memos to our customers that
could adversely affect our business, profitability and growth
prospects.
Contracts with our customers have complex calculations. We are
consistently in the process of implementing procedures to
improve our monitoring of material contractual obligations. We
continue to issue credit memos to customers related to meeting,
among other things, pricing performance guarantees. The
continued issuance of credit memos could adversely affect our
business, profitability and growth prospects.
Failure
of our health plan customers to pay for prescription claims or a
delay in payment of those claims could have a material adverse
effect on our profitability.
Our contracts with retail pharmacies that participate in our
network generally obligate us to make payments for prescription
claims even if we are not reimbursed by our customers. If our
customers delay their reimbursement payments or fail to make
payments for prescription claims, it could have a material
adverse effect on our profitability.
If we
become subject to liability claims that are not covered by our
insurance policies, we may be liable for damages and other
expenses that could have a material adverse effect on our
business, results of operations, financial condition or cash
flows.
Various aspects of our business may subject us to litigation and
liability for damages, for example, the performance of PBM
services and the operation of our call centers and website. A
successful product or professional liability claim in excess of
our insurance coverage where we are required to pay damages,
incur legal costs or face negative publicity could have a
material adverse effect on our business, results of operations,
financial condition or cash flows, our business reputation and
our ability to attract and retain clients, network pharmacies,
and employees. While we intend to maintain professional and
general liability insurance coverage at all times, we cannot
provide assurance that we will be able to maintain insurance in
the future, that insurance will be available on acceptable terms
or that insurance will be adequate to cover any or all potential
product or professional liability claims.
Our
operations are vulnerable to interruption by damage from a
variety of sources, many of which are not within our
control.
The success of our business depends in part on our ability to
operate our systems without interruption. Our products and
services are susceptible to all the threats inherent in computer
software and other technology-based systems. Our systems are
vulnerable to, among other things, power loss and
telecommunications failures, software and hardware errors,
failures or crashes, computer viruses and similar disruptive
problems, and fire, flood, and other natural disasters. Although
we take precautions to guard against and minimize damage from
these and other potential risks, including implementing disaster
recovery systems and procedures, they are often unpredictable
and beyond our control. Any significant interruptions in our
services could damage our reputation in the marketplace and have
a material adverse effect on our business, financial condition
and results of operations.
23
Our
business depends on our intellectual property rights, and if we
are unable to protect them, our competitive position may
suffer.
We do not have any patents on our technology. Nonetheless, our
business plan is predicated on our proprietary systems and
technology. Accordingly, protecting our intellectual property
rights is critical to our continued success and our ability to
maintain our competitive position. We protect our proprietary
rights through a combination of trademark, trade secret and
copyright law, confidentiality and non-disclosure agreements
with our employees, consultants, customers and suppliers, and
limiting access to our trade secrets and technology. We cannot
be assured that the steps we have taken will prevent
misappropriation of our technology, which could have a material
adverse effect on our competitive position. Also, despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our intellectual property by
reverse-engineering the functionality of our systems or
otherwise obtain and use information that we regard as
proprietary. Policing unauthorized use of our intellectual
property is difficult and expensive, and we are unable to
determine the extent, if any, to which piracy of our
intellectual property exists.
In addition, we may have to engage in litigation in the future
to enforce or protect our intellectual property rights, and we
may incur substantial costs and the diversion of
managements time and attention as a result.
We may
become subject to claims that we infringe the intellectual
property rights of others, which, even if not successful, could
have a material adverse impact on our business.
We could be subject to intellectual property infringement claims
from third parties as the number of our competitors grows and
our applications functionality overlaps with their
products. There has been a substantial amount of intellectual
property litigation in the information technology industries.
While we do not believe that we have infringed or are infringing
on any proprietary rights of third parties, we cannot assure
that infringement claims will not be asserted against us or that
those claims will be unsuccessful. Even if a claim brought
against us is ultimately unsuccessful, we could incur
substantial costs and diversion of management resources in
defending any infringement claims. Furthermore, a party making a
claim against us could secure a judgment awarding substantial
damages as well as injunctive or other equitable relief that
could effectively block our ability to develop and market our
products and services. We may be required to license
intellectual property from third parties in order to continue
using our products, and we cannot assure that we will be able to
obtain such licenses on commercially reasonable terms, or at all.
We may
be unable to obtain, retain the right to use or successfully
integrate third-party licenses for the use in our solutions,
which could prevent us from offering the products and services
which use those technologies.
We use third-party licenses for some of the technology used in
our solutions, and intend to continue licensing technologies
from third parties. These licenses are the type that ordinarily
accompany the business that we conduct. However, these licenses
might not continue to be available to us on commercially
reasonable terms or at all in the future. Most of these licenses
can be renewed only by mutual consent and may be terminated if
we breach the terms of the license and fail to cure the breach
within a specified period of time. Although we are not dependant
upon any individual license and believe that substitutes are
generally available, our inability to obtain or renew any of
these licenses could delay development of our new product
offerings or prevent us from selling our existing solutions
until equivalent technology can be identified, licensed and
integrated, or developed by us, and there is no assurance as to
when we would be able to do so, if at all. Lack of access to
required licenses from third parties could harm our business,
financial condition, and results of operations.
Most of our third-party licenses are non-exclusive. Our
competitors may obtain the right to use any of the technology
covered by these licenses and use the technology to attempt to
compete more effectively with us. Our use of third-party
technologies exposes us to risks associated with the integration
of components from various sources into our solutions, such as
unknown software errors or defects or unanticipated
incompatibility with our systems and technologies. In addition,
if our vendors choose to discontinue support of the licensed
technology in the future or are unsuccessful in their continued
research and development efforts, are unable to continue their
business, decide to discontinue dealings with us or are acquired
by a competitor or other party that does not wish to deal with
us, we may not be able to modify or adapt our own solutions to
use other available technologies in a timely manner, if at all.
We are
subject to a number of existing laws, regulations, and industry
initiatives, non-compliance with which could adversely affect
our business, financial condition and results of
operations.
We could suffer civil
and/or
criminal penalties, lose customers, and be required to pay
substantial damages or make significant changes to our
operations if we fail to comply with complex and rapidly
evolving laws and regulations.
24
During the past several years, the U.S. health care
industry has been subject to an increase in governmental
regulation at both the federal and state levels. Numerous state
and federal laws and regulations affect our business and
operations. The categories include, but are not necessarily
limited to:
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health care fraud and abuse laws and regulations, which prohibit
certain types of payments and referrals as well as false claims
made in connection with health benefit programs;
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privacy and confidentiality laws and regulations, including
those under HIPAA;
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ERISA and related regulations, which regulate many health care
plans;
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potential regulation of the PBM industry by the U.S. Food
and Drug Administration;
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the Medicare prescription drug coverage law and Centers for
Medicare and Medicaid Services (CMS) regulations;
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consumer protection and unfair trade practice laws and
regulations;
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various licensure laws, such as state insurance, managed care
and third party administrator licensure laws;
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pharmacy laws and regulations;
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antitrust lawsuits challenging PBM pricing practices;
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state legislation regulating PBMs or imposing fiduciary status
on PBMs;
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drug pricing legislation, including most favored
nation pricing and unitary pricing legislation;
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other Medicare and Medicaid reimbursement regulations;
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pending legislation regarding importation of drug products into
the United States;
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legislation imposing benefit plan design restrictions, which
limit how our customers can design their drug benefit plans;
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network pharmacy access laws, including any willing
provider and due process legislation, that
affect aspects of our pharmacy network contracts; and
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formulary development and disclosure laws
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If we fail to comply with existing or future applicable laws and
regulations, we could suffer civil or criminal penalties. We
devote significant operational and managerial resources to
comply with these laws and regulations. Although we have not
been notified, and are not otherwise aware of any material claim
or non-compliance, there can be no assurance that we are in
compliance with all existing legal requirements material to our
business. Different interpretations and enforcement policies of
these laws and regulations could subject our current practices
to allegations of impropriety or illegality, or could require us
to make significant changes to our operations. In addition, we
cannot predict the impact of future legislation and regulatory
changes on our business or assure you that we will be able to
obtain or maintain the regulatory approvals required to operate
our business.
We cannot predict whether or when future healthcare reform
initiatives by U.S. federal or state, Canadian or other
foreign regulatory authorities will be proposed, enacted or
implemented or what impact those initiatives may have on our
business, financial condition or results of operations.
Additionally, government regulation could alter the clinical
workflow of physicians, hospitals, and other healthcare
participants, thereby limiting the utility of our products and
services to existing and potential customers and resulting in a
negative impact on market acceptance of our products and
services.
Due to
the complex laws and regulations governing the Medicare program
in which we participate, our recorded estimates may materially
change in the future, and our failure to fully comply with such
laws and regulations may adversely impact our business and
financial results.
The Medicare Part D program in which we participate is
based upon extremely complex laws and regulations that are
subject to interpretation. As a result, there is at least a
reasonable possibility that our recorded estimates of
receivables from CMS may change by a material amount in the near
term. Additionally, our noncompliance with such laws and
regulations could result in fines, penalties and exclusion from
the Medicare program.
Although we are not aware of any allegations of noncompliance
that could have a material adverse effect on our consolidated
financial statements, we cannot assure you that any instances of
noncompliance will not have a material adverse effect on our
consolidated financial statements or results of operations.
25
Uncertainty
regarding the impact of Medicare Part D may adversely
impact our business and financial results.
The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 created a new, voluntary prescription drug benefit
for Medicare beneficiaries entitled to Medicare benefits under
Part A or enrolled in Medicare Part B effective
January 1, 2006. We currently participate in the
administration of the Medicare drug benefit: (i) through
the provision of PBM services to our health plan customers and
other customers that have qualified as a prescription drug plan
(PDP) or a Medicare Advantage plan,
(ii) by assisting employers, unions and other health plan
customers that qualify for the retiree drug subsidy available
under Medicare Part D by collecting and submitting
eligibility
and/or drug
cost data to CMS for them in order to obtain the subsidy, and
(iii) by operating as a CMS approved Employer/Union Group
Waiver PDP contract with CMS (S8841). Our existing PBM business
could be adversely affected if our customers decide to
discontinue providing prescription drug benefits altogether to
their Medicare-eligible members. We are not yet able to assess
the impact that Medicare Part D will have on our
customers decisions to continue to offer a prescription
drug benefit to their Medicare-eligible members.
In addition, as an approved PDP sponsor, we are a direct
contractor to the federal government and subject to the rules,
regulations, and enforcement authority of the federal government
over its contractors. In addition, under regulations established
by CMS governing participation in the Medicare Part D
program, our subsidiary, NMHC Group Solutions Insurance, Inc.
(GSI), a former risk-bearing entity regulated under
state insurance laws, must obtain licensure as a domestic
insurance company. GSI has been approved to operate as a
risk-bearing entity in its domicile state, Delaware, as required
by CMS, and has obtained approval from all but two state
insurance departments that it is not required to maintain a risk
bearing license in such states. We did not continue to provide
our PDP to individual Medicare Part D enrolees in 2009 and
CMS has acknowledged our intent to provide the PDP Medicare
benefits solely to employer groups. In addition, as of
January 1, 2008, we only provide non-risk bearing Medicare
benefits to employer groups that will reimburse us directly for
any prescription drug costs. We do not intend at this time to
offer our PDP to employer groups in instances where we could be
subject to risk.
If our
security is breached, outsiders could gain access to information
we are required to keep confidential, and we could be subject to
liability and customers could be deterred from using our
services.
Our business relies on using the Internet to transmit
confidential information. However, the difficulty of securely
transmitting confidential information over the Internet has been
a significant barrier to engaging in sensitive communications
over the Internet, and is an important concern of our existing
and prospective customers. Publicized compromise of Internet
security, including third-party misappropriation of patient
information or other data, or a perception of any such security
breach, may deter people from using the Internet for these
purposes, which would result in an unwillingness to use our
systems to conduct transactions that involve transmitting
confidential healthcare information. Further, if we are unable
to protect the physical and electronic security and privacy of
our databases and transactions, we could be subject to potential
liability and regulatory action, our reputation and customer
relationships would be harmed, and our business, operations, and
financial results may be materially adversely affected.
We are
highly dependent on senior management and key employees.
Competition for our employees is intense, and we may not be able
to attract and retain the highly skilled employees that we need
to support our business.
Our success largely depends on the skills, experience, and
continued efforts of our management and other key personnel, and
on our ability to continue to attract, motivate, and retain
highly qualified individuals. Competition for senior management
and other key personnel is intense, and the pool of suitable
candidates is limited. If we lose the services of one or more of
our key employees, we may not be able to find a suitable
replacement and our business, financial condition and results of
operations could be materially adversely affected.
Our ability to provide high-quality services to our customers
also depends in large part upon the experience and expertise of
our employees generally. We must attract and retain highly
qualified personnel with a deep understanding of the healthcare
and HCIT industries. We compete with a number of companies for
experienced personnel and many of these companies, including
customers and competitors, have greater resources than we have
and may be able to offer more attractive terms of employment. In
addition, we invest significant time and expense in training our
employees, which increases their value to customers and
competitors who may seek to recruit them and increases the cost
of replacing them. If we are unable to attract or retain
qualified employees, the quality of our services could diminish
and we may be unable to meet our business and financial goals.
Actual
financial results may vary from our publicly disclosed
forecasts.
Our actual financial results may vary from our publicly
disclosed forecasts and these variations could be material and
adverse. We periodically provide guidance on future financial
results. These forecasts reflect numerous assumptions concerning
our expected performance, as well as other factors, which are
beyond our control and which may not turn out to be correct.
Although we believe that the assumptions underlying our guidance
and other forward-looking statements were and are
26
reasonable when we make such statements, actual results could be
materially different. Our financial results are subject to
numerous risks and uncertainties, including those identified
throughout these risk factors. If our actual results vary from
our announced guidance, the price of our common shares may
decline, and such a decline could be substantial. We do not
undertake to update any guidance or other forward-looking
information we may provide.
We may
experience fluctuations in our financial results because of
timing issues associated with our revenue recognition
policy.
A portion of our revenue is derived from system sales, where we
recognize revenue upon execution of a license agreement and
shipment of the software, as long as all vendor obligations have
been satisfied and collection of license fees is probable. As
the costs associated with system sales are minimal, revenue and
income may vary significantly based on the timing of recognition
of revenue. Given that revenue from certain projects is
recognized using the
percentage-of-completion
method, our revenue from these projects can vary substantially
on a monthly and quarterly basis. In addition, certain contracts
may contain undelivered elements or multiple deliverables, which
may cause the applicable revenue to be deferred over multiple
periods. Accordingly, the timing and delivery requirements of
customers orders may have a material effect on our
operations and financial results during any reporting period. In
addition, to the extent that the costs required to complete a
fixed price contract exceed the price quoted by us, our results
may be materially adversely affected.
If we
are required to write off goodwill or other intangible assets,
our financial position and results of operations would be
adversely affected.
We have goodwill and other intangible assets of approximately
$179.4 million as of December 31, 2009. We are
required to periodically evaluate goodwill and other intangible
assets for impairment. In the future we may take charges against
earnings resulting from impairment. Any determination requiring
the write off of a significant portion of our goodwill or other
intangible assets could adversely affect our results of
operations and our financial condition.
Our
tax filings are subject to possible review, audit and/or
reassessment and we may be liable for additional taxes, interest
or penalties if the final tax outcome is different from those
provided for in our filings.
Although our primary operations are in the United States, we
also have operations in Canada. Our income tax liability is
therefore a consolidation of the tax liabilities we expect to
have in various locations. Our tax rate is affected by the
profitability of our operations in all locations, tax rates and
systems of the countries in which we operate, our tax policies
and the impact of certain tax planning strategies which we have
implemented or may implement. To determine our worldwide tax
liability, we make estimates of possible tax liabilities. Our
tax filings, positions and strategies are subject to review
under local or international tax audit and the outcomes of such
reviews are uncertain. In addition, these audits generally take
place years after the period in which the tax provision in
question was provided and it may take a substantial amount of
time before the final outcome of any audit is known. Future
final tax outcomes could also differ materially from the amounts
recorded in our financial statements. These differences could
have a material effect on our financial position and our net
income in the period such determination is made.
Changes
in our accounting estimates and assumptions could negatively
affect our financial position and results of
operations.
We prepare our financial statements in accordance with
U.S. GAAP. These accounting principles require us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, and the disclosure of contingent assets
and liabilities at the date of our financial statements. We are
also required to make certain judgments that affect the reported
amounts of revenues and expenses during each reporting period.
We periodically evaluate our estimates and assumptions including
those relating to revenue recognition, rebates, asset
impairments, valuation of allowance for doubtful accounts,
contingencies, and income taxes. We base our estimates on
historical experience and various assumptions that we believe to
be reasonable based on specific circumstances. Actual results
could differ from these estimates, and changes in accounting
standards could have an adverse impact on our future financial
position and results of operations.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None
The Companys principal business operations are conducted
from a 93,908 square foot leased office facility located at
2441 Warrenville Road, Suite 610 in Lisle, Illinois
(outside of Chicago). This lease expires in January 2018.
27
The Companys Specialty Service operation which supports
the delivery of certain medications to individuals with chronic
or genetic diseases and disorders is located in Maine, and its
Mail Order operation is located in Florida.
Besides the Lisle, Specialty Service and Mail Order facilities,
the Company maintains operations in several other leased
locations in the U.S. and Canada, including operations in
Ontario (Milton), Arizona, Hawaii, Georgia, Arkansas, and
Pennsylvania.
The Company believes these properties are adequate for its
current operations.
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ITEM 3.
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LEGAL
PROCEEDINGS
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From time to time we become subject to legal proceedings and
claims in the ordinary course of business. Such claims, even if
without merit, could result in the significant expenditure of
our financial and managerial resources. It is possible that
future results of operations or cash flows for any particular
quarterly or annual period could be materially affected by an
unfavorable resolution of such a claim. We are not aware of any
legal proceedings or claims that we believe will, individually
or in the aggregate, materially harm our business, results of
operations, financial condition or cash flows.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information
The Companys common stock is traded on the Toronto Stock
Exchange (TSX) and NASDAQ Global Market
(NASDAQ) under the symbol SXC and
SXCI, respectively. Amounts related to trading on
the TSX are provided in Canadian dollars. The following table
sets forth for each period indicated the high and low sales
prices for the Companys common stock on the TSX:
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High
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Low
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2009
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First quarter
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C$
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27.85
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C$
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18.48
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Second quarter
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C$
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30.99
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C$
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21.30
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Third quarter
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C$
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52.50
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C$
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28.50
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Fourth quarter
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C$
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59.37
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C$
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45.61
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2008
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First quarter
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C$
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16.41
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C$
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9.89
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Second quarter
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C$
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17.75
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C$
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11.96
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Third quarter
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C$
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16.79
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C$
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13.17
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Fourth quarter
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C$
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23.11
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C$
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12.60
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The Companys common stock began trading on the NASDAQ on
June 13, 2006. The following table sets forth for each
period indicated the high and low prices for the Companys
common stock on the NASDAQ:
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High
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Low
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2009
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First quarter
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$
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22.00
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$
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15.61
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Second quarter
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$
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26.89
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$
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17.69
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Third quarter
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$
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48.85
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$
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24.51
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Fourth quarter
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$
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56.16
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$
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42.53
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2008
|
|
|
|
|
|
|
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|
First quarter
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|
$
|
16.00
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|
|
$
|
9.85
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Second quarter
|
|
$
|
17.35
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|
|
$
|
11.75
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Third quarter
|
|
$
|
16.96
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|
|
$
|
11.54
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Fourth quarter
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$
|
18.84
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|
$
|
10.40
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28
On March 1, 2010, the closing sale price of the common
stock, as reported by the TSX and NASDAQ was Cdn.$52.96 and
$50.76 per share, respectively. As of March 1, 2010, there
were approximately 9,939 holders of the Companys common
stock either of record or in street name.
Dividend
Policy
The Company has never paid a dividend on its common stock and
has no present intention to commence the payment of cash
dividends. It is possible that the Board of Directors could
determine in the future, based on the Companys financial
and other relevant circumstances at that time, to pay dividends.
Stock
Performance Graphs
The following graph shows a four-year comparison of cumulative
returns for the Companys stock, as compared to the Nasdaq
Composite Index and the S&P Healthcare index, as of
December 31 of each year indicated. The graph assumes an initial
investment of $100 was made on June 13, 2006 (the date of
the U.S. initial public offering) and assumes the
reinvestment of any dividends.
Cumulative
Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/13/2006
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
SXC
|
|
$
|
100.00
|
|
|
$
|
143.46
|
|
|
$
|
103.13
|
|
|
$
|
132.79
|
|
|
$
|
383.71
|
|
Nasdaq Composite
|
|
$
|
100.00
|
|
|
$
|
116.54
|
|
|
$
|
127.98
|
|
|
$
|
76.09
|
|
|
$
|
109.49
|
|
S&P Healthcare index
|
|
$
|
100.00
|
|
|
$
|
111.91
|
|
|
$
|
117.94
|
|
|
$
|
89.07
|
|
|
$
|
104.27
|
|
29
The following graph shows a five-year comparison of cumulative
returns for the Companys stock, as compared to the TSX
Composite Index and the S&P/TSX Capped Health Care index,
as of December 31 of each year indicated. The graph assumes an
initial investment of $100 was made on January 3, 2005 and
assumes the reinvestment of any dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
1/1/2005
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
SXC
|
|
$100.00
|
|
$192.31
|
|
$409.79
|
|
$254.55
|
|
$397.55
|
|
$1,001.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TSX Composite
|
|
$100.00
|
|
$121.91
|
|
$139.60
|
|
$149.60
|
|
$97.20
|
|
$127.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P/TSX Capped Health Care Index
|
|
$100.00
|
|
$95.95
|
|
$96.97
|
|
$72.48
|
|
$51.20
|
|
$65.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The information in this Stock Performance Graphs
section shall not be deemed to be soliciting
material or to be filed with the Securities
and Exchange Commission or subject to Regulation 14A or
14C, or to the liabilities of Section 18 of the Securities
Exchange Act of 1934.
Recent
Sales of Unregistered Securities
Not applicable.
30
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The following selected consolidated financial data as at
December 31, 2009 and 2008 and for each of the years in the
three-year period ended December 31, 2009 has been derived
from the audited consolidated financial statements of the
Company prepared in accordance with U.S. GAAP contained
elsewhere in this Annual Report on
Form 10-K.
The selected consolidated financial data as at December 31,
2007 and for the year ended December 31, 2006 has been
derived from the audited financial statements of the Company
prepared in accordance with U.S. GAAP contained in the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008. The selected
consolidated financial data as at December 31, 2006 and for
the year ended December 31, 2005 has been derived from the
audited financial statements of the Company prepared in
accordance with U.S. GAAP contained in the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007. The selected
consolidated financial data as at December 31, 2005 has
been constructed from the fiscal 2006 audited financial
statements of the Company prepared in accordance with Canadian
GAAP and reconciled to U.S. GAAP. Selected consolidated
financial data for fiscal 2009, 2008, 2007, 2006, and 2005 are
all in accordance with U.S. GAAP. The selected consolidated
financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the audited
consolidated financial statements, including the notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
2009(6)
|
|
2008(5)
|
|
2007(4)
|
|
2006(2)(3)
|
|
2005(1)
|
|
|
(Dollars in thousands except per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,438,634
|
|
|
$
|
862,939
|
|
|
$
|
93,171
|
|
|
$
|
80,923
|
|
|
$
|
54,123
|
|
Net income
|
|
$
|
46,061
|
|
|
$
|
15,113
|
|
|
$
|
13,146
|
|
|
$
|
13,647
|
|
|
$
|
7,722
|
|
Earnings per share, basic
|
|
$
|
1.77
|
|
|
$
|
0.66
|
|
|
$
|
0.63
|
|
|
$
|
0.73
|
|
|
$
|
0.52
|
|
Earnings per share, diluted
|
|
$
|
1.72
|
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
|
$
|
0.69
|
|
|
$
|
0.50
|
|
Weighed average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,004,204
|
|
|
|
22,978,466
|
|
|
|
20,755,372
|
|
|
|
18,710,370
|
|
|
|
14,805,857
|
|
Diluted
|
|
|
26,797,373
|
|
|
|
23,413,011
|
|
|
|
21,562,754
|
|
|
|
19,700,139
|
|
|
|
15,437,138
|
|
Ratio of earnings to fixed charges(7)
|
|
|
9.98
|
|
|
|
4.43
|
|
|
|
21.31
|
|
|
|
7.41
|
|
|
|
3.97
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
662,080
|
|
|
$
|
428,343
|
|
|
$
|
159,479
|
|
|
$
|
131,415
|
|
|
$
|
81,304
|
|
Long-term debt
|
|
$
|
|
|
|
$
|
47,640
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,103
|
|
Total stockholders equity
|
|
$
|
458,494
|
|
|
$
|
194,163
|
|
|
$
|
132,457
|
|
|
$
|
111,490
|
|
|
$
|
59,471
|
|
Notes:
|
|
|
1) |
|
On November 29, 2005, the Company completed a public
offering in Canada of 2,250,000 common shares at a price of Cdn
$10.00 per common share. The gross proceeds of the offering were
$19.2 million (Cdn $22.5 million). Share issuance
costs were approximately $1.3 million. |
|
2) |
|
On June 22, 2006, the Company completed a public offering
in Canada and the U.S. of 3,200,000 common shares at a price of
Cdn $13.50 per common share. The gross proceeds of the offering
were $38.7 million (Cdn $43.2 million), excluding
underwriting fees and issuance costs of $2.6 million and
$1.4 million, respectively. |
|
3) |
|
As of January 1, 2004, the Company adopted the Financial
Accounting Standards Boards (FASB) fair value
method of accounting for stock-based compensation. In addition,
effective January 1, 2006, the Company was required to
apply the FASBs revised provisions of accounting for
stock-based compensation. Both standards were adopted using the
modified-prospective transition method. |
|
4) |
|
Effective January 1, 2007, the Company adopted the
FASBs guidance for uncertainty in income taxes and, as a
result, the Company recognized an adjustment in the liability
for unrecognized income tax benefits of $0.2 million and a
corresponding reduction in the beginning balance of retained
earnings. |
|
5) |
|
Effective April 30, 2008, the Company, through a
wholly-owned subsidiary, acquired all of the outstanding shares
of National Medical Health Card Systems, Inc.
(NMHC), based in Port Washington, New York, which
provides pharmacy benefit management services. The results of
operations of the acquired business are included from the date
of acquisition. The Company issued 2,785,960 shares of its
common stock in connection with the acquisition. |
|
6) |
|
On September 23, 2009, the Company completed a public
offering in Canada and the U.S of 5,175,000 of its common shares
at a price of $41.50 per share. The gross proceeds to the
Company from the offering were $214.8 million. Share
issuance costs were approximately $11.7 million for
underwriting discounts and commissions, and related professional
services. |
|
7) |
|
See Exhibit 12.1 to this report for the computation of the
ratios of earnings to fixed charges. |
31
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This Managements Discussion and Analysis
(MD&A) of SXC Health Solutions Corp. (the
Company) should be read in conjunction with the
audited consolidated financial statements. This MD&A also
contains forward looking statements and should be read in
conjunction with the risk factors described in Item 1A
Risk Factors.
Certain information in this MD&A, in various filings
with regulators, in reports to shareholders and in other
communications is forward-looking within the meaning of certain
securities laws and is subject to important risks, uncertainties
and assumptions. This forward-looking information includes,
amongst others, information with respect to the Companys
objectives and the strategies to achieve those objectives, as
well as information with respect to the Companys beliefs,
plans, expectations, anticipations, estimates and intentions.
There are a number of important factors that could cause actual
results to differ materially from those indicated by such
forward-looking statements. Such factors include, but may not be
limited to, the ability of the Company to adequately address:
the risks associated with further market acceptance of the
Companys products and services; its ability to manage its
growth effectively; its reliance on an ability to retain key
customers and key personnel; industry conditions such as
consolidation of customers, competitors and acquisition targets;
the Companys ability to acquire a company, manage
integration and potential dilution associated therewith; the
impact of technology changes on its products/service offerings,
including impact on the intellectual property rights of others;
the effects of regulatory and legislative changes in the
healthcare industry; and the sufficiency and fluctuations of its
liquidity and capital needs.
When relying on forward-looking information to make
decisions, investors and others should carefully consider the
foregoing factors and other uncertainties and potential events.
In making the forward-looking statements contained in this
MD&A, the Company does not assume any significant
acquisitions, dispositions or one-time items. It does assume,
however, the renewal of certain customer contracts. Every year,
the Company has major customer contracts that come up for
renewal. In addition, the Company also assumes new customer
contracts. In this regard, the Company is pursuing large
opportunities that present a very long and complex sales cycle
which substantially affects its forecasting abilities. The
Company has assumed certain timing for the realization of these
opportunities which it thinks is reasonable but which may not be
achieved. Furthermore, the pursuit of these larger opportunities
does not ensure a linear progression of revenue and earnings
since they may involve significant up-front costs followed by
renewals and cancellations of existing contracts. The Company
has assumed certain revenues which may not be realized. The
Company has also assumed that the material factors referred to
in the previous paragraph will not cause such forward-looking
information to differ materially from actual results or events.
The foregoing list of factors is not exhaustive and is subject
to change and there can be no assurance that such assumptions
will reflect the actual outcome of such items or factors. For
additional information with respect to certain of these and
other factors, refer to the risks and uncertainties section of
Item 1A of this Annual Report on
Form 10-K.
THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A
REPRESENTS THE COMPANYS CURRENT EXPECTATIONS AND,
ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY
EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR
REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF
NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED
BY APPLICABLE LAW.
All figures are in U.S. dollars unless otherwise
stated.
Overview
PBM
Business
The Company provides comprehensive PBM services to customers,
which include managed care organizations, local governments,
unions, corporations, HMOs, employers, workers
compensation plans, third party health care plan administrators,
and federal and state government programs through its network of
licensed pharmacies throughout the United States. The PBM
services include electronic
point-of-sale
pharmacy claims management, retail pharmacy network management,
mail service pharmacy, specialty pharmacy, Medicare Part D
services, benefit design consultation, preferred drug management
programs, drug review and analysis, consulting services, data
access and reporting and information analysis. The Company owns
a mail service pharmacy (Mail Service) and a
specialty service pharmacy (Specialty Service). In
addition, the Company is a national provider of drug benefits to
its customers under the federal governments Medicare
Part D program.
Revenue primarily consists of sales of prescription drugs,
together with any associated administrative fees, to customers
and participants, either through the Companys nationwide
network of pharmacies, Mail Service pharmacy or Specialty
Service pharmacy. Revenue related to the sales of prescription
drugs is recognized when the claims are adjudicated and the
prescription drugs are shipped. Claims are adjudicated at the
point-of-sale
using an on-line processing system.
32
Under the Companys customer contracts, the pharmacy is
solely obligated to collect the co-payments from the
participants. As such, the Company does not include participant
co-payments to retail pharmacies in revenue or cost of revenue.
If these amounts were included in revenue and cost of revenue,
operating income and net income would not have been affected.
The Company evaluates customer contracts to determine whether it
acts as a principal or as an agent in the fulfillment of
prescriptions through its retail pharmacy network. The Company
acts as a principal in most of its transactions with customers
and revenue is recognized at the prescription price (ingredient
cost plus dispensing fee) negotiated with customers, plus an
administrative fee, if applicable (gross reporting).
Gross reporting is appropriate when the Company (i) has
separate contractual relationships with customers and with
pharmacies, (ii) is responsible to validate and manage a
claim through the claims adjudication process,
(iii) commits to set prescription prices for the pharmacy,
including instructing the pharmacy as to how that price is to be
settled (co-payment requirements), (iv) manages the overall
prescription drug relationship with the patients, who are
participants of customers plans, and (v) has credit
risk for the price due from the customer. In instances where the
Company merely administers a customers network pharmacy
contract to which the Company is not a party and under which the
Company does not assume pricing risk and credit risk, among
other factors, the Company only records an administrative fee as
revenue. For these customers, the Company earns an
administrative fee for collecting payments from the customer and
remitting the corresponding amount to the pharmacies in the
customers network. In these transactions, the Company acts
as an agent for the customer. As the Company is not the
principal in these transactions, the drug ingredient cost is not
included in revenue or in cost of revenue (net
reporting). As such, there is no impact to gross profit
based upon whether gross or net reporting is used.
HCIT
Business
The Company is also a leading provider of HCIT solutions and
services to providers, payors, and other participants in the
pharmaceutical supply chain in North America. The Companys
product offerings include a wide range of software products for
managing prescription drug programs and for drug prescribing and
dispensing. The Companys solutions are available on a
license basis with on-going maintenance and support or on a
transaction fee basis using an Application Service Provider
(ASP) model. The Companys payor customers
include managed care organizations, Blue Cross Blue Shield
organizations, government agencies, employers and intermediaries
such as pharmacy benefit managers. The solutions offered by the
Companys services assist both payors and providers in
managing the complexity and reducing the cost of their
prescription drug programs and dispensing activities.
Profitability of the HCIT business depends primarily on revenue
derived from transaction processing services, software license
sales, hardware sales, maintenance, and professional services.
Recurring revenue remains a cornerstone of the Companys
business model and consists of transaction processing services
and maintenance. Growth in revenue from recurring sources has
been driven primarily by growth in the Companys
transaction processing business in the form of claims processing
for its payor customers and switching services for its provider
customers. Through the Companys transaction processing
business, where the Company is generally paid based on the
volume of transactions processed, the Company continues to
benefit from the growth in pharmaceutical drug use in the United
States. The Company believes that aging demographics and
increased use of prescription drugs will continue to benefit the
transaction processing business. In addition to benefiting from
this industry growth, the Company continues to focus on
increasing recurring revenue in the transaction processing area
by adding new transaction processing customers to its existing
customer base. The recognition of revenue depends on various
factors including the type of service provided, contract
parameters, and any undelivered elements.
Operating
Expenses
The Companys operating expenses primarily consist of cost
of revenue, product development costs, selling, general and
administrative (SG&A) costs, depreciation, and
amortization. Cost of revenue includes the costs of drugs
dispensed as well as costs related to the products and services
provided to customers and costs associated with the operation
and maintenance of the transaction processing centers. These
costs include salaries and related expenses for professional
services personnel, transaction processing centers
personnel, customer support personnel, any hardware or equipment
sold to customers and depreciation expense related to data
center operations. Product development costs consist of staffing
expenses to produce enhancements and new initiatives. SG&A
costs relate to selling expenses, commissions, marketing,
network administration and administrative costs, including
legal, accounting, investor relations and corporate development
costs. Depreciation expense relates to the depreciation of
property and equipment used by the Company. Amortization expense
relates to definite-lived intangible assets from business
acquisitions.
Industry
Overview
The PBM industry is intensely competitive, generally resulting
in continuous pressure on gross profit as a percentage of total
revenue. In recent years, industry consolidation and dramatic
growth in managed healthcare have led to increasingly
33
aggressive pricing of PBM services. Given the pressure on all
parties to reduce healthcare costs, the Company expects this
competitive environment to continue for the foreseeable future.
In order to remain competitive, the Company looks to continue to
drive purchasing efficiencies of pharmaceuticals to improve
operating margins, and target the acquisition of other
businesses to achieve its strategy of expanding its product
offerings and customer base. The Company also looks to retain
and expand its customer base by improving the quality of service
provided by enhancing its solutions and lowering the total drug
spend for customers.
The HCIT industry is increasingly competitive as technologies
continue to advance and new products continue to emerge. This
rapidly developing industry requires the Company to perpetually
improve its offerings to meet customers rising product
standards. Recent governmental stimulus initiatives to improve
the countrys electronic health records should assist the
growth of the industry, but it may also increase competition as
more players enter the expanding market.
The complicated environment in which the Company operates
presents it with opportunities, challenges, and risks. The
Companys clients are paramount to its success; the
retention of existing and winning of new clients and members
poses the greatest opportunity, and the loss thereof represents
an ongoing risk. The preservation of the Companys
relationships with pharmaceutical manufacturers and retail
pharmacies is very important to the execution of its business
strategies. The Companys future success will hinge on its
ability to drive mail volume and increase generic dispensing
rates in light of the significant brand-name drug patent
expirations expected to occur over the next several years. The
Companys ability to continue to provide innovative and
competitive clinical and other services to clients and patients,
including the Companys active participation in the
Medicare Part D benefit and the rapidly growing specialty
pharmacy industry, also plays an important part in the
Companys future success.
The frequency with which the Companys customer contracts
come up for renewal, and the potential for one of the
Companys larger customers to terminate, or elect not to
renew, its existing contract with the Company, create the risk
that the Companys results of operations may be volatile.
The Companys customer contracts generally do not have
terms longer than three years and, in some cases, are terminable
by the customer on relatively short notice. The Companys
larger customers generally seek bids from other PBM providers in
advance of the expiration of their contracts. If existing
customers elect not to renew their contracts with the Company at
the expiration of the current terms of those contracts, and in
particular if one of the Companys largest customers elects
not to renew, the Companys recurring revenue base will be
reduced and results of operations will be adversely affected.
The Company operates in a competitive environment where clients
and other payors seek to control the growth in the cost of
providing prescription drug benefits. The Companys
business model is designed to reduce the level of drug cost. The
Company helps manage drug cost primarily by its programs
designed to maximize the substitution of expensive brand drugs
with equivalent but much lower cost generic drugs, obtaining
competitive discounts from suppliers, securing rebates from
pharmaceutical manufacturers and third party rebate
administrators, securing discounts from retail pharmacies,
applying the Companys sophisticated clinical programs, and
efficiently administering prescriptions dispensed through the
Companys Mail Service and Specialty Service pharmacies.
Various aspects of the Companys business are governed by
federal and state laws and regulations. Because sanctions may be
imposed for violations of these laws, compliance is a
significant operational requirement. The Company believes it is
in substantial compliance with all existing legal requirements
material to the operation of its business. There are, however,
significant uncertainties involving the application of many of
these legal requirements to its business. In addition, there are
numerous proposed health care laws and regulations at the
federal and state levels, many of which could adversely affect
the Companys business, results of operations and financial
condition. The Company is unable to predict what additional
federal or state legislation or regulatory initiatives may be
enacted in the future relating to its business or the health
care industry in general, or what effect any such legislation or
regulations might have on it. The Company also cannot provide
any assurance that federal or state governments will not impose
additional restrictions or adopt interpretations of existing
laws or regulations that could have a material adverse effect on
its business or financial performance.
Competitive
Strengths
The Company has demonstrated its ability to serve a broad range
of clients from large managed care organizations and state
governments to employer groups with fewer than a thousand
members. The Company believes its principal competitive
strengths are:
Flexible, customized and independent
services: The Company believes a key
differentiator between itself and its competitors is not only
the Companys ability to provide innovative PBM services,
but also to deliver these services on an à la carte basis.
The informedRx suite offers the flexibility of broad product
choice along the entire PBM continuum, enabling enhanced
customer control, solutions tailored to the Companys
customers specific requirements, and flexible pricing. The
market for the Companys products is divided between large
customers that have the sophisticated technology
34
infrastructure and staff required to operate a
24-hour data
center and other customers that are not able or willing to
operate these sophisticated systems.
The Companys business model allows its large customers to
license the Companys products and operate the
Companys systems themselves (with or without taking
advantage of the Companys significant customization,
consulting and systems implementation services) and allows its
other customers to utilize the Companys systems
capabilities on a
fee-per-transaction
or subscription basis through ASP processing from the
Companys data center.
Leading technology and platform: The
Companys technology is robust, scaleable, and web-enabled.
The Companys payor offerings efficiently supported over
400 million transactions in 2009. The platform is able to
instantly cross-check multiple processes, such as reviewing
claim eligibility, adverse drug reaction and properly
calculating member, pharmacy and payor payments. The
Companys technology is built on flexible, database-driven
rule sets and broad functionality applicable for most any type
of business. The Company believes it has one of the most
comprehensive claims processing platforms in the market.
The Companys technology platform allows it to provide more
comprehensive PBM services through informedRx by offering
customers a selection of services to choose from to meet their
unique needs versus requiring them to accept a one-size-fits-all
solution. The Company believes this à la carte offering is
a key differentiator from its competitors.
Measurable cost savings for customers: The
Company provides its customers with increased control over
prescription drug costs and drug benefit programs. The
Companys pricing model and flexible product offerings are
designed to deliver measurable cost savings to the
Companys customers. The Company believes its pricing model
is a key differentiator from its competitors for the
Companys customers who want to gain control of their
prescription drug costs. For example, the Companys
pharmacy network contracts and manufacturer rebate agreements
are made available by the Company to each customer. For
customers who select the Companys pharmacy network and
manufacturer rebate services on a fixed fee per transaction
basis, there is clarity to the rebates and other fees payable to
the client. The Company believes that its pricing model together
with the flexibility to select from a broad range of
customizable services helps the customers realize measurable
results and cost savings.
Selected
financial highlights for the year ended December 31, 2009
compared to the same period in 2008
Effective April 30, 2008, the Company completed its
acquisition of National Medical Health Card Systems, Inc.
(NMHC). The acquisition has yielded benefits for
health plan sponsors through more effective cost-management
solutions and innovative programs. The Company believes that it
has operated the combined companies more efficiently than either
company could have operated on its own. The acquisition has
enabled the combined companies to achieve significant synergies
from purchasing scale and operating efficiencies. Purchasing
synergies are largely comprised of purchase discounts from
prescription drug suppliers, rebates obtained from generic and
brand name manufacturers or third party rebate administrators,
and cost efficiencies obtained from retail pharmacy networks.
Operating synergies include decreases in overhead expense, as
well as increases in productivity and efficiencies by
eliminating excess capacity. In the long-term, the Company
expects that the acquisition will continue to create incremental
revenue opportunities. These opportunities are expected to be
derived from a variety of new programs and benefit designs that
leverage client relationships.
Effective with the acquisition, the Company is comprised of two
operating segments: PBM and HCIT.
Selected financial highlights for the years ended
December 31, 2009 and 2008 are noted below:
|
|
|
|
|
Total revenue in 2009 was $1,438.6 million as compared to
$862.9 million in 2008. The increase is largely
attributable to the acquisition of NMHC and the inclusion of a
full twelve months of revenue from the Companys PBM
segment for the year ended December 31, 2009 as compared to
only eight months for the same period last year, complemented by
new customer additions, and additional services provided to
existing customers, during 2009.
|
|
|
|
The Company reported net income of $46.1 million, or $1.72
per share (fully-diluted), for the year ended December 31,
2009 compared to $15.1 million, or $0.65 per share
(fully-diluted), for the same period in 2008. Net income is
higher for the year ended December 31, 2009 as compared to
the same period in 2008, due to higher gross profit as a result
of having a full year of the PBM segment activity in 2009 versus
eight months in 2008, as well as additional gross margin
generated from new customers added during 2009. The higher gross
profit is partially offset by an increase in operating expenses
in 2009, mostly due to a full year of the PBM segment costs
compared to eight months in 2008, plus higher interest expense
and income taxes in 2009.
|
|
|
|
During the third quarter of 2009, the Company successfully
completed an equity offering for 5,175,000 shares of the
Companys common stock. The offering raised
$203.1 million in net proceeds for the Company.
|
35
|
|
|
|
|
The Company fully extinguished its long-term debt in the fourth
quarter of 2009 by paying the remaining principal outstanding.
The Company initially borrowed $48.0 million, and had an
unpaid principal balance of $47.6 million at the beginning
of 2009.
|
|
|
|
Strong operational results drove an increase in operating cash
flow of $44.8 million during the year ended
December 31, 2009 as compared to 2008, resulting in total
operating cash flow of $86.4 million in 2009.
|
Results
of Operations
Year
ended December 31, 2009 as compared to year ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
In thousands, except per share data
|
|
|
Revenue
|
|
$
|
1,438,634
|
|
|
$
|
862,939
|
|
Cost of revenue
|
|
|
1,252,034
|
|
|
|
747,453
|
|
Gross profit
|
|
|
186,600
|
|
|
|
115,486
|
|
Product development costs
|
|
|
11,951
|
|
|
|
10,105
|
|
SG&A
|
|
|
85,797
|
|
|
|
68,792
|
|
Depreciation of property and equipment
|
|
|
5,811
|
|
|
|
4,810
|
|
Amortization of intangible assets
|
|
|
9,724
|
|
|
|
9,365
|
|
Interest expense (income), net
|
|
|
4,643
|
|
|
|
1,391
|
|
Other expense (income), net
|
|
|
589
|
|
|
|
719
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
68,085
|
|
|
|
20,304
|
|
Income tax expense
|
|
|
22,024
|
|
|
|
5,191
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
46,061
|
|
|
$
|
15,113
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.72
|
|
|
$
|
0.65
|
|
Revenue
Revenue increased $575.7 million to $1,438.6 million
during 2009, primarily due to three main factors: 1) the
inclusion of a full year of operating results of NMHC in 2009 as
compared to eight months in the prior year, 2) the
conversion of existing HCIT customers to PBM customers through
new contracts and contract amendments as a result of the Company
taking advantage of cross-selling opportunities between the
Companys two segments (discussed in further detail in the
PBM segment analysis below) and 3) new customer additions
during 2009.
Cost
of Revenue
Cost of revenue increased $504.6 million to
$1,252.0 million during 2009, primarily due to the
increased revenues from the PBM segment driven by the factors
noted above. Cost of revenue in the PBM segment relates to the
actual cost of the prescription drugs sold. Cost of revenue for
the HCIT segment relates primarily to the cost of labor to
deliver the services provided.
Gross
Profit
Gross profit increased $71.1 million to $186.6 million
during 2009, primarily due to having a full year of PBM segment
gross profits versus eight months in the prior year, as well as
the launch of new contracts during the year.
Product
Development Costs
Product development costs for the year ended December 31,
2009 were $12.0 million compared to $10.1 million for
the year ended December 31, 2008. Product development costs
represent the cost of labor related to development activities
and include stock-based compensation cost of $0.2 million
and $0.3 million for the years ended December 31, 2009
and 2008, respectively. Product development continues to be a
key focus of the Company as it continues to pursue enhancements
of existing products, as well as the development of new
offerings, to support market expansion and to take advantage of
cross-selling opportunities with its existing customer base.
36
SG&A
Costs
SG&A costs for the year ended December 31, 2009 were
$85.8 million compared to $68.8 million for the year
ended December 31, 2008. SG&A costs consist primarily
of employee costs in addition to professional services costs,
facilities, and costs not related to cost of revenue. SG&A
costs also include stock-based compensation cost of
$2.8 million and $3.2 million for the years ended
December 31, 2009 and 2008, respectively. The increase in
SG&A costs is largely attributable to increased operating
expenses due to the acquisition of NMHC. The growth in the
overall customer base has also caused SG&A to increase due
to increased payroll, professional services, and facility costs
in order for the Company to properly service its customers. The
decrease in stock-based compensation is primarily attributable
to stock options that fully vested in 2008, partially offset by
new grants in 2008 as well as in 2009. The Company also incurred
additional stock-based compensation expense in 2008 related to
the assumption and grant of restricted stock units in connection
with the acquisition of NMHC.
Depreciation
Depreciation expense relates to property and equipment used in
all areas of the Company except for those depreciable assets
directly related to the generation of revenue, which is included
in the cost of revenue in the consolidated statements of
operations. Depreciation expense increased $1.0 million to
$5.8 million for the year ended December 31, 2009 from
$4.8 million for the same period in 2008, due primarily to
the expense related to assets associated with the acquisition of
NMHC, as well as purchases related to the Companys
expansion of its data centers and information technology
equipment to expand network capacity.
Amortization
Amortization expense for the year ended December 31, 2009
was $9.7 million compared to $9.4 million for the same
period in 2008. The increase is due to a full year of
amortization of intangible assets associated with the
acquisition of NMHC versus a partial year in 2008. Many of the
intangibles are amortized at a declining rate using a future
economic benefit model instead of a straight line methodology.
As such, amortization expense on all the Companys
intangible assets is expected to decrease to approximately
$7.9 million in 2010.
Interest
Income and Expense and Other Income and Expense
Interest income decreased $1.9 million for the year ended
December 31, 2009 as compared to the same period in 2008,
due primarily to lower interest rates in 2009. Interest expense
increased $1.3 million to $5.4 million for the year
ended December 31, 2009 compared to the same period in
2008, mostly due to a $1.1 million charge recorded to fully
amortize deferred financing costs. The amortization of the
deferred financing costs was accelerated due to the
extinguishment of the Companys long-term debt in the
fourth quarter of 2009. These increases were offset by lower
interest rates, and a lower outstanding principal balance of the
debt in 2009 versus 2008.
Interest expense for 2008 also includes a $0.4 million
expense for fair value adjustments related to the Companys
derivative instruments. The derivative instruments were
designated as cash flow hedges late in 2008, thus reducing the
fair value adjustments impact on interest expense in 2009. Hedge
accounting was in place for most of 200; however, a charge of
$0.6 million was recorded to other expense when hedge
accounting was discontinued in the fourth quarter of 2009. Hedge
accounting was discontinued due to the extinguishment of the
Companys long-term debt obligation. The derivative
instruments were hedging against future interest payments on the
long-term debt, and as the future interest payments were no
longer probable of occurring, hedge accounting could no longer
be applied. As such, changes in the fair value of the
instruments will be recorded as additional charges or income in
the statement of operations through the remainder of the
contract term, which ends in mid-2011. Since the fair value of
these instruments is based on variable market interest rates,
the Company cannot predict the impact to future periods;
however, the Company does not expect future impacts to be
material to its consolidated financial results.
Interest paid on the Companys term loan totaled
$1.8 million for the year ended December 31, 2009,
compared to $2.2 million in the same period in 2008. The
Company expects interest expense to be greatly reduced in 2010
due to the extinguishment of its long-term debt obligation in
the fourth quarter of 2009.
Income
Taxes
The Company recognized income tax expense of $22.0 million
for the year ended December 31, 2009, representing an
effective tax rate of 32.3%, compared to $5.2 million,
representing an effective tax rate of 25.6%, for the same period
in 2008. The effective tax rate increased during the year ended
December 31, 2009 compared to the same period in 2008,
primarily due to the diminishing impact of the income tax
benefit produced from the NMHC acquisition, as well as an
increase in taxable income and the difference in the proportion
of overall income among jurisdictions.
37
Net
Income
The Company reported net income of $46.1 million for the
year ended December 31, 2009, or $1.72 per share
(fully-diluted), compared to net income of $15.1 million,
or $0.65 per share (fully-diluted), for the year ended
December 31, 2008.
Segment
Analysis
Effective with the acquisition of NMHC, the Company manages its
business in two segments, PBM and HCIT, and evaluates segment
performance based on revenue and gross profit. Prior to the
acquisition of NMHC, the Companys business was comprised
of its HCIT business. Information about the Companys
business segments for the years ended December 31, 2009 and
2008 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBM
|
|
|
HCIT
|
|
|
Consolidated
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
$
|
1,335,961
|
|
|
$
|
771,840
|
|
|
$
|
102,673
|
|
|
$
|
91,099
|
|
|
$
|
1,438,634
|
|
|
$
|
862,939
|
|
Cost of revenue
|
|
|
1,197,757
|
|
|
|
702,333
|
|
|
|
54,277
|
|
|
|
45,120
|
|
|
|
1,252,034
|
|
|
|
747,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
138,204
|
|
|
$
|
69,507
|
|
|
$
|
48,396
|
|
|
$
|
45,979
|
|
|
$
|
186,600
|
|
|
$
|
115,486
|
|
Gross profit %
|
|
|
10.3
|
%
|
|
|
9.0
|
%
|
|
|
47.1
|
%
|
|
|
50.5
|
%
|
|
|
13.0
|
%
|
|
|
13.4
|
%
|
PBM
Revenue was $1,336.0 million for the year ended
December 31, 2009 as compared to $771.8 million for
the same period last year. Revenues increased during 2009 due to
the inclusion of a full year of revenue related to the NMHC
business as compared to only eight months for the same period in
2008. In addition, the terms of services for several HCIT
customers were changed to include, or add more, PBM services.
Revenues also increased due to the launch of new customer
contracts throughout 2009.
For the year ended December 31, 2009, there was
$13.3 million of co-payments included in revenue related to
prescriptions filled at the Companys Mail Service
pharmacy. For transactions at retail pharmacies, driven by the
terms of the customer contracts, the pharmacy is solely
obligated to collect the co-payments from the participants. The
Company does not assume liability for participant co-payments in
retail pharmacy transactions, and therefore does not include
participant co-payments in revenue or cost of revenue.
Cost of revenue was $1,197.8 million for the year ended
December 31, 2009, compared to $702.3 million for the
same period in 2008. Cost of revenue has increased in line with
the increase in PBM revenues, and is predominantly comprised of
the cost of prescription drugs. As a percentage of revenue, cost
of revenue was 89.7% and 91.0% for the years ended
December 31, 2009 and 2008, respectively. The decrease in
the cost of revenue as a percentage of revenue is due to the
improved purchasing efficiencies for prescription drugs realized
as a result of the increased size of the organization and the
increased use of lower cost generic drugs. The Company will
continue to seek opportunities for increased generic
prescription drug usage to help reduce overall prescription drug
costs to the Company and its customers.
Gross profit was $138.2 million for the year ended
December 31, 2009, compared to $69.5 million for the
same period in 2008. Gross profit increased primarily due to new
customers added during 2009, along with a full year of PBM
operations as compared to 8 months in 2008, both which
increased the volumes in the PBM segment. Gross profit margin
was 10.3% and 9.0% for the years ended December 31, 2009
and 2008, respectively, with the improvement driven by the
purchasing efficiencies realized from the NMHC acquisition.
38
HCIT
HCIT revenue is comprised of the following components for the
years ended December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
Transaction processing
|
|
$
|
61,225
|
|
|
$
|
52,773
|
|
Maintenance
|
|
|
18,427
|
|
|
|
16,397
|
|
|
|
|
|
|
|
|
|
|
Total recurring
|
|
|
79,652
|
|
|
|
69,170
|
|
Non-Recurring
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
15,336
|
|
|
|
13,480
|
|
System sales
|
|
|
7,685
|
|
|
|
8,449
|
|
|
|
|
|
|
|
|
|
|
Total non-recurring
|
|
|
23,021
|
|
|
|
21,929
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
102,673
|
|
|
$
|
91,099
|
|
|
|
|
|
|
|
|
|
|
Total HCIT revenue increased $11.6 million, or 12.7%, for
the year ended December 31, 2009 as compared to the same
period in 2008. Revenues increased mainly due to the rise in
transaction processing revenues that are dependent on
transaction volumes. On a percentage basis, recurring revenue
accounted for 77.6% and 75.9% of consolidated HCIT revenues for
the years ended December 31, 2009 and 2008, respectively.
Recurring revenue consists of transaction processing and
maintenance revenue.
Recurring Revenue: Recurring revenue increased
15.2% to $79.7 million for the year ended December 31,
2009 from $69.2 million for the same period in 2008.
Recurring revenue is subject to fluctuations caused by the
following: the number and timing of new customers, fluctuations
in transaction volumes, and the number of contract terminations
and renewals.
Transaction processing revenue, which consists of claims
processing, increased $8.5 million, or 16.0%, to
$61.2 million for the year ended December 31, 2009
compared to $52.8 million for the same period in 2008. The
increase in transaction processing revenue is due primarily to
the launch of new customer contracts during 2009, as well as
increased volumes on existing customers.
Maintenance revenue, which consists of maintenance contracts on
system sales, increased to $18.4 million for the year ended
December 31, 2009 compared to $16.4 million for the
year ended December 31, 2008. The increase in maintenance
revenue is due primarily to the launch of new customer contracts
during 2009. The Company continues to focus on the retention of
its clients and the renewal of these contracts to provide a
basis for stable growth in its recurring revenue.
Non-Recurring Revenue: Non-recurring revenue
increased to $23.0 million, or 22.4% of total HCIT revenue,
for the year ended December 31, 2009 compared to
$21.9 million, or 24.0% of total HCIT revenue, for the same
period in 2008. The decrease in non-recurring revenue as a
percentage of total HCIT revenue is due to the larger portion of
revenue being derived from transaction processing services.
Professional services revenue increased $1.9 million, or
13.8%, to $15.3 million for the year ended
December 31, 2009 compared to $13.5 million for the
same period in 2008. Professional services revenue is derived
from providing support projects for both system sales and
transaction processing clients, on an as-needed basis. This
revenue is dependent on customers continuing to require the
Company to assist them on both a fixed bid and time and
materials basis.
System sales are derived from license upgrades and additional
applications for existing and new clients, as well as software
and hardware sales to pharmacies that purchase the
Companys retail pharmacy system. Systems sales revenue
decreased $0.8 million, or 9.0%, to $7.7 million for
year ended December 31, 2009 compared to $8.4 million
for same period in 2008. This revenue is dependent on acquiring
new customers, selling license upgrades, and additional
applications to existing customers, which will fluctuate
accordingly as new customers are added, or license upgrades and
additional applications are sold to existing customers.
Cost of Revenue: Cost of revenue increased
20.3% to $54.3 million for the year ended December 31,
2009 from $45.1 million for the year ended
December 31, 2008. The increase is due primarily to
personnel and support costs related to the growing transaction
processing business and the implementation costs of new customer
contracts.
Cost of revenue includes depreciation expense of
$2.2 million and $1.8 million for the years ended
December 31, 2009 and 2008, respectively. In addition, cost
of revenue includes stock-based compensation expense of
$0.7 million and $0.6 million for the years ended
December 31, 2009 and 2008, respectively.
39
Gross Profit: Gross profit increased
$2.4 million to $48.4 million for the year ended
December 31, 2009 as compared to $46.0 million for the
same period in 2008. The increase is primarily due to increases
in high margin recurring revenue services. The increased gross
profit was partially offset by additional HCIT personnel needed
to support the growing HCIT business.
Year
ended December 31, 2008 as compared to year ended
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
In thousands, except per share data
|
|
|
Revenue
|
|
$
|
862,939
|
|
|
$
|
93,171
|
|
Cost of revenue
|
|
|
747,453
|
|
|
|
39,595
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
115,486
|
|
|
|
53,576
|
|
Product development costs
|
|
|
10,105
|
|
|
|
10,206
|
|
SG&A
|
|
|
68,792
|
|
|
|
26,532
|
|
Depreciation of property and equipment
|
|
|
4,810
|
|
|
|
2,476
|
|
Amortization of intangible assets
|
|
|
9,365
|
|
|
|
1,584
|
|
Interest expense (income), net
|
|
|
1,391
|
|
|
|
(4,578
|
)
|
Other expense (income), net
|
|
|
719
|
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
20,304
|
|
|
|
17,444
|
|
Income tax expense
|
|
|
5,191
|
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,113
|
|
|
$
|
13,146
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
Revenue
Revenue increased $769.8 million to $862.9 million
during 2008, primarily due to the NMHC acquisition, and consists
primarily of PBM revenue of $771.8 million. Revenue under
the contracts acquired in the NMHC acquisition are recorded
gross as the Company acts as a principal in the transaction,
whereas revenue from the majority of historical PBM contracts
are recorded net as the Company functions as an agent. In
addition, revenue increased due to new contracts that began in
2008.
Cost
of Revenue
Cost of revenue increased $707.9 million to
$747.5 million during 2008, primarily due to the NMHC
acquisition, and consists primarily of PBM cost of revenue of
$702.3 million. Cost of revenue in the PBM segment relates
to the actual cost of the prescription drugs sold. Cost of
revenue for the HCIT segment relates primarily to the cost of
labor to deliver the services provided.
Gross
Profit
Gross profit increased $61.9 million during 2008, primarily
due to the NMHC acquisition, as well as the launch of new
contracts during the year.
Product
Development Costs
Product development costs for the year ended December 31,
2008 were $10.1 million compared to $10.2 million for
the year ended December 31, 2007. Product development
continues to be a key focus of the Company as it continues to
pursue enhancements of existing products, as well as the
development of new offerings, to support its market expansion.
Product development costs represent the cost of labor related to
development activities and include stock-based compensation cost
of $0.3 million for the years ended December 31, 2008
and 2007.
SG&A
Costs
SG&A costs for the year ended December 31, 2008 were
$68.8 million compared to $26.5 million for the year
ended December 31, 2007. The increase is largely
attributable to increased operating expenses due to the
acquisition of NMHC. The Company also incurred approximately
$2.0 million in severance expense during the year ended
December 31, 2008.
40
SG&A costs include stock-based compensation cost of
$3.2 million and $2.4 million for the years ended
December 31, 2008 and 2007, respectively. The increase is
due primarily to new grants issued in late 2007 and in 2008 at a
higher fair value per option awarded. The Company also incurred
additional stock-based compensation expense related to the
assumption and grant of restricted stock units in connection
with the acquisition of NMHC.
Depreciation
Depreciation expense relates to property and equipment used in
all areas of the Company except for those depreciable assets
directly related to the generation of revenue, which is included
in the cost of revenue in the consolidated statements of
operations. Depreciation expense increased $2.3 million to
$4.8 million for the year ended December 31, 2008 from
$2.5 million for the same period in 2007, due primarily to
the expense related to assets associated with the acquisition of
NMHC, as well as purchases related to the Companys
expansion of its Lisle, Illinois facility and network capacity.
Amortization
Amortization expense for the year ended December 31, 2008
was $9.4 million compared to $1.6 million for the same
period in 2007. The increase is due to amortization of
intangible assets associated with the acquisition of NMHC.
Interest
Income and Expense
Interest income decreased $1.9 million for the year ended
December 31, 2008 as compared to the same period in 2007,
due primarily to lower interest rates and lower cash balances
available for investment. Interest expense increased
$4.0 million to $4.1 million for the year ended
December 31, 2008 compared to the same period in 2007,
primarily due to the long-term debt incurred to finance a
portion of the NMHC acquisition. Interest expense for 2008 also
includes the effect of fair value adjustments related to the
Companys derivative instruments. Interest paid on the
Companys term loan totalled $2.2 million for the year
ended December 31, 2008. The fair value adjustments related
to the derivative instruments totalled $0.4 million for the
year ended December 31, 2008.
Income
Taxes
The Company recognized income tax expense of $5.2 million
for the year ended December 31, 2008, representing an
effective tax rate of 25.6%, compared to $4.3 million,
representing an effective tax rate of 24.6%, for the same period
in 2007. The change in the effective tax rate is due primarily
to the comparatively larger release of valuation allowances in
2007, offset partially by the effect of the financing structure
used to fund the NMHC acquisition and lower statutory tax rates
in 2008.
Net
Income
The Company reported net income of $15.1 million for the
year ended December 31, 2008, or $0.65 per share
(fully-diluted), compared to net income of $13.1 million,
or $0.61 per share (fully-diluted), for the year ended
December 31, 2007.
Segment
Analysis
Effective with the acquisition of NMHC, the Company manages its
business in two segments, PBM and HCIT, and evaluates segment
performance based on revenue and gross profit. Prior to the
acquisition of NMHC, the Companys business was comprised
of its HCIT business. Information about the Companys
business segments for the years ended December 31, 2008 and
2007 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBM
|
|
|
HCIT
|
|
|
Consolidated
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
$
|
771,840
|
|
|
$
|
|
|
|
$
|
91,099
|
|
|
$
|
93,171
|
|
|
$
|
862,939
|
|
|
$
|
93,171
|
|
Cost of revenue
|
|
|
702,333
|
|
|
|
|
|
|
|
45,120
|
|
|
|
39,595
|
|
|
|
747,453
|
|
|
|
39,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
69,507
|
|
|
$
|
|
|
|
$
|
45,979
|
|
|
$
|
53,576
|
|
|
$
|
115,486
|
|
|
$
|
53,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
9.0
|
%
|
|
|
|
|
|
|
50.5
|
%
|
|
|
57.5
|
%
|
|
|
13.4
|
%
|
|
|
57.5
|
%
|
PBM
Revenue was $771.8 million for the year ended
December 31, 2008, nearly all of which was due to the
acquisition of NMHC. In addition, revenue in 2008 includes the
effect of new contracts launched in 2008.
41
For the year ended December 31, 2008, there was
$9.9 million of co-payments included in revenue related to
prescriptions filled at the Companys Mail Service
pharmacy. Co-payments retained by retail pharmacies on
prescriptions filled for participants are not included in
revenue. Under customer contracts, the pharmacy is solely
obligated to collect the co-payments from the participants and
as such, the Company does not assume liability for participant
co-payments in pharmacy transactions. Therefore, the Company
does not include participant co-payments to retail pharmacies in
revenue or cost of revenue.
Cost of revenue was $702.3 million for the year ended
December 31, 2008, nearly all of which was due to the
acquisition of NMHC. Cost of revenue is predominantly comprised
of the cost of prescription drugs. As a percentage of revenue,
cost of revenue was 91.0% for the year ended December 31,
2008.
Gross profit was $69.5 million for the year ended
December 31, 2008, nearly all of which was due to the
acquisition of NMHC, complemented by new customers added and
increased volumes realized following the acquisition. Gross
profit margin was 9.0% for the year ended December 31, 2008.
HCIT
HCIT revenue is comprised of the following components for the
years ended December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
Transaction processing
|
|
$
|
52,773
|
|
|
$
|
54,273
|
|
Maintenance
|
|
|
16,397
|
|
|
|
16,476
|
|
|
|
|
|
|
|
|
|
|
Total recurring
|
|
|
69,170
|
|
|
|
70,749
|
|
Non-Recurring
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
13,480
|
|
|
|
14,031
|
|
System sales
|
|
|
8,449
|
|
|
|
8,391
|
|
|
|
|
|
|
|
|
|
|
Total non-recurring
|
|
|
21,929
|
|
|
|
22,422
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
91,099
|
|
|
$
|
93,171
|
|
|
|
|
|
|
|
|
|
|
Total HCIT revenue decreased $2.1 million, or 2.2%, for the
year ended December 31, 2008 as compared to the same period
in 2007. On a percentage basis, recurring revenue accounted for
76.0% of consolidated HCIT revenues for the years ended
December 31, 2008 and 2007, respectively. Recurring revenue
consists of transaction processing and maintenance revenue.
Recurring Revenue: Recurring revenue decreased
2.2% to $69.2 million for the year ended December 31,
2008 from $70.7 million for the same period in 2007. This
decrease is due primarily to the reclassification of certain
customers to the PBM segment effective April 1, 2008.
Recurring revenue is subject to fluctuations caused by the
following: the number and timing of new customers, fluctuations
in transaction volumes, and the number of contract terminations
and renewals.
Transaction processing revenue decreased $1.5 million, or
2.8%, to $52.8 million for the year ended December 31,
2008 compared to $54.3 million for the same period in 2007,
due primarily to the reclassification of certain customers to
the PBM segment effective April 1, 2008.
Maintenance revenue decreased slightly to $16.4 million for
the year ended December 31, 2008 compared to
$16.5 million for the year ended December 31, 2007.
The Company focus continues to be on the retention of its
clients and the renewal of these contracts to provide a basis
for stable growth in its recurring revenue.
Non-Recurring Revenue: Non-recurring revenue
decreased to $21.9 million, or 24.0% of total HCIT revenue,
for the year ended December 31, 2008 compared to
$22.4 million, or 24.0% of total HCIT revenue, for the same
period in 2007.
Professional services revenue decreased $0.5 million, or
3.9%, to $13.5 million for the year ended December 31,
2008 compared to $14.0 million for the same period in 2007.
The decrease is due to less consulting and implementation
services performed during the year ended December 31, 2008
as compared to the same period in 2007. Professional services
revenue is derived from providing support projects for both
system sales and transaction processing clients, on an as-needed
basis. This revenue is dependent on customers continuing to
require the Company to assist them on both a fixed bid and time
and materials basis.
System sales are derived from license upgrades and additional
applications for existing and new clients, as well as software
and hardware sales to pharmacies that purchase the
Companys pharmacy system. Systems sales revenue was
essentially unchanged at $8.4 million for the year ended
December 31, 2008 compared to the same period in 2007.
42
Cost of Revenue: Cost of revenue increased
14.0% to $45.1 million for the year ended December 31,
2008 from $39.6 million for the year ended
December 31, 2007. The increase is due primarily to
personnel and support costs related to the growing transaction
processing business and the implementation of new customer
contracts.
Cost of revenue includes depreciation expense of
$1.8 million and $1.5 million for the years ended
December 31, 2008 and 2007, respectively. In addition, cost
of revenue includes stock-based compensation expense of
$0.6 million and $0.3 million for the years ended
December 31, 2008 and 2007, respectively.
Gross Profit: Gross profit margin was 50.5%
and 57.5% for the years ended December 31, 2008 and 2007,
respectively. Gross profit decreased $7.6 million to
$46.0 million for the year ended December 31, 2008 as
compared to $53.6 million for the same period in 2007. The
decrease is primarily due to the reclassification of certain
customers to the PBM segment effective April 1, 2008.
Liquidity
and Capital Resources
The Companys sources of liquidity have primarily been cash
provided by operating activities, proceeds from its public
offerings, and proceeds from credit facilities. The
Companys principal uses of cash have been to fund working
capital, finance capital expenditures, satisfy contractual
obligations, and to meet acquisition and investment needs. The
Company anticipates that these uses will continue to be the
principal demands on cash in the future.
At December 31, 2009 and 2008, the Company had cash and
cash equivalents totalling $304.4 million and
$67.7 million, respectively. Additionally, the Company has
$4.6 million in short term investments at December 31,
2009. The Company believes that its cash on hand and short term
investments, together with cash generated from operating
activities, will be sufficient to support planned operations for
the foreseeable future. At December 31, 2009, cash and cash
equivalents consisted of cash on hand, deposits in banks, money
market funds, and bank term deposits with original maturities of
90 days or less. As of December 31, 2009, all of the
Companys cash and cash equivalents were exposed to market
risks, primarily changes in U.S. and Canadian interest
rates. Declines in interest rates over time will reduce interest
income from these investments.
Credit
Agreement
On April 29, 2008, SXC Health Solutions, Inc. (US
Corp.) borrowed $48 million under a credit facility
to pay a portion of the consideration in connection with the
acquisition of NMHC and certain transaction fees and expenses
related to the acquisition. See Note 7 to the consolidated
financial statements for information on the terms and conditions
of the credit facility. In December 2009, the Company repaid all
of its outstanding obligations under the credit facility and
terminated the credit agreement, effective as of
December 31, 2009. The Company was able to extinguish its
debt obligation early due to cash provided from operations and
cash on hand from the September 2009 public offering proceeds as
described in Note 8 to the consolidated financial
statements.
Consolidated
Balance Sheets
Selected balance sheet highlights at December 31, 2009 are
as follows:
|
|
|
|
|
At December 31, 2009, cash and cash-equivalents increased
$236.7 million to $304.4 million from
$67.7 million at December 31, 2008. The increase is
primarily related to the $203.1 million in net proceeds
from the public offering of 5,175,000 shares and strong
operating cash flows.
|
|
|
|
Restricted cash totaling $14.2 million relates to cash
balances required to be maintained in accordance with various
state statutes, contractual terms with customers and other
customer restrictions related to the PBM business. The Company
continues to monitor changes in balance requirements that may
release restrictions and allow the funds to be used for general
corporate purposes.
|
|
|
|
Rebates receivable of $17.6 million relate to billed and
unbilled PBM receivables from pharmaceutical manufacturers and
third party administrators in connection with the administration
of the rebate program where the Company is the principal
contracting party. The receivable and related payables are based
on estimates, which are subject to final settlement. Rebates
receivable decreased $12.0 million from $29.6 million
at December 31, 2008, due primarily to improved collections
of rebates.
|
|
|
|
The Companys inventory balance of $7.1 million
consists predominately of prescription drugs and medical
supplies at its Mail Service and Specialty Service pharmacies.
Changes in the inventory balance from period to period are
caused by some seasonality in certain products, taking advantage
of buying opportunities, and changing inventory levels due to
customer demands.
|
43
|
|
|
|
|
Customer deposits payable of $14.8 million relate to
deposits required by the Company for certain customers in order
to satisfy liabilities incurred on the customers behalf
for the adjudication of pharmacy claims, and are related to the
restricted cash balances discussed above.
|
|
|
|
Pharmacy benefit management rebates payable represents amounts
owed to customers for rebates from pharmaceutical manufacturers
and third party administrators where the Company administers the
rebate program on the customers behalf, and the Company is
the principal contracting party. The payables are based on
estimates, which are subject to final settlement. Pharmacy
benefit management rebates payable increased $10.3 million
to $46.6 million at December 31, 2009. The increase is
due to increased rebate volumes driven by increased prescription
drug sales transactions.
|
|
|
|
Pharmacy benefit claims payable of $61.7 million
predominantly relates to amounts owed to retail pharmacies for
prescription drug costs and dispensing fees in connection with
prescriptions dispensed by the pharmacies for the Companys
customers when the Company is the principal contracting party
with the pharmacy.
|
|
|
|
Total long term debt decreased to $0 at December, 31 2009 from
$47.6 million at December 31, 2008 due to the
repayment of the entire outstanding balance in December 2009.
|
|
|
|
Accrued liabilities decreased $1.3 million to
$30.8 million at December 31, 2009 from
$32.0 million at December 31, 2008 due primarily to
final adjustments made to the fair values of assumed liabilities
related to the NMHC acquisition. In addition, the decrease is
due to payments on previously recorded liabilities related to
the NMHC acquisition.
|
Cash
flows from operating activities
For the year ended December 31, 2009, the Company generated
$86.4 million of cash through its operations. Cash provided
by operating activities has increased $44.8 million
compared to the same period in 2008 mainly due to the increased
profitability of the Company. The Companys continued focus
on timely collection of its accounts receivables, and
effectively managing its working capital has also increased
operating cash flows. Cash from operations consisted of net
income of $46.1 million adjusted for $17.7 million in
depreciation and amortization expense, $3.7 million in
stock-based compensation expense, a reduction of rebates
receivable of $12.0 million, an increase in rebates payable
of $10.3 million, an increase in pharmacy benefit claims
payable of $10.3, and an increase in customer deposits of
$3.0 million. These were partially offset by a reduction of
accrued liabilities of $1.1 million, an increase in
accounts receivable of $16.7 million, and $4.5 million
in tax benefits from option exercises.
Changes in the Companys cash from operations results
primarily from the timing of collections on its accounts
receivable and payment or processing of its various payables and
accrued liabilities. The Company continually monitors its
balance of trade and rebate accounts receivable and devotes
ample resources to collection efforts on those balances. Rebates
receivable and the related payables are primarily estimates
based on claims submitted. Rebates are typically paid to
customers on a quarterly basis upon receipt of the billed funds
from the pharmaceutical manufacturers and third party
administrators. The timing of the payments to customers and
collections from pharmaceutical manufacturers and third party
administrators on rebates causes fluctuations in the balances of
these accounts on the balance sheet, as well as in the
Companys cash from operating activities.
Changes in non-cash items such as depreciation and amortization
are caused by the purchase and acquisition of capital and
intangible assets. As these assets become fully depreciated or
amortized, the related expenses will decrease.
Changes in operating assets and liabilities, as well as non-cash
items related to income taxes, will fluctuate based on working
capital requirements and the required tax provision, which is
determined by examining taxes actually paid or owed, as well as
amounts expected to be paid or owed.
For the year ended December 31, 2008, the Company generated
$41.6 million of cash through its operations. Cash from
operating activities consisted of net income of
$15.1 million adjusted for $16.0 million in
depreciation and amortization expense, $4.1 million in
stock-based compensation expense, and a $6.4 million
increase in all other operating activities, primarily changes in
working capital items. Included in the change in other operating
activities (net of the effects of the acquisitions of NMHC and
the assets of Zynchros, Inc.) is an $8.4 million decrease
in claims payable, an $8.0 million decrease in accounts
receivable, a $4.8 million increase in accrued liabilities
and a $2.4 million increase in rebates receivable.
For the year ended December 31, 2007, the Company generated
$22.1 million of cash through its operations. Cash from
operating activities consisted of net income of
$13.1 million adjusted for $5.6 million in
depreciation and amortization expense, $3.0 million in
stock-based compensation expense, and a $0.4 million
decrease in all other operating activities. Included in the
change in other operating activities is a $3.7 million
increase in deferred revenue, as well as a $1.6 million
increase in pharmacy benefit management rebates payable.
44
Cash
flows from investing activities
For the year ended December 31, 2009, the Company used
$15.8 million of cash for investing activities, which
consisted primarily of $9.0 million for purchases of
property and equipment to support increased transaction volume,
and $5.1 million to purchase short-term investments.
As the Company grows, it continues to purchase capital assets to
support increases in its information technology network capacity
and personnel. The Company monitors and budgets these costs to
ensure the expenditures aid in the strategic growth of the
Company. Transactions in short-term investments are made to take
advantage of higher interest rates offered on securities other
than cash, and are monitored by the Company for liquidity and
impairments.
For the year ended December 31, 2008, the Company used
$112.8 million of cash for investing activities, which
consisted primarily of cash used for the acquisitions of NMHC
and the assets of Zynchros Inc. along with the purchases of
property and equipment to support increased transaction volume.
For the year ended December 31, 2007, the Company used
$7.3 million of cash for investing activities, which
consisted of purchases of property and equipment to support
increased transaction volume and the cost of the relocation to
new facilities.
Cash
flows from financing activities
For the year ended December 31, 2009, the Company generated
$166.2 million of cash from financing activities, which
mainly consisted of $203.1 million in net proceeds from the
public offering of 5,175,000 shares in September 2009. The
Company intends to use the proceeds for general corporate
purposes, which may include financing of potential acquisitions
and strategic transactions, funding capital expenditures, and
providing working capital to enhance and maintain financial
flexibility. In addition to the cash generated from the public
offering, cash inflows from financing activities included
proceeds from the exercise of stock options of $6.3 million
and a $4.5 million tax benefit on the exercise of stock
options. These were partially offset by the repayment of all of
the Companys long term debt of $47.6 million.
Cash flows from financing activities generally fluctuate based
on the timing of option exercises by the Companys
employees, which are affected by market prices, vesting dates
and expiration dates. In addition, the Company was required in
2009 to make quarterly principal and interest payments on its
long term debt, which varied based on the loans repayment
schedules and respective interest rates. As noted, the
Companys long-term debt was fully extinguished in the
fourth quarter of 2009 and no future principal or interest
payments will be made.
For the year ended December 31, 2008, the Company generated
$48.2 million of cash from financing activities, which
consisted of the net proceeds from the issuance of long-term
debt of $45.8 million, the exercise of stock options of
$1.5 million and a $0.8 million tax benefit on the
exercise of stock options.
For the year ended December 31, 2007, the Company generated
$4.9 million of cash from financing activities, which
consisted of $2.5 million in proceeds from the exercise of
stock options. In addition, the Company recognized a non-cash
tax benefit on stock options exercised of $2.4 million,
which results in a reduction in income taxes payable.
Future
Capital Requirements
The Companys future capital requirements depend on many
factors, including its product development programs. The Company
expects to fund its operating and working capital needs, and
business growth requirements through cash flow from operations
and its cash and cash equivalents on hand. The Company expects
that purchases of property and equipment will remain consistent
with prior years. The Company cannot provide assurance that its
actual cash requirements will not be greater than expected as of
the date of this report. In order to meet business growth goals,
the Company will, from time to time, consider the acquisition
of, or investment in, complementary businesses, products,
services and technologies, which might impact liquidity
requirements or cause the issuance of additional equity or debt
securities. Any issuance of additional equity or debt securities
may result in dilution to shareholders, and the Company cannot
be certain that additional public or private financing will be
available in amounts or on terms acceptable to the Company, or
at all.
If sources of liquidity are not available or if it cannot
generate sufficient cash flow from operations during the next
twelve months, the Company might be required to obtain
additional funds through operating improvements, capital markets
transactions, asset sales or financing from third parties or a
combination thereof. The Company cannot provide assurance that
these additional sources of funds will be available or, if
available, will have reasonable terms.
If adequate funds are not available, the Company may have to
substantially reduce or eliminate expenditures for marketing,
research and development, and testing of proposed products, or
obtain funds through arrangements with partners that require the
Company to relinquish rights to certain of its technologies or
products. There can be no assurance that the Company will be
able
45
to raise additional capital if its capital resources are
exhausted. A lack of liquidity and an inability to raise capital
when needed may have a material adverse impact on the
Companys ability to continue its operations or expand its
business.
Contractual
Obligations
The following table summarizes the Companys significant
contractual obligations as of December 31, 2009 and the
effect such obligations are expected to have on the
Companys liquidity and cash in future periods assuming all
obligations reach maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
Years
|
|
|
Years
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1 - 3
|
|
|
4 - 5
|
|
|
5 years
|
|
|
Operating leases
|
|
$
|
17,174
|
|
|
$
|
4,068
|
|
|
$
|
4,645
|
|
|
$
|
3,185
|
|
|
$
|
5,276
|
|
Capital leases
|
|
|
487
|
|
|
|
326
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
Purchase obligations(1)
|
|
|
1,020
|
|
|
|
644
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,681
|
|
|
$
|
5,037
|
|
|
$
|
5,183
|
|
|
$
|
3,185
|
|
|
$
|
5,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, certain contracts with the
Companys utilities providers require minimum annual
purchases. |
The above table excludes $0.5 million related to the
Companys accrued liability for uncertain tax positions;
the Company is unable to reliably estimate the period of cash
settlement, if any, with the respective taxing authorities.
Off-Balance
Sheet Arrangements
The Company has no off-balance sheet arrangements.
Outstanding
Securities
As of February 28, 2010, the Company had 30,060,594 common
shares outstanding, 1,529,351 options outstanding and 224,937
restricted stock units (RSUs) outstanding. The
options are exercisable on a
one-for-one
basis into common shares. The outstanding RSUs are subject to
time-based and performance-based vesting restrictions. Once
vested, RSUs convert on a
one-for-one
basis into common shares.
Summary
of Quarterly Results
The following table provides summary quarterly results
(unaudited) for the eight quarters prior to and including the
quarter ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009(1)
|
|
|
|
2008(2)(3)
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
PBM revenue
|
|
$
|
416,802
|
|
|
$
|
357,473
|
|
|
$
|
293,906
|
|
|
$
|
267,780
|
|
|
|
$
|
269,802
|
|
|
$
|
297,178
|
|
|
$
|
204,860
|
|
|
$
|
|
|
HCIT revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
20,117
|
|
|
|
21,194
|
|
|
|
20,140
|
|
|
|
18,201
|
|
|
|
|
18,665
|
|
|
|
15,629
|
|
|
|
16,018
|
|
|
|
18,858
|
|
Nonrecurring
|
|
|
6,397
|
|
|
|
4,862
|
|
|
|
6,783
|
|
|
|
4,979
|
|
|
|
|
4,299
|
|
|
|
5,294
|
|
|
|
6,877
|
|
|
|
5,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
443,316
|
|
|
$
|
383,529
|
|
|
$
|
320,829
|
|
|
$
|
290,960
|
|
|
|
$
|
292,766
|
|
|
$
|
318,101
|
|
|
$
|
227,755
|
|
|
$
|
24,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PBM gross profit %
|
|
|
9.3
|
%
|
|
|
10.1
|
%
|
|
|
11.7
|
%
|
|
|
10.8
|
%
|
|
|
|
10.5
|
%
|
|
|
8.3
|
%
|
|
|
8.2
|
%
|
|
|
0.0
|
%
|
HCIT gross profit %
|
|
|
52.3
|
%
|
|
|
43.9
|
%
|
|
|
47.1
|
%
|
|
|
44.8
|
%
|
|
|
|
38.7
|
%
|
|
|
50.0
|
%
|
|
|
57.0
|
%
|
|
|
55.0
|
%
|
Net income
|
|
$
|
15,193
|
|
|
$
|
11,209
|
|
|
$
|
11,977
|
|
|
$
|
7,682
|
|
|
|
$
|
4,950
|
|
|
$
|
3,539
|
|
|
$
|
3,267
|
|
|
$
|
3,357
|
|
Basic EPS
|
|
$
|
0.51
|
|
|
$
|
0.45
|
|
|
$
|
0.49
|
|
|
$
|
0.32
|
|
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Diluted EPS
|
|
$
|
0.49
|
|
|
$
|
0.43
|
|
|
$
|
0.47
|
|
|
$
|
0.31
|
|
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
|
|
1) |
|
On September 23, 2009, the Company completed a public
offering of 5,175,000 of its common shares. The shares were
offered to the public at a price of $41.50 per share. The gross
proceeds from the offering totaled $214.8 million,
excluding $11.7 million for underwriting discounts and
commissions, and other offering costs. |
|
2) |
|
The Company acquired all of the outstanding shares of NMHC in
2008. The results of operations of the acquired business are
included from the date of acquisition on May 1, 2008. The
Company issued 2,785,960 shares of its common stock in
connection with the acquisition. |
46
|
|
|
3) |
|
Effective with the acquisition of NMHC in the second quarter of
2008, the Company reports revenue in two operating segments, PBM
and HCIT. Recurring and nonrecurring revenue are included in the
HCIT segment. |
Critical
Accounting Policies and Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the
reported amounts of revenue and expenses during the period.
Significant items subject to such estimates and assumptions
include revenue recognition, purchase price allocation in
connection with acquisitions, the carrying amount of property
and equipment, the value of intangible assets acquired and
related amortization periods, impairment of goodwill, rebates,
contingencies, the valuation allowances for receivables and
future income taxes and accruals for income tax uncertainties.
Actual results could differ from those estimates. Note 2 to
the Companys 2009 consolidated financial statements
include a Summary of Significant Accounting Policies. The
understanding of the accounting policies used to prepare the
consolidated financial statements is important to understanding
the Companys results of operations and financial condition.
Revenue
recognition
The Companys revenue is derived from prescription drug
sales along with transaction processing services, maintenance,
professional services, and systems sales (including software
license and hardware sales).
The Company recognizes revenue when all of the following
conditions are satisfied: (i) there is persuasive evidence
of an arrangement; (ii) the service or product has been
provided to the customer and no uncertainties exist surrounding
product acceptance; (iii) the amount of fees to be paid by
the customer is fixed or determinable; and (iv) the
collection of fees is reasonably assured. Areas of judgment and
subjectivity in the Companys revenue recognition include
principle versus agent considerations for PBM contracts,
arrangements with multiple elements, and professional service
revenues under long-term contracts.
Principal versus agent considerations: The
Company evaluates customer contracts using the indicators of the
principal versus agent revenue accounting guidance to determine
whether the Company acts as a principal or as an agent in the
fulfillment of prescriptions through the retail pharmacy
network. Assessing each contract requires judgment, and the
conclusions reached on each contract will greatly impact the
amount of revenue recorded. While gross margin is not impacted
by the conclusion reached, revenues and cost of revenues will
vary significantly. The Company assesses each contract to
determine if the Company is acting as a principal or an agent.
Key factors that the Company considers when determining whether
it acts as a principal or an agent includes: (i) whether
the Company has separate contractual relationships with
customers and with pharmacies, (ii) is the Company
responsible to validate and manage a claim through its claims
adjudication process, (iii) does the Company commit to set
prescription prices for the pharmacy, including instructing the
pharmacy as to how that price is to be settled (co-payment
requirements), (iv) does the Company manage the overall
prescription drug plan relationship with the patients, who are
participants of customers plans, (v) who has credit
risk for the amount due from the customer, and (vi) does
the Company have direct obligations to the retail pharmacies to
pay for the prescription drug spend. The Company weighs the
criteria that are present in order to conclude whether the
contract should be recorded gross as a principal, or net as an
agent.
Arrangements with multiple elements: When the
Company enters into arrangements with multiple deliverables it
must consider: (i) whether the delivered item has value to
the customer on a stand-alone basis, (ii) whether there is
objective and reliable evidence of the fair value of the
undelivered item(s), and (iii) if the contract includes a
general right of return relative to the delivered item, whether
delivery or performance of the undelivered item(s) is considered
probable and substantially in the control of the Company. In
most cases, the Company is able to conclude that the separate
deliverables have stand alone value since most of the
deliverables are sold as stand alone products or services. A key
area of judgment is for the Company to determine the fair value
of the undelivered items. The value of undelivered elements,
such as professional services, or ASP services, is determined
based on stated pricing within the contract with each customer,
or pricing for the same product sold to other customers.
Professional services fair values are determined based on
billing rates per hour based on the type of professional
services provided, whereas ASP services are generally based on
transaction fee rates, or standard monthly access and processing
fees. Once a fair value is determined, revenue is allocated to
each unit of accounting or element based on relative fair values.
Professional service revenues under long-term
contracts: As part of the Companys
professional services offerings, the Company enters into
contracts to provide professional services over a specified time
frame, or for a specific contract deliverable. In cases where
the contracts require professional services to be delivered for
an extended time frame, the Company records revenue based on a
percentage of completion model. The percentage of completion
model is impacted by managements estimate of hours
required to complete a deliverable and the mix of staffing
required for the project. When projects have a fixed fee, the
Company must estimate the total cost to complete the deliverable
in order to assess a projected margin from the project. Revenues
are then recorded based on the hours completed for the project
and the calculated margin to be earned from the project.
Revenues are impacted based on managements estimate of
margin to be earned on the project, and may fluctuate throughout
the
47
project as estimates are revised. Whenever management expects a
loss on a project, the Company records the expected loss
immediately in its consolidated statement of operations.
Rebates
The Company administers rebate programs through which it
receives rebates and administrative fees from pharmaceutical
manufacturers and third party administrators that are shared
with customers. The Company recognizes rebates when the Company
is entitled to them, and when the amounts of the rebates are
determinable. The amount recorded for rebates earned by the
Company from the pharmaceutical manufacturers, third party
administrators, and from administrative fees are recorded as a
reduction of cost of sales. Rebates owed to the Companys
customers are recorded as a reduction of revenue. The Company
determines the amount of rebates to record based on the number
and types of claims submitted, the rebate program terms with its
customers, the Companys rebate contracts, and any
additional information that becomes available. The amount of
rebates ultimately earned by the Company, or paid to its
customers, is contingent upon several factors, including
validation of claims data submitted by the Company, and may
require adjustments in future periods to the amounts originally
estimated. Historically, adjustments to the Companys
original rebate estimates have not been significant.
Goodwill
and intangible assets
Goodwill is the residual amount that results when the purchase
price of an acquired business exceeds the sum of the amounts
allocated to the identifiable assets acquired, less liabilities
assumed, based on their fair values. Goodwill is allocated to
the Companys reporting units that are expected to benefit
from the business combination as of the date of the business
combination. Intangible assets acquired individually or as part
of a group of other assets are initially recognized and measured
at cost. The cost of a group of intangible assets acquired in a
transaction, including those acquired in a business combination
that meet the specified criteria for recognition apart from
goodwill, is allocated to the individual assets acquired based
on their fair values.
Goodwill and intangible assets are impacted by the
Companys fair value measurements at initial recording.
Beginning in 2009, the Company applied the revised business
combination guidance as issued by the Financial Accounting
Standards Board (FASB). Measurements of goodwill and
purchased intangible assets will be based on models derived from
a market participant point of view. Along with the methodology
of how assets and liabilities acquired are measured, the new
guidance also impacts the types of assets and liabilities
required to be measured and recorded. While the Company did not
have any material acquisitions in 2009, any future acquisitions
will be impacted by the new guidance and approach used by the
Company. Managements conclusion on who would make up the
market participants, the types of assets and liabilities
required to be measured, and the methodology used to measure the
assets and liabilities will all have a significant impact on the
purchase price allocation for any business combinations.
Asset
impairments
The Companys goodwill and long-lived assets (including
property and equipment, and purchased intangibles subject to
amortization) are subject to periodic impairment testing.
Goodwill is tested for impairment annually as of October 31 of
each year, while long-lived assets are only required to be
tested for impairment when events or circumstances indicate that
the net carrying amount of the asset may not be recoverable.
Both asset impairment tests and considerations are impacted by
various estimates and judgments made by management.
The annual impairment test for goodwill is impacted by
managements assessment of reporting units, allocation of
the consolidated Companys assets and liabilities to each
reporting unit, managements estimate of future operating
results, and a selection of peers to establish a comparable
market group. The annual impairment test completed for 2009 did
not indicate any impairment of either of the Companys two
reporting units, and did not reveal that an impairment would be
reasonably likely in the near future.
As noted above, long-lived assets are only required to be tested
for impairment when events or circumstances indicate that the
net carrying amount of the asset may not be recoverable.
Assessing whether an impairment test is necessary requires
management to monitor results of the business that utilize the
long-lived assets, as well as outside market forces that impact
the future recoverability of the long-lived assets. No events or
other circumstances occurred in 2009 that caused management to
conclude any of its long-lived or intangible assets may not be
recoverable.
Valuation
of allowance for doubtful accounts
In assessing the valuation of the allowance for doubtful
accounts, management reviews the collectability of accounts
receivable in aggregate and on an individual account-basis.
Delinquency is assessed based primarily on contractual terms,
and managements judgement is used as the basis for
allowances required. Management reviews the accounts receivable
on an individual customer-basis to determine if events such as
subsequent collections, discussions with management of the
debtor companies, or other activities lead to the conclusion to
either increase or decrease the calculated allowance. The
conclusions and estimates made are further impacted by changes
in economic and market conditions as well as changes to the
customers financial condition.
48
Contingencies
From time to time in connection with its operations, the Company
is named as a defendant in actions for damages and costs
allegedly sustained by the plaintiffs. Management also considers
other areas of the Companys business that may be subject
to litigation and liability for damages arising from errors in
processing the pricing of prescription drug claims, failure to
meet performance measures within certain contracts relating to
its services performed or its ability to obtain certain levels
of discounts or rebates on prescription purchases from retail
pharmacies and drug manufacturers or other actions or omissions.
Reserves for contingencies are based upon the Companys
consideration of these proceedings and disputes. Management
assesses the probability that these contingencies will be
realized, and whether the outcome is reasonably estimable. The
Companys estimates for reserves recorded may be impacted
by the history of similar claims, the limitations of any
insurance coverage, advice from outside counsel, and
managements strategy with regard to the settlement or
defense against such claims and obligations.
Income
taxes
The Company uses the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are
recognized for the deferred tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Benefits from
tax positions are recognized in the consolidated financial
statements only when it is more likely than not that the tax
position will be sustained upon examination by the appropriate
taxing authority having full knowledge of all relevant
information. Managements estimates of future operating
results and tax planning strategies, assessment of the
probability of future tax benefits realization, and the
determination of the likelihood of tax positions being sustained
upon exam, are key judgments that management makes that impact
the accounting for income taxes and necessary valuation
allowances.
Recent
Accounting Standards
See Note 2 to the consolidated financial statements for
information on recent accounting pronouncements. The Company is
currently assessing the impact on its financial condition and
future operating results for recently issued accounting
guidance, and does not expect the recently issued guidance to
have a significant impact on the Companys financial
condition or future results of operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
INTEREST
RATE PRICE SENSITIVITY
As of December 31, 2009, the Company had cash and cash
equivalents totaling $304.4 million, most of which is
invested in liquid money market funds that earn interest at
floating rates. The Company previously paid interest based on
the current LIBOR interest rate, however, the associated debt
was fully repaid in December 2009, alleviating the
Companys exposure to interest rate risks for interest due
on outstanding debt.
Throughout 2009, the Companys effective interest income
rate was less than 1%. Accordingly the Company did not perform a
sensitivity analysis as of December 31, 2009, assuming a
hypothetical one percentage point decrease. As the interest
rates at which the Company is earning interest are at historic
lows, the Company would not expect a material change in its
interest income if rates fell further than those applicable in
2009. Actual increases or decreases in earnings in the future
could differ materially from this analysis based on the timing
and amount of both interest rate changes and the levels of cash
held by the Company. An analysis on the hypothetical impact to
the Companys interest expense was not performed since the
long-term debt was extinguished during the fourth quarter of
2009, and the Company no longer has a risk due to interest rate
fluctuations related to debt.
FOREIGN
EXCHANGE RISK
The Company is subject to foreign exchange risk related to its
operations in Canada. The Company does not enter into derivative
instruments to mitigate this risk. Exposure to fluctuations in
Canadian-dollar denominated transactions is partially offset by
Canadian dollar-denominated assets and liabilities. The realized
foreign exchange gains and losses for each of the periods
presented were insignificant. The Company performed a
sensitivity analysis as of December 31, 2009, assuming a
hypothetical 10% fluctuation in the U.S. dollar to Canadian
dollar exchange rate. Holding other variables constant, a 10%
fluctuation in either direction in the exchange rate would
affect the Companys pre-tax income by less than
$0.1 million.
There are inherent limitations in the sensitivity analysis
presented, primarily due to the assumption that foreign exchange
rate movements are linear and instantaneous. As a result, the
analysis is unable to reflect the potential effects of more
complex market changes that could arise, which may positively or
negatively affect income.
49
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
SXC Health Solutions Corp.:
We have audited the accompanying consolidated balance sheets of
SXC Health Solutions Corp. (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of
operations, shareholders equity, comprehensive income, and
cash flows for the years then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of SXC Health Solutions Corp. as of December 31,
2009 and 2008, and the results of their operations and their
cash flows for years then ended, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, in 2008, the Company changed the date of its annual
goodwill impairment test from December 31 to October 31.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys 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 March 5, 2010
expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Chicago, Illinois
March 5, 2010
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
SXC Health Solutions Corp.
We have audited the accompanying consolidated statements of
operations, comprehensive income, shareholders equity and
cash flows of SXC Health Solutions Corp. (the
Company) for the year ended December 31, 2007. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements 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 the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of the Companys operations and its cash flows for the year
ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for
income tax uncertainties in 2007.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
March 14, 2008
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
SXC Health Solutions Corp.:
We have audited SXC Health Solutions Corp.s (the
Companys) 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). The Companys 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 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, the Company maintained, in all material
respects, effective 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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of
December 31, 2009, and the related consolidated statements
of operations, shareholders equity, comprehensive income,
and cash flows for the year then ended, and our report dated
March 5, 2010 expressed an unqualified opinion on those
consolidated financial statements.
Chicago, Illinois
March 5, 2010
52
SXC
HEALTH SOLUTIONS CORP.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
304,370
|
|
|
$
|
67,715
|
|
Restricted cash
|
|
|
14,169
|
|
|
|
12,498
|
|
Short term investments
|
|
|
4,639
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,871 (2008 $3,570)
|
|
|
97,330
|
|
|
|
80,531
|
|
Rebates receivable
|
|
|
17,630
|
|
|
|
29,586
|
|
Prepaid expenses and other assets
|
|
|
4,483
|
|
|
|
4,455
|
|
Inventory
|
|
|
7,106
|
|
|
|
6,689
|
|
Income tax recoverable
|
|
|
345
|
|
|
|
1,459
|
|
Deferred income taxes
|
|
|
9,875
|
|
|
|
10,219
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
459,947
|
|
|
|
213,152
|
|
Property and equipment, net of accumulated depreciation of
|
|
|
|
|
|
|
|
|
$27,421 (2008 $19,449)
|
|
|
19,880
|
|
|
|
20,756
|
|
Goodwill
|
|
|
141,787
|
|
|
|
143,751
|
|
Other intangible assets, net of accumulated amortization of
$23,831 (2008 $14,099)
|
|
|
37,574
|
|
|
|
46,406
|
|
Deferred financing charges
|
|
|
|
|
|
|
1,481
|
|
Deferred income taxes
|
|
|
1,641
|
|
|
|
1,323
|
|
Other assets
|
|
|
1,251
|
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
662,080
|
|
|
$
|
428,343
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,916
|
|
|
$
|
8,302
|
|
Customer deposits
|
|
|
14,832
|
|
|
|
11,875
|
|
Salaries and wages payable
|
|
|
12,349
|
|
|
|
15,681
|
|
Accrued liabilities
|
|
|
30,786
|
|
|
|
32,039
|
|
Pharmacy benefit management rebates payable
|
|
|
46,606
|
|
|
|
36,326
|
|
Pharmacy benefit claim payments payable
|
|
|
61,669
|
|
|
|
51,406
|
|
Deferred revenue
|
|
|
7,304
|
|
|
|
7,978
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
3,720
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
183,462
|
|
|
|
167,327
|
|
Long-term debt, less current installments
|
|
|
|
|
|
|
43,920
|
|
Deferred income taxes
|
|
|
13,597
|
|
|
|
15,060
|
|
Deferred lease inducements
|
|
|
2,748
|
|
|
|
3,217
|
|
Deferred rent
|
|
|
1,337
|
|
|
|
1,461
|
|
Other liabilities
|
|
|
2,442
|
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
203,586
|
|
|
|
234,180
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common shares: no par value, unlimited shares authorized;
30,057,281 shares issued and outstanding at
December 31, 2009 (2008 24,103,032 shares)
|
|
|
361,530
|
|
|
|
146,988
|
|
Additional paid-in capital
|
|
|
15,153
|
|
|
|
11,854
|
|
Retained earnings
|
|
|
81,812
|
|
|
|
35,751
|
|
Accumulated other comprehensive loss
|
|
|
(1
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
458,494
|
|
|
|
194,163
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
662,080
|
|
|
$
|
428,343
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the
consolidated financial statements.
53
SXC
HEALTH SOLUTIONS CORP.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
PBM
|
|
$
|
1,335,961
|
|
|
$
|
771,840
|
|
|
$
|
|
|
HCIT:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction processing
|
|
|
61,225
|
|
|
|
52,773
|
|
|
|
54,273
|
|
Maintenance
|
|
|
18,427
|
|
|
|
16,397
|
|
|
|
16,476
|
|
Professional services
|
|
|
15,336
|
|
|
|
13,480
|
|
|
|
14,031
|
|
System sales
|
|
|
7,685
|
|
|
|
8,449
|
|
|
|
8,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,438,634
|
|
|
|
862,939
|
|
|
|
93,171
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
PBM
|
|
|
1,197,757
|
|
|
|
702,333
|
|
|
|
|
|
HCIT
|
|
|
54,277
|
|
|
|
45,120
|
|
|
|
39,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
1,252,034
|
|
|
|
747,453
|
|
|
|
39,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
186,600
|
|
|
|
115,486
|
|
|
|
53,576
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development costs
|
|
|
11,951
|
|
|
|
10,105
|
|
|
|
10,206
|
|
Selling, general and administrative
|
|
|
85,797
|
|
|
|
68,792
|
|
|
|
26,665
|
|
Depreciation of property and equipment
|
|
|
5,811
|
|
|
|
4,810
|
|
|
|
2,476
|
|
Amortization of intangible assets
|
|
|
9,724
|
|
|
|
9,365
|
|
|
|
1,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,283
|
|
|
|
93,072
|
|
|
|
40,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
73,317
|
|
|
|
22,414
|
|
|
|
12,645
|
|
Interest income
|
|
|
(756
|
)
|
|
|
(2,749
|
)
|
|
|
(4,690
|
)
|
Interest expense
|
|
|
5,399
|
|
|
|
4,140
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense (income)
|
|
|
4,643
|
|
|
|
1,391
|
|
|
|
(4,578
|
)
|
Other expense (income), net
|
|
|
589
|
|
|
|
719
|
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
68,085
|
|
|
|
20,304
|
|
|
|
17,444
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
22,285
|
|
|
|
4,866
|
|
|
|
5,258
|
|
Deferred
|
|
|
(261
|
)
|
|
|
325
|
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,024
|
|
|
|
5,191
|
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
46,061
|
|
|
$
|
15,113
|
|
|
$
|
13,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.77
|
|
|
$
|
0.66
|
|
|
$
|
0.63
|
|
Diluted
|
|
$
|
1.72
|
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
See accompanying notes to the
consolidated financial statements.
54
SXC
HEALTH SOLUTIONS CORP.
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income
|
|
$
|
46,061
|
|
|
$
|
15,113
|
|
|
$
|
13,146
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges and other (net of
income tax expense of $255 in 2009, and income tax benefit of
$254 in 2008)
|
|
|
429
|
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
46,490
|
|
|
$
|
14,683
|
|
|
$
|
13,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the
consolidated financial statements.
55
SXC
HEALTH SOLUTIONS CORP.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
46,061
|
|
|
$
|
15,113
|
|
|
$
|
13,146
|
|
Items not involving cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
3,657
|
|
|
|
4,080
|
|
|
|
3,040
|
|
Depreciation of property and equipment
|
|
|
8,014
|
|
|
|
6,615
|
|
|
|
3,994
|
|
Amortization of intangible assets
|
|
|
9,724
|
|
|
|
9,365
|
|
|
|
1,584
|
|
Deferred lease inducements and rent
|
|
|
(593
|
)
|
|
|
(304
|
)
|
|
|
452
|
|
Deferred income taxes
|
|
|
(261
|
)
|
|
|
325
|
|
|
|
(960
|
)
|
Tax benefit on option exercises
|
|
|
(4,464
|
)
|
|
|
(798
|
)
|
|
|
(2,405
|
)
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(16,705
|
)
|
|
|
8,005
|
|
|
|
(3,678
|
)
|
Rebates receivable
|
|
|
11,956
|
|
|
|
(2,383
|
)
|
|
|
|
|
Restricted cash
|
|
|
(1,671
|
)
|
|
|
632
|
|
|
|
|
|
Unbilled revenue
|
|
|
73
|
|
|
|
1,122
|
|
|
|
781
|
|
Prepaid expenses
|
|
|
(72
|
)
|
|
|
107
|
|
|
|
(335
|
)
|
Inventory
|
|
|
(401
|
)
|
|
|
(83
|
)
|
|
|
18
|
|
Income tax recoverable
|
|
|
6,098
|
|
|
|
677
|
|
|
|
(1,073
|
)
|
Accounts payable
|
|
|
1,635
|
|
|
|
1,678
|
|
|
|
689
|
|
Accrued liabilities
|
|
|
(1,139
|
)
|
|
|
4,845
|
|
|
|
2,496
|
|
Pharmacy benefit claim payments payable
|
|
|
10,263
|
|
|
|
(205
|
)
|
|
|
3,731
|
|
Pharmacy benefit management rebates payable
|
|
|
10,280
|
|
|
|
(8,357
|
)
|
|
|
(905
|
)
|
Deferred revenue
|
|
|
(630
|
)
|
|
|
1,305
|
|
|
|
1,593
|
|
Customer deposits
|
|
|
2,957
|
|
|
|
(490
|
)
|
|
|
|
|
Other
|
|
|
1,602
|
|
|
|
335
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
86,384
|
|
|
|
41,584
|
|
|
|
22,149
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(2,176
|
)
|
|
|
(104,769
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(8,994
|
)
|
|
|
(8,410
|
)
|
|
|
(7,651
|
)
|
Lease inducements received
|
|
|
|
|
|
|
373
|
|
|
|
391
|
|
Purchases of short term investments
|
|
|
(5,098
|
)
|
|
|
|
|
|
|
|
|
Proceeds from the sale of short term investments
|
|
|
449
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(15,819
|
)
|
|
|
(112,806
|
)
|
|
|
(7,251
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
|
|
|
|
|
|
48,000
|
|
|
|
|
|
Proceeds from public offering, net of issuance costs
|
|
|
203,121
|
|
|
|
|
|
|
|
|
|
Payment of financing costs
|
|
|
|
|
|
|
(1,792
|
)
|
|
|
|
|
Repayment of long-term debt
|
|
|
(47,640
|
)
|
|
|
(360
|
)
|
|
|
|
|
Proceeds from exercise of options
|
|
|
6,264
|
|
|
|
1,549
|
|
|
|
2,531
|
|
Tax benefit on option exercises
|
|
|
4,464
|
|
|
|
798
|
|
|
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
166,209
|
|
|
|
48,195
|
|
|
|
4,936
|
|
Effect of foreign exchange on cash balances
|
|
|
(119
|
)
|
|
|
(187
|
)
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
236,655
|
|
|
|
(23,214
|
)
|
|
|
19,986
|
|
Cash and cash equivalents, beginning of period
|
|
|
67,715
|
|
|
|
90,929
|
|
|
|
70,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
304,370
|
|
|
$
|
67,715
|
|
|
$
|
90,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
56
SXC
HEALTH SOLUTIONS CORP.
Consolidated Statements of Shareholders Equity
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Shares
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2006
|
|
|
20,444,490
|
|
|
$
|
99,840
|
|
|
$
|
4,003
|
|
|
$
|
7,492
|
|
|
$
|
|
|
|
$
|
111,335
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,146
|
|
|
|
|
|
|
|
13,146
|
|
Exercise of stock options
|
|
|
541,444
|
|
|
|
3,680
|
|
|
|
(1,149
|
)
|
|
|
|
|
|
|
|
|
|
|
2,531
|
|
Tax benefit on options exercised
|
|
|
|
|
|
|
|
|
|
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
2,405
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
20,985,934
|
|
|
|
103,520
|
|
|
|
8,299
|
|
|
|
20,638
|
|
|
|
|
|
|
|
132,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,113
|
|
|
|
|
|
|
|
15,113
|
|
Issuance of shares under ESPP
|
|
|
2,386
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Issuance of shares for acquisition
|
|
|
2,785,960
|
|
|
|
40,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,926
|
|
Costs to issue shares for acquisition
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(362
|
)
|
Exercise of stock options
|
|
|
291,458
|
|
|
|
2,262
|
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
|
1,549
|
|
Vesting of restricted stock units
|
|
|
37,294
|
|
|
|
610
|
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on options exercised
|
|
|
|
|
|
|
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
798
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,080
|
|
|
|
|
|
|
|
|
|
|
|
4,080
|
|
Other comprehensive (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(430
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
24,103,032
|
|
|
|
146,988
|
|
|
|
11,854
|
|
|
|
35,751
|
|
|
|
(430
|
)
|
|
|
194,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,061
|
|
|
|
|
|
|
|
46,061
|
|
Exercise of stock options
|
|
|
732,837
|
|
|
|
9,063
|
|
|
|
(2,799
|
)
|
|
|
|
|
|
|
|
|
|
|
6,264
|
|
Issuance of common shares
|
|
|
5,175,000
|
|
|
|
203,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,121
|
|
Issuance of common shares for acquisition
|
|
|
247
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Vesting of restricted stock units
|
|
|
46,165
|
|
|
|
2,023
|
|
|
|
(2,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on options exercised
|
|
|
|
|
|
|
|
|
|
|
4,464
|
|
|
|
|
|
|
|
|
|
|
|
4,464
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
3,657
|
|
Tax benefit of share issuance costs
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
Discontinuance of hedge accounting, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430
|
|
|
|
430
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
30,057,281
|
|
|
$
|
361,530
|
|
|
$
|
15,153
|
|
|
$
|
81,812
|
|
|
$
|
(1
|
)
|
|
$
|
458,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the
consolidated financial statements.
57
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business
|
SXC Health Solutions Corp. (the Company) is a
leading provider of pharmacy benefits management
(PBM) services and healthcare information technology
(HCIT) solutions to the healthcare benefits
management industry. The Companys product offerings and
solutions combine a wide range of PBM services, software
applications, application service provider (ASP)
processing services and professional services designed for many
of the largest organizations in the pharmaceutical supply chain,
such as federal, provincial, and state and local governments,
pharmacy benefit managers, managed care organizations, retail
pharmacy chains and other healthcare intermediaries. The Company
is headquartered in Lisle, Illinois with several locations in
the U.S. and Canada. The Company trades on the Toronto
Stock Exchange under ticker symbol SXC and on the
Nasdaq Global Market under ticker symbol SXCI. For
more information please visit www.sxc.com.
Effective April 30, 2008, the Company completed its
acquisition of National Medical Health Card Systems, Inc.
(NMHC). Please see Note 3 for more information.
|
|
2.
|
Significant
Accounting Policies
|
(a) Significant accounting policies are summarized below:
Basis
of presentation:
The consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally
accepted in the United States (U.S. GAAP) and
include its wholly-owned subsidiaries. All significant
inter-company transactions and balances have been eliminated in
consolidation. Amounts in the consolidated financial statements
are expressed in U.S. dollars, except where indicated.
Certain reclassifications have been made to conform the prior
years financial statements to the current years
presentation.
Subsequent
events:
As of the issuance date of the Companys consolidated
financial statements, no subsequent events have occurred that
would require adjustment to, or disclosure in, the consolidated
financial statements in accordance with Financial Accounting
Standards Boards (FASB) guidance.
Accounting
Standards Codification
Effective with the quarter ended September 30, 2009, the
Company adopted the FASBs Accounting Standards
Codification (the Codification), which is now the
exclusive authoritative reference for nongovernmental
U.S. GAAP. Where applicable, titles and references to
accounting standards have been updated to reflect the
Codification.
Use of
estimates:
The preparation of the consolidated financial statements in
conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
periods. Significant items subject to such estimates and
assumptions include revenue recognition, purchase price
allocation in connection with acquisitions, valuation of
property and equipment, valuation of intangible assets acquired
and related amortization periods, impairment of goodwill,
contingencies, and valuation allowances for receivables and
income taxes. Actual results could differ from those estimates.
Revenue
recognition:
The Companys revenue is derived from prescription drug
sales along with transaction processing services, maintenance,
professional services, and systems sales (including software
license and hardware sales).
The Company recognizes revenue when all of the following
conditions are satisfied: (i) there is persuasive evidence
of an arrangement; (ii) the service or product has been
provided to the customer and no uncertainties exist surrounding
product acceptance; (iii) the amount of fees to be paid by
the customer is fixed or determinable; and (iv) the
collection of fees is reasonably assured.
58
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When the Company enters into arrangements with multiple
deliverables, it applies the FASBs guidance for revenue
arrangements with multiple deliverables and evaluates each
deliverable to determine whether it represents a separate unit
of accounting based on the following criteria: (i) whether
the delivered item has value to the customer on a stand-alone
basis, (ii) whether there is objective and reliable
evidence of the fair value of the undelivered item(s), and
(iii) if the contract includes a general right of return
relative to the delivered item, delivery or performance of the
undelivered item(s) is considered probable and substantially in
the control of the Company. If objective reliable evidence of
fair value exists for all units of accounting in the
arrangement, revenue is allocated to each unit of accounting or
element based on relative fair values. In situations where there
is objective and reliable evidence of fair value for all
undelivered elements, but not for delivered elements, the
residual method is used to allocate the contract consideration.
Under the residual method, the amount of revenue allocated to
delivered elements equals the total arrangement consideration
less the aggregate fair value of any undelivered elements.
After determining which deliverables represent a separate unit
of accounting, each unit is then accounted for under the
applicable revenue recognition guidance. In cases where elements
cannot be treated as separate units of accounting, the elements
are combined into a single unit of accounting for revenue
recognition purposes.
Revenue is recognized for specific types of transactions as
follows:
PBM revenue: The Companys PBM revenue is
primarily derived from sales of prescription drugs, together
with any associated administrative fees, to customers and
participants, either through the Companys nationwide
network of pharmacies, Mail Service or Specialty Service.
Revenue related to the sales of prescription drugs by the
Companys nationwide network of pharmacies, Mail Service
pharmacy or Specialty Service pharmacy is recognized when the
claims are adjudicated and the prescription drugs are shipped.
Claims are adjudicated at the
point-of-sale
using the Companys on-line processing system. Co-payment
revenue recognized at the Companys Mail Service and
Specialty Service pharmacies on these prescription drugs for the
years ended December 31, 2009, 2008, and 2007 was
$13.3 million, $9.9 million, and $0, respectively. To
date, the Companys Mail Service primarily fills
prescriptions for the Companys customers. Revenue from
Specialty Service primarily represents sales of
biopharmaceutical drugs and is reported at the net amount billed
to third party payors, patients and others. The Company records
an offsetting reduction to revenue for any rebates earned from
pharmaceutical manufacturers and third party administrators
which are payable to the Companys customers.
Under the Companys customer contracts, the retail pharmacy
is solely obligated to collect the co-payments from the
participants. As such, the Company does not include participant
co-payments to pharmacies in revenue or cost of revenue for
prescriptions not filled by the Companys Mail Service and
Specialty Service. If these amounts were included in the
Companys operating results, its operating income and net
income would not have been affected.
The Company evaluates customer contracts to determine whether
the Company acts as a principal or as an agent in the
fulfillment of prescriptions through its retail pharmacy
network. The Company acts as a principal in certain of its
transactions with customers and, in these cases, revenues are
recognized at the prescription price (ingredient cost plus
dispensing fee) negotiated with customers, plus the
Companys administrative fees (gross
reporting). Gross reporting is appropriate when the
Company (i) has separate contractual relationships with
customers and with pharmacies, (ii) is responsible to
validate and manage a claim through its claims adjudication
process, (iii) commits to set prescription prices for the
pharmacy, including instructing the pharmacy as to how that
price is to be settled (co-payment requirements),
(iv) manages the overall prescription drug plan
relationship with the patients, who are members of
customers plans, and (v) has credit risk for the
amount due from the customer.
Transaction processing revenue: Revenue from
transaction processing includes ASP and switching services. ASP
services consist primarily of hosting, claims adjudication,
customer support, financial reporting, data storage, and rebate
administration services. The Company earns a transaction fee for
each transaction processed. The Company recognizes revenue at
the time the transaction is processed, with the exception of any
undelivered elements.
System sales revenue: Revenue from software
licenses is recognized in accordance with the American Institute
of Certified Public Accountants accounting guidance for
software. Revenue is recognized when all the
conditions described above are satisfied. In the event the fee
is not fixed or determinable, revenue is recognized as the
payments become due from the customer. In cases where collection
is not deemed probable, revenue is recognized upon receipt of
cash, assuming all other criteria have been met.
Typically, software license agreements are multiple element
arrangements as they also include professional services, related
maintenance, hardware,
and/or
implementation services fees. Arrangements that include
consulting services are evaluated to determine whether those
services are considered essential to the functionality of the
software.
59
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
When services are considered essential to the functionality of
the software or significant customization of the software is
required, license and professional services revenues are
recognized using the
percentage-of-completion
method where reasonably dependable estimates of progress toward
completion of a contract can be made in accordance with
long-term contract accounting. The Company estimates the
percentage-of-completion
on contracts utilizing actual hours worked to date as a
percentage of the total estimated hours at project completion,
subject to meeting agreed milestones. In the event that a
milestone has not been reached, the associated cost is deferred
and revenue is not recognized until the customer has accepted
the milestone. Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions to
estimates may occur periodically during the project due to
change orders or contract amendments initiated and agreed to by
the customer. Revisions in profit estimates are charged or
credited to earnings in the period in which the facts that give
rise to the revision become known. Revenue recognized under the
percentage-of-completion
method that is unbilled at each period end is recorded in
unbilled revenue within current assets. Billings in excess of
revenue recognized to date on contracts are recorded within
deferred revenue. In those arrangements that include maintenance
and involve significant customization of software or services
that are deemed essential to the software, for which vendor
specific objective evidence (VSOE) of fair value of
the maintenance obligation cannot be established, revenue is
recognized to the extent of direct costs incurred until the only
undelivered element is maintenance, at which time the remaining
revenue is recognized over the remaining term of the maintenance
obligation. If the Company does not have a sufficient basis to
estimate the progress towards completion and for contracts with
short durations, revenue is recognized when the project is
complete or when final acceptance is received from the customer.
When services are not considered essential to the functionality
of the software and significant customization of the software is
not required, the entire arrangement fee is allocated to each
element in the arrangement based on the respective VSOE of fair
value of each element. VSOE of fair value used in determining
the fair value of license revenues is based on the price charged
by the Company when the same element is sold in similar volumes
to a customer of similar size and nature on a stand-alone basis.
As the Company has not sold many licenses over the past several
years, VSOE of fair value for licenses is not always
established. VSOE used in determining revenue for consulting is
based on the standard daily rates for the type of services being
provided multiplied by the estimated time to complete the task.
VSOE used in determining the fair value of maintenance and
technical support is based on the annual renewal rates. The
revenue allocable to the consulting services is recognized as
the services are performed. In instances where VSOE exists for
undelivered elements but does not exist for delivered elements
of a software arrangement, the Company uses the residual method
of allocation of the arrangement fees for revenue recognition
purposes. The Company has used the residual method of revenue
recognition to determine the amount of revenue to be applied to
any software licenses that contain multiple elements for the
periods covered in this report as VSOE of fair value of the
software licenses was not available. If VSOE of fair value
cannot be established for the undelivered elements of a license
agreement, the entire amount of revenue under the arrangement is
deferred until these elements have been delivered or VSOE can be
established.
Maintenance revenue: Maintenance revenues
consist of revenue derived from contracts to provide
post-contract customer support (PCS) to license
holders. These revenues are recognized ratably over the term of
the contract. Advance billings of PCS are not recorded to the
extent that the term of the PCS has not commenced or payment has
not been received.
Professional services revenue: Professional
services revenues are recognized as the services are performed,
generally on a time and material basis. Professional services
revenues attributed to fixed price arrangements are recognized
over the service period based on a proportionate performance
method whereby the performance is estimated utilizing direct
labor hours incurred to date as a percentage of total estimated
direct labor hours to complete the project.
Cost
of revenue:
The Companys cost of revenue includes the cost of
pharmaceuticals dispensed, either directly through Mail Service
or Specialty Service, or indirectly through its nationwide
network of retail pharmacies. Cost of revenue is reduced for
rebates earned from pharmaceutical manufacturers and third party
administrators. Cost of revenue also includes the cost of
personnel to support the Companys transaction processing
services, system sales, maintenance, and professional services.
In addition, the Company includes in cost of revenue an amount
of depreciation expense that is related to property and
equipment used to provide services to customers.
60
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and cash equivalents:
The Company considers cash on hand, deposits in banks, money
market funds, and bank term deposits with original maturities of
ninety days or less as cash and cash equivalents. The amounts
presented in the consolidated balance sheets approximate the
fair value of cash and cash equivalents. These assets are deemed
level one securities in the fair value hierarchy.
Restricted
cash:
Restricted cash balances at December 31, 2009 are
restricted as to use and relate primarily to minimum cash
balances required in accordance with various state statutes,
contractual terms with customers and other customer restrictions
related to the Companys PBM business.
Short-term
investments:
The Company holds debt securities, U.S. government
treasuries, and other short-term investments that are classified
as
available-for-sale
securities as prescribed in investment accounting guidance.
These securities are classified as
available-for-sale
since they do not qualify as trading securities or as
held-to-maturity
securities. Management assesses the classification of each
investment at the purchase date, and reviews the classification
at each reporting period. The
available-for-sale
securities are carried at fair value based on current market
prices obtained from industry pricing sources (e.g. Bloomberg).
Unrealized gains and losses on the securities are recorded in
other comprehensive income, net of tax. The securities have
maturities of less than one year, and are accordingly classified
as short-term assets.
The Company considers the need to review its investments for an
other-than-temporary
impairment at each reporting period. The Company reviews each
investment that has a fair value that is below its amortized
cost basis and considers whether the decline in the assets
value is temporary. For those impairments deemed
other-than-temporary,
a charge will be recorded to current period earnings. The
Company did not record any
other-than-temporary
impairment charges during 2009.
Fair
value measurements:
The Company applies the fair value accounting guidance for
measuring its financial and non-financial assets and
liabilities. Currently, none of the Companys non-financial
assets are required to be carried at fair value. The Company
would apply the fair value accounting guidance to non-financial
assets and liabilities in the event that a non-financial asset
or liability was impaired, or, if non-financial assets and
liabilities were purchased in a business acquisition.
The fair value of the Companys interest rate contracts are
based upon observable market-based inputs that reflect the
current value of the difference between the fixed rate payments
the Company will make to the counter party, and the future
variable rate receipts from the counterparty. The Companys
short-term investments are valued based upon market prices for
those specific securities obtained from industry pricing
sources. Other assets and liabilities held by the Company deemed
as financial instruments and required to be carried at fair
value include cash and cash equivalents, accounts receivable,
unbilled revenue, accounts payable, salaries and wages payable,
accrued liabilities (current portion) pharmacy benefit
management rebates payable and pharmacy benefit claim payments
payable. The estimated fair values of these financial
instruments approximate their carrying amounts due to the
short-term nature of their maturities.
Deferred
charges:
Deferred charges consisted of deferred financing costs relating
to the issuance of long-term debt. Amortization is provided
using the effective-interest method over the term of the related
debt. As of December 31, 2009, the Company expensed all of
the remaining deferred financing costs due to the extinguishment
of all of the Companys long-term debt associated with
these costs.
Inventory:
Inventory consists primarily of prescription drugs and medical
supplies, computer hardware and
sub-licensed
software held for resale and is carried at the lower of cost or
net realizable value. Inventory costs are calculated using the
first-in,
first-out method and the weighted-average method.
61
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and equipment:
Property and equipment (P&E) are stated at cost
less accumulated depreciation. Depreciation is generally
calculated over the expected estimated useful lives of the
assets. Assets are depreciated in the following manner:
1) Furniture and equipment is depreciated using the
straight line method based on a useful life of five years,
2) Computer equipment and software assets are depreciated
using a straight line method and a useful life of three to five
years, and 3) Leasehold improvements are depreciated on a
straight line basis over the shorter of the assets lease
term or useful life.
Accounts
receivable and allowance for doubtful accounts:
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. Amounts collected on trade accounts
receivable are included in net cash provided by operating
activities in the consolidated statements of cash flows. In
assessing the valuation of the allowance for doubtful accounts,
management reviews the collectability of accounts receivable in
aggregate and on an individual account-basis. Individual
customer events such as subsequent collections, discussions with
management of the debtor companies, or other activities are used
by management as factors in concluding whether to increase or
decrease the calculated allowance. Any increase or decrease to
the allowance is recognized in the statements of operations as
bad debt expense within selling, general and administrative
expense.
Impairment
of long-lived assets:
Long-lived assets or asset groups held and used, including
P&E and purchased intangibles subject to amortization are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Circumstances which could trigger a review
include, but are not limited to: significant decreases in the
market price of the asset; significant adverse changes in the
business climate or legal factors; the accumulation of costs
significantly in excess of the amount originally expected for
the acquisition or construction of the asset; current period
cash flow or operating losses combined with a history of losses
or a forecast of continuing losses associated with the use of
the asset; and a current expectation that the asset will more
likely than not be sold or disposed of significantly before the
end of its previously estimated useful life. Recoverability is
assessed based on the carrying amount of the asset and the sum
of the undiscounted cash flows expected to result from the use
and the eventual disposal of the asset or asset group. An
impairment loss is recognized when the carrying amount is not
recoverable and exceeds the fair value of the asset or asset
group. The impairment loss is measured as the amount by which
the carrying amount exceeds fair value. During each of the years
ended December 31, 2009, 2008, and 2007, no events or
circumstances occurred that indicated that the carrying amounts
of the long-lived assets may not be recoverable.
Goodwill:
Goodwill is the residual amount that results when the purchase
price of an acquired business exceeds the sum of the amounts
allocated to the identifiable assets acquired, less liabilities
assumed, based on their fair values. Goodwill is allocated to
the Companys reporting unit that is expected to benefit
from the business combination as of the date of the business
combination.
Goodwill is not amortized, but rather, is tested for impairment
annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Prior
to 2008, the Company completed its goodwill impairment test at
December 31. In 2008, the Company changed the date of its
annual impairment test to October 31 driven by the increase in
reporting segments due to the NMHC acquisition completed in
2008. Changing the date to October 31 is preferable to allow the
Company more time to accurately complete its impairment testing
process.
Circumstances that could trigger an interim impairment test
include: a significant adverse change in the business climate or
legal factors; an adverse action or assessment by a regulator;
unanticipated competition; the loss of key personnel; a change
in reportable segments; the likelihood that a reporting unit or
significant portion of a reporting unit will be sold or
otherwise disposed of; the results of testing for recoverability
of a significant asset group within a reporting unit; and the
recognition of a goodwill impairment loss in the financial
statements of a subsidiary that is a component of a reporting
unit.
The impairment test is carried out in two steps. In the first
step, the carrying amount of the reporting unit is compared with
its fair value. When the fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is
considered not to be impaired and the second step of the
impairment test is unnecessary. The second step is carried out
when the carrying amount of a reporting unit exceeds its fair
value, in which case the implied fair value of the reporting
units goodwill is compared with its carrying amount to
measure the amount of the impairment loss, if any. The implied
fair value of goodwill is determined in the
62
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
same manner as the value of goodwill is determined in a business
combination using the fair value of the reporting unit as if it
was the purchase price. When the carrying amount of reporting
unit goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to the excess
and is presented as a separate line item in the consolidated
statements of operations. The Company completed its goodwill
impairment test for 2009 and determined no impairment existed.
Based on the testing results, an impairment in the near future
is not considered reasonably likely. The Company previously
completed the impairment test in 2008 and 2007 and concluded no
impairment existed.
Intangible
assets:
Intangible assets acquired individually or as part of a group of
other assets are initially recognized and measured at cost. The
cost of a group of intangible assets acquired in a transaction,
including those acquired in a business combination that meet the
specified criteria for recognition apart from goodwill, is
allocated to the individual assets acquired based on their fair
values.
Intangible assets with finite useful lives are amortized over
their estimated useful lives on either a straight-line basis or
in proportion to the economic benefits expected to be consumed.
Customer relationships acquired with the acquisition of NMHC are
amortized over 8 years based on projected cash flows
associated with existing customers at the acquisition date. The
remaining customer relationships are currently amortized over
either five years or ten years on a straight line basis. The
remaining intangible assets are amortized on a straight-line
basis over 1 to 15 years.
Customer
deposits:
The Company requires deposits from certain customers in order to
satisfy liabilities incurred by the Company on the
customers behalf for the adjudication of pharmacy claims.
Customer deposits totalled $14.8 million and
$11.9 million as of December 31, 2009 and 2008,
respectively.
Rebates:
The Company administers a rebate program through which it
receives rebates and administrative fees from pharmaceutical
manufacturers and third party administrators that are shared
with a majority of the Companys customers. The rebates
earned for the administration of the program are recorded as a
reduction of cost of revenue and the portion of the rebate
payable to customers is treated as a reduction of revenue.
Rebates receivable include billed and unbilled PBM receivables
from pharmaceutical manufacturers and third party
administrators. The Company records the gross rebate receivable
and the related payable to the customers based on estimates,
which are subject to final settlement due to validation of
claims data submitted to the pharmaceutical manufacturers and
third party administrators, as well as contingent items
contained in the total calculation for rebates earned. The
estimates are based upon claims submitted and the Companys
rebate contracts, and are adjusted as additional information
becomes available. Upon billing the pharmaceutical manufacturer
or third party administrator, any difference between the
Companys estimate and the actual amount of the rebate
receivable is recorded to cost of revenue, net of the estimated
impact to the Companys customers. The Company generally
pays rebates to its customers on a quarterly basis, or as agreed
upon with its customers. There are certain instances where the
Company pays rebates to its customers on a more accelerated
basis.
In late 2008, the Company entered into new contracts for
manufacturer rebates and currently only acts as the principal
contracting party. Prior to entering into the new contracts, the
Company had two rebate programs. In one of the programs the
Company acted as an agent for its customers, and in the other as
a principal, as it acts in the current rebate program.
As of December 31, 2009 and 2008, total unbilled
pharmaceutical manufacturer rebates receivable amounted to
$7.0 million and $20.1 million, respectively.
Research
and product development:
Research costs are expensed as incurred. Costs related to
development of software are expensed as incurred unless such
costs meet the criteria for capitalization and amortization. The
Company has not capitalized any software development costs
incurred during 2009, 2008, or 2007.
63
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment
tax credits:
Non-refundable investment tax credits for Scientific Research
and Experimental Development (SRED) activities are
recorded when the Company has reasonable assurance that the
credit will be realized. Management has made a number of
estimates and assumptions in determining the expenditures
eligible for the investment tax credit claim. It is possible
that the allowable amount of the investment tax credit claim
could be materially different from the recorded amount upon
assessment by the Canada Revenue Agency. Non-refundable
investment tax credits are recorded as a reduction of income tax
expense on the consolidated statements of operations.
Stock-based
compensation:
For stock-based awards issued to employees and directors,
compensation cost related to those awards is measured based on
the fair value of the options on the date of the grant. For
stock options, the fair value is determined by using the
Black-Scholes-Merton option-pricing model. The compensation cost
of the awards expected to vest is recognized on a straight-line
basis over the service period as compensation expense and
additional paid-in capital. In addition, the Company estimates
forfeitures as part of the initial measure of the grant date
fair value of the award.
The cumulative compensation cost is treated as a temporary
difference for stock-based awards that are deductible for tax
purposes. If a deduction reported on a tax return exceeds the
cumulative compensation cost for those awards, any resulting
realized tax benefit that exceeds the previously recognized
deferred tax asset for those awards (the excess tax benefit) is
recognized as additional paid-in capital. If the amount
deductible is less than the cumulative compensation cost
recognized for financial reporting purposes, the write-off of a
deferred tax asset related to that deficiency, net of the
related valuation allowance, if any, is first offset to the
extent of any remaining additional paid-in capital from excess
tax benefits from previous awards with the remainder recognized
in the statement of operations.
Derivatives:
The Company accounts for derivative instruments pursuant to the
FASBs derivative and hedge accounting guidance. The
guidance requires that all derivative instruments are recorded
on the balance sheet at their respective fair values. Changes in
the fair value of the Companys derivative instruments not
deemed cash flow hedges are recorded in the statements of
operations each reporting period. The Company records the change
in the fair value of its derivative instruments deemed as cash
flow hedges through other comprehensive income in each reporting
period.
Foreign
currency:
The Companys functional currency and reporting currency is
the U.S. dollar. Monetary items denominated in foreign
currency are translated to U.S. dollars at exchange rates
in effect at the balance sheet date and non-monetary items are
translated at rates in effect when the assets were acquired or
obligations incurred. Revenue and expenses are translated at
rates in effect at the time of the transactions. Foreign
exchange gains and losses are included in the consolidated
statements of operations as Other (income) expense.
Earnings
per share:
Basic earnings per share (EPS) is computed by
dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted EPS is computed by
dividing net income by the weighted-average number of common
shares adjusted for the dilutive effect of outstanding
stock-based awards. The dilutive effect is calculated by
assuming that the proceeds from the exercise of
in-the-money
stock options were used to acquire shares of common stock at the
average market price for the period.
Income
taxes:
The Company uses the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are
recognized for the deferred tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the periods in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the date of enactment.
64
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future tax benefits resulting from historical net operating
losses (NOLs) and deductible temporary differences
are recognized in accordance with tax accounting guidance. In
assessing the realizability of the related deferred income tax
assets (DTAs), management considers whether it is
more likely than not that some portion or all of the DTAs will
be realized. The ultimate realization of DTAs is dependent upon
the generation of future taxable income during the period in
which those temporary differences become deductible, in addition
to managements tax planning strategies. Management
considers projected future taxable income, uncertainties related
to the industry in which the Company operates, tax planning
strategies, historical taxable income, and a comparison of
actual levels of taxable income with pre-tax book income in
making this assessment. Valuation allowances are established for
DTAs that are not considered more likely than not to be
realized. The amount of this valuation allowance is subject to
adjustment by the Company in future periods based upon its
assessment of evidence supporting the degree of probability that
DTAs will be realized.
Benefits from uncertain tax positions are recognized in the
consolidated financial statements only when it is more likely
than not that the tax position will be sustained upon
examination by the appropriate taxing authority having full
knowledge of all relevant information. A tax position that meets
the more-likely-than-not recognition threshold is measured at
the largest amount of benefit that is greater than fifty percent
likely of being realized upon settlement. The Company recognizes
interest and penalties related to uncertain tax positions in
income tax expense.
Deferred
lease inducements:
Deferred lease inducements represent cash inducements and tenant
improvement allowances received from the Companys
landlords that are amortized against rent expense on a
straight-line basis over the term of the respective lease.
Deferred
rent:
When the terms of an operating lease provide for periods of free
rent, rent concessions
and/or rent
escalations, the Company records rent expense on a straight-line
basis over the term of the respective lease. The difference
between the rent expense recognized and the actual payments made
in accordance with the lease agreement is recognized as deferred
rent liability.
(b) Recent accounting standards implemented are summarized
below:
Derivative
and hedging disclosures:
Effective January 1, 2009, the Company adopted the amended
accounting guidance for derivative and hedging disclosures. The
new guidance requires qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures
about fair value amounts and gains and losses on derivative
instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. The amended
accounting guidance did not have a material impact to the
financial results.
Business
combinations:
The Company adopted the FASBs new accounting guidance for
business combinations as of January 1, 2009. The new
accounting guidance applies to all transactions or other events
in which an entity (the acquirer) obtains control of one or more
businesses. The new guidance establishes principles and
requirements for how the acquirer recognizes and measures in its
financial statements the assets, liabilities, noncontrolling
interest, and goodwill related to a business combination. It
also establishes what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. This new accounting
guidance applies prospectively to business combinations for
which the acquisition date is on or after January 1, 2009.
The adoption did not have a material impact on the
Companys financial results during 2009.
(c) Recent accounting pronouncements are summarized below:
Revenue
arrangements with multiple deliverables
In October 2009, the FASB issued an amendment to revenue
recognition guidance for transactions with multiple
deliverables. The updated accounting guidance changes the
criteria necessary for a delivered item to be considered a
separate element. The new accounting guidance eliminates the
requirement of using objective and reliable evidence of fair
value in determining the amount of revenue to recognize. In
place of having objective and reliable evidence of fair value
for delivered and undelivered elements, a company may use its
best estimate of selling price to determine the amount of
revenue to recognize. The
65
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
new guidance is required to be adopted for the Companys
fiscal year beginning January 1, 2011, with early adoption
permitted. The Company is adopting the provisions of the new
guidance effective January 1, 2010. The Company does not
expect the implementation of the new guidance to have a material
impact on its financial results.
Revenue
arrangements that include software elements
The FASB issued new revenue recognition guidance in October 2009
for transactions of tangible products that have software
components. The new accounting guidance removes the non-software
components and software elements of the tangible product from
the scope of software revenue recognition accounting guidance.
The new guidance is required to be adopted for the
Companys fiscal year beginning January 1, 2011, with
early adoption permitted. The Company is adopting the provisions
of the new guidance effective January 1, 2010. The Company
does not expect the implementation of the new guidance to have a
material impact on its financial results.
NMHC
Acquisition
Effective April 30, 2008, the Company completed the
acquisition of NMHC, a pharmacy benefit management company, in
an exchange offer of (i) 0.217 of a Company common share
and (ii) $7.70 in cash for each outstanding NMHC common
share. Total deal consideration approximated
$143.8 million, which included the issuance of 2,786,100
Company common shares. The value of the common shares issued was
based on the average market price of the Companys common
shares from a few days before to a few days after the agreement
was finalized and announced. To fund the transaction, the
Company entered into a six-year $48.0 million term loan
agreement. The Company also signed a $10.0 million senior
secured revolving credit agreement. NMHC results of operations
are included in the consolidated financial statements from the
date of acquisition.
Prior to the acquisition, the Company and one of NMHCs
subsidiaries, NMHCRX, Inc., were parties to a consulting
agreement and software license and maintenance agreements
pursuant to which the Company licensed, and provided consulting
and support services in connection with, certain computer
software for one of NMHCRX, Inc.s claims adjudication
systems.
The Company and NMHC have similar missions and core values, and
the Company believes the synergies gained from this business
combination will create long-term value for customers, vendors
and shareholders, as well as opportunities for new and existing
employees by making the Company better positioned to compete in
the changing PBM environment.
The purchase price of the acquired operations was comprised of
the following (in thousands):
|
|
|
|
|
Cash payment to NMHC shareholders
|
|
$
|
98,711
|
|
Value assigned to shares issued
|
|
|
40,930
|
|
Direct costs of the acquisition
|
|
|
4,114
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
143,755
|
|
|
|
|
|
|
Direct
Costs of the Acquisition
Direct costs of the acquisition include investment banking fees,
legal and accounting fees and other external costs directly
related to the acquisition.
Purchase
Price Allocation
The acquisition was accounted for under the purchase method of
accounting with the Company treated as the acquiring entity.
Accordingly, the consideration paid by the Company to complete
the acquisition has been allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as of
the date of acquisition. The excess of the purchase price over
the estimated fair values of the net assets acquired and
liabilities assumed was recorded as goodwill. Goodwill is
non-amortizing
for financial statement purposes and is not tax deductible. The
changes in goodwill from December 31, 2008 are primarily
due to deferred tax adjustments, changes in the estimated fair
value of acquired fixed assets, and revisions to the estimated
fair values of assumed liabilities related to the NMHC
acquisition. During the third quarter of 2009, the Company
recorded an adjustment to goodwill and deferred tax liabilities.
The adjustment decreased goodwill and decreased deferred tax
liabilities (non-current) by approximately $2.1 million.
66
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the fair values assigned to the assets
acquired and liabilities assumed at the acquisition date and are
subject to change (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
115,864
|
|
Property and equipment
|
|
|
3,495
|
|
Goodwill
|
|
|
122,122
|
|
Intangible assets
|
|
|
44,420
|
|
Other assets
|
|
|
1,258
|
|
|
|
|
|
|
Total assets acquired
|
|
|
287,159
|
|
Current liabilities
|
|
|
132,618
|
|
Deferred income taxes
|
|
|
10,490
|
|
Other liabilities
|
|
|
296
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
143,404
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
143,755
|
|
|
|
|
|
|
During the year ended December 31, 2009, the Company
recognized $7.6 million of amortization expense from
intangible assets acquired. Amortization for 2010 and 2011 is
expected to be $6.0 million and $5.3 million,
respectively.
The estimated fair values and useful lives of intangible assets
acquired are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Trademarks/Trade names
|
|
$
|
1,120
|
|
|
|
6 months
|
|
Customer relationships
|
|
|
39,700
|
|
|
|
8 years
|
|
Non-compete agreements
|
|
|
1,480
|
|
|
|
1 year
|
|
Software
|
|
|
1,120
|
|
|
|
1 year
|
|
Licenses
|
|
|
1,000
|
|
|
|
15 years
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of the acquired intangible assets will have any residual
value at the end of the amortization periods. There were no
in-process research and development assets acquired.
Unaudited
Pro Forma Financial Information
The following unaudited pro forma financial information presents
the combined historical results of the operations of the Company
and NMHC as if the acquisition had occurred on the first day of
the periods presented. Certain adjustments have been made to
reflect changes in depreciation, amortization and income taxes
based on the fair values recognized in the application of
purchase accounting, and interest expense on borrowings to
finance the acquisition. Unaudited pro forma results of
operations are as follows (dollars in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Sales
|
|
$
|
1,244,600
|
|
|
$
|
716,967
|
|
Gross profit
|
|
$
|
140,773
|
|
|
$
|
135,587
|
|
Net income
|
|
$
|
10,038
|
|
|
$
|
495
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.41
|
|
|
$
|
0.02
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,886,355
|
|
|
|
23,541,332
|
|
Diluted
|
|
|
24,320,900
|
|
|
|
24,348,714
|
|
67
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
This unaudited pro forma financial information is not intended
to represent or be indicative of what would have occurred if the
transaction had taken place on the dates presented and is not
indicative of what the Companys actual results of
operations would have been had the acquisition been completed at
the beginning of the periods indicated above. Further, the pro
forma combined results do not reflect one-time costs to fully
merge and operate the combined organization more efficiently, or
anticipated synergies expected to result from the combination
and should not be relied upon as being indicative of the future
results that the Company will experience.
Zynchros
acquisition
On December 22, 2008, the Company announced that it had
acquired the assets of Zynchros, a privately-owned leader in
formulary management solutions, in a cash transaction effective
December 19, 2008. Founded in 2000, Zynchros provides a
suite of on-demand formulary management tools to approximately
45 health plan and PBM customers. The zynchros.com platform
helps payors to effectively manage their formulary programs, and
to maintain Medicare Part D compliance of their programs.
The Company recorded identifiable intangible assets of
$1.7 million with estimated useful lives of 4 to
5 years and goodwill of $2.4 million associated with
the acquisition. The goodwill acquired was allocated to the
Companys HCIT segment. Zynchros results of operations are
included in the consolidated statement of operations for the
period from December 19, 2008 through December 31,
2008 and were not material to the Companys results of
operations for the twelve months then ended on a pro forma basis.
|
|
4.
|
Property
and equipment
|
Net property and equipment was made up of the following at
December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
December 31, 2009
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Furniture and equipment
|
|
$
|
5,161
|
|
|
$
|
(2,638
|
)
|
|
$
|
2,523
|
|
Computer equipment and software
|
|
|
35,928
|
|
|
|
(22,062
|
)
|
|
|
13,866
|
|
Leasehold improvements
|
|
|
6,212
|
|
|
|
(2,721
|
)
|
|
|
3,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,301
|
|
|
$
|
(27,421
|
)
|
|
$
|
19,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
December 31, 2008
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Furniture and equipment
|
|
$
|
3,788
|
|
|
$
|
(1,762
|
)
|
|
$
|
2,026
|
|
Computer equipment and software
|
|
|
29,585
|
|
|
|
(15,900
|
)
|
|
|
13,685
|
|
Leasehold improvements
|
|
|
6,832
|
|
|
|
(1,787
|
)
|
|
|
5,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,205
|
|
|
$
|
(19,449
|
)
|
|
$
|
20,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense, including property and equipment acquired
under capital leases, totaled $8.0 million,
$6.6 million, and $4.0 million for the years ended
December 31, 2009, 2008, and 2007, respectively. Of the
total depreciation expense, $2.2 million,
$1.8 million, and $1.5 million was related to the data
center operations and allocated to cost of revenue for the years
ended December 31, 2009, 2008 and 2007, respectively.
68
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Deferred
lease inducements
|
The following table summarizes activity related to deferred
lease inducements for the years ended December 31, 2009 and
2008 (in thousands):
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
3,222
|
|
Additions
|
|
|
373
|
|
Amortization
|
|
|
(378
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
3,217
|
|
|
|
|
|
|
Additions
|
|
|
|
|
Amortization
|
|
|
(469
|
)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
2,748
|
|
|
|
|
|
|
During 2008, additions to gross lease inducements represent
amounts paid by the landlord for leasehold improvements related
to the Lisle, Illinois leased facility acquired on behalf of the
Company, as per the lease agreement. There were no new lease
inducements received by the Company during 2009.
|
|
6.
|
Other
intangible assets
|
Definite-lived intangible assets are amortized over the useful
lives of the related assets. The components of intangible assets
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Customer relationships
|
|
$
|
53,760
|
|
|
$
|
18,116
|
|
|
$
|
35,644
|
|
|
$
|
53,100
|
|
|
$
|
10,043
|
|
|
$
|
43,057
|
|
Acquired software
|
|
|
3,765
|
|
|
|
2,932
|
|
|
|
833
|
|
|
|
3,565
|
|
|
|
1,903
|
|
|
|
1,662
|
|
Trademarks/Trade names
|
|
|
1,370
|
|
|
|
1,188
|
|
|
|
182
|
|
|
|
1,360
|
|
|
|
1,122
|
|
|
|
238
|
|
Non-compete agreements
|
|
|
1,510
|
|
|
|
1,484
|
|
|
|
26
|
|
|
|
1,480
|
|
|
|
987
|
|
|
|
493
|
|
Licenses
|
|
|
1,000
|
|
|
|
111
|
|
|
|
889
|
|
|
|
1,000
|
|
|
|
44
|
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,405
|
|
|
$
|
23,831
|
|
|
$
|
37,574
|
|
|
$
|
60,505
|
|
|
$
|
14,099
|
|
|
$
|
46,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future amortization associated with intangible assets at
December 31, 2009 is estimated to be $7.9 million in
2010, $7.1 million in 2011, $6.5 million in 2012,
$5.7 million in 2013, $5.2 million in 2014 and
$5.2 million for years after 2014.
Long-term
debt:
On April 25, 2008, the Companys U.S. subsidiary,
SXC Health Solutions, Inc. (US Corp.), entered into
a credit agreement (the Credit Agreement) providing
for up to $58 million of borrowings, consisting of
(i) a $10 million senior secured revolving credit
facility (including borrowing capacity available for letters of
credit and for borrowings on
same-day
notice) referred to as a swing loan (the Revolving Credit
Facility) and (ii) a $48 million senior secured
term loan (the Term Loan Facility and, together with
the Revolving Credit Facility, the Credit
Facilities). On April 29, 2008, US Corp. borrowed
$48 million under the Term Loan Facility to pay a portion
of the consideration in connection with the acquisition of NMHC
and certain transaction fees and expenses related to the
acquisition.
The Company repaid the entire outstanding principal under the
Term Loan Facility on December 31, 2009. In exchange for a
payment of $45.6 million, the Company was relieved of its
future obligations to the lender. The Company also cancelled the
Revolving Credit Facility on the same date. There was no gain or
loss on extinguishment of the principal balance of the debt when
it was repaid to the lender; however, the Company recorded a
charge of $1.1 million to interest expense upon the
extinguishment to expense the unamortized financing costs
related to the Credit Facilities. The financing costs initially
were
69
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$1.8 million and had been presented on the consolidated
balance sheet as deferred financing charges. These costs were
previously amortized into interest expense over the life of the
loan using the effective interest method.
The interest rates applicable to the loans under the Credit
Facilities were based on a fluctuating rate measured by
reference to either, at US Corp.s option, (i) a base
rate, plus an applicable margin, subject to adjustment, or
(ii) an adjusted London interbank offered rate (adjusted
for the maximum reserves)(LIBOR), plus an applicable
margin. The initial rate for all borrowings is prime plus 2.25%
with respect to base rate borrowings or LIBOR plus 3.25%. No
rate was applicable as of December 31, 2009 due to the debt
extinguishment. In addition to paying interest on outstanding
principal under the Credit Facilities, US Corp. was required to
pay an unused commitment fee to the lenders in respect of any
unutilized commitments under the Revolving Credit Facility at a
rate of 0.50% per annum. This requirement was released when the
Company cancelled the Revolving Credit Facility. In addition,
pursuant to the terms of its credit agreement, the Company
entered into interest rate contracts for 50% of the borrowed
amount, or $24 million, to provide protection against
fluctuations in interest rates for a three-year period from the
date of issue. These contracts are still in place subsequent to
the Credit Facilities extinguishment. See Note 16 for more
information.
The Credit Facilities previously required US Corp. to prepay
outstanding loans, subject to certain exceptions, from certain
transactions. One of the criteria related to the issuance or
sale by the Company of its own stock. In September 2009, the
Company raised net proceeds of $203.1 million from a public
offering of the Companys common shares as described in
Note 8. US Corp. obtained consent from its creditors which
waived the need to use part of the proceeds to prepay the
outstanding loans under the Credit Facilities.
The Company and all material U.S. subsidiaries of US Corp.
were the guarantors of the obligations under the Credit
Agreement. In addition, the Credit Facilities and the guarantees
were secured by the capital stock of US Corp. and certain other
subsidiaries of the Company and substantially all other tangible
and intangible assets owned by the Company, US Corp. and each
subsidiary that guarantees the obligations of US Corp. under the
Credit Facilities, subject to certain specified exceptions.
Supplemental
information:
Interest expense, including that applicable to capital leases,
relates to the following for the years ended December 31,
2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Long-term debt
|
|
$
|
1,882
|
|
|
$
|
2,223
|
|
|
$
|
|
|
Other (including fair value adjustments of derivatives)
|
|
|
2,036
|
|
|
|
1,605
|
|
|
|
112
|
|
Deferred charges long-term debt
|
|
|
1,481
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,399
|
|
|
$
|
4,140
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Authorized: Unlimited no par voting
common shares
70
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(ii) Issued and outstanding:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
(In thousands except share data)
|
|
|
Balance, December 31, 2006
|
|
|
20,444,490
|
|
|
$
|
99,840
|
|
Exercise of options
|
|
|
541,444
|
|
|
|
3,680
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
20,985,934
|
|
|
|
103,520
|
|
Issuance of common shares (iii)
|
|
|
2,785,960
|
|
|
|
40,926
|
|
Issuance of common shares under ESPP
|
|
|
2,386
|
|
|
|
32
|
|
Vesting of restricted stock units
|
|
|
37,294
|
|
|
|
610
|
|
Stock issuance costs
|
|
|
|
|
|
|
(362
|
)
|
Exercise of options
|
|
|
291,458
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
24,103,032
|
|
|
|
146,988
|
|
Issuance of common shares (iii)
|
|
|
5,175,247
|
|
|
|
203,125
|
|
Tax benefit of share issuance costs
|
|
|
|
|
|
|
331
|
|
Vesting of restricted stock units
|
|
|
46,165
|
|
|
|
2,023
|
|
Exercise of options
|
|
|
732,837
|
|
|
|
9,063
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
30,057,281
|
|
|
$
|
361,530
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009, 2008 and 2007,
proceeds from the exercise of stock options totalled
$6.2 million, $1.5 million, and $2.5 million,
respectively. The additional amounts recorded for option
exercises relate to the reclassification of the fair value of
those options from additional paid-in capital to common shares.
|
|
(iii)
|
Issuance
of common shares:
|
Effective April 30, 2008, the Company completed the
acquisition of NMHC in an exchange offer of (i) 0.217 of a
common share of the Companys common stock and
(ii) $7.70 in cash for each outstanding NMHC common share.
The Company issued 2,785,960 shares of its common stock in
connection with the acquisition during 2008, and an additional
247 shares were issued during 2009.
On September 23, 2009, the Company completed a public
offering of 5,175,000 shares of its common stock. The
shares were offered to the public at a price of $41.50 per
share. The gross proceeds to the Company from the offering
totalled $214.8 million, excluding $11.7 million for
underwriting discounts and commissions, and other offering costs.
Effective on March 11, 2009, the Board of Directors of the
Company adopted the SXC Health Solutions Corp. Long-term
Incentive Plan (the LTIP), which was approved by the
shareholders of the Company at the Annual and Special Meeting of
Shareholders on May 13, 2009. The LTIP provides for the
grant of stock option awards, stock appreciation rights,
restricted stock awards, restricted stock unit awards,
performance awards and other stock-based awards to eligible
persons, including executive officers and directors of the
Company. The purpose of the LTIP is to advance the interests of
the Company by attracting and retaining high caliber employees
and other key individuals who perform services for the Company,
a subsidiary or an affiliate; align the interests of the
Companys shareholders and recipients of awards under the
LTIP by increasing the proprietary interest of such recipients
in the Companys growth and success; and motivate award
recipients to act in the best long-term interest of the Company
and its shareholders. The LTIP provides for a maximum of
1,070,000 common shares of the Company to be issued in addition
to the common shares that remained available for issuance under
the previous option plan (the Plan).
A committee of the Board of Directors determines award amounts,
option prices and vesting periods, subject to the provisions of
the LTIP. All officers, directors, employees and service
providers of the Company are eligible to receive equity awards
at the discretion of the committee. Options issued under the
LTIP entitle holders to purchase one common share as defined by
the LTIP.
71
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The LTIP replaced the Plan, and no further grants or awards will
be issued under the Plan. At December 31, 2009, 5,007,500
common shares had been reserved for issuance under the LTIP and
the Plan.
Prior to May 2007, all stock options awarded by the Company were
denominated in Canadian dollars as required by the Plan in
effect at the grant date. Amendments to the Plan in May 2007
permitted the Company to denominate stock option awards in
either Canadian or U.S. dollars. All grants made subsequent
to May 2007 are denominated in U.S. dollars.
The following table summarizes activity related to stock options
denominated in Canadian dollars for each of the years in the
three-year period ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding, beginning of period
|
|
|
1,134,394
|
|
|
$
|
10.44
|
|
|
|
1,452,602
|
|
|
$
|
9.54
|
|
|
|
2,058,461
|
|
|
$
|
8.38
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
6,000
|
|
|
$
|
23.05
|
|
Exercised
|
|
|
(647,549
|
)
|
|
$
|
8.86
|
|
|
|
(291,458
|
)
|
|
$
|
5.61
|
|
|
|
(541,444
|
)
|
|
$
|
5.15
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
(3,000
|
)
|
|
$
|
14.36
|
|
|
|
(625
|
)
|
|
$
|
14.36
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
$
|
6.60
|
|
|
|
(23,750
|
)
|
|
$
|
14.22
|
|
|
|
(69,790
|
)
|
|
$
|
11.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
481,845
|
|
|
$
|
12.61
|
|
|
|
1,134,394
|
|
|
$
|
10.44
|
|
|
|
1,452,602
|
|
|
$
|
9.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period
|
|
|
460,345
|
|
|
$
|
12.47
|
|
|
|
1,090,896
|
|
|
$
|
10.23
|
|
|
|
1,200,235
|
|
|
$
|
8.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar stock options granted to employees during 2007
vest over three years. Stock options granted to directors during
this same period vested immediately. All Canadian dollar options
outstanding expire five years from the date of vesting.
The following table summarizes the information about the
Canadian dollar stock options outstanding at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
(In Cdn. Dollars)
|
|
|
$ 3.08 - $ 6.60
|
|
|
88,457
|
|
|
|
1.75
|
|
|
$
|
5.68
|
|
|
|
88,457
|
|
|
$
|
5.68
|
|
$ 7.32 - $13.60
|
|
|
148,534
|
|
|
|
2.98
|
|
|
$
|
11.93
|
|
|
|
148,534
|
|
|
$
|
11.93
|
|
$14.36 - $24.37
|
|
|
244,854
|
|
|
|
2.59
|
|
|
$
|
15.52
|
|
|
|
223,354
|
|
|
$
|
15.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.08 - $24.37
|
|
|
481,845
|
|
|
|
2.56
|
|
|
$
|
12.61
|
|
|
|
460,345
|
|
|
$
|
12.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value and remaining contractual term of
exercisable stock options at December 31, 2009 was
approximately $19.6 million (Cdn.$20.6 million) and
2.56 years, respectively.
The total intrinsic value of Canadian stock options exercised
during the years ended December 31, 2009, 2008, and 2007
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
U.S. dollars
|
|
$
|
12,399
|
|
|
$
|
2,790
|
|
|
$
|
8,588
|
|
Canadian dollars
|
|
$
|
13,791
|
|
|
$
|
2,972
|
|
|
$
|
9,343
|
|
The total fair value of Canadian stock options which vested
during the years ended December 31, 2009, 2008 and 2007 was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
U.S. dollars
|
|
$
|
275
|
|
|
$
|
1,228
|
|
|
$
|
2,158
|
|
Canadian dollars
|
|
$
|
317
|
|
|
$
|
1,494
|
|
|
$
|
2,117
|
|
72
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, there was $0.2 million
(Cdn.$0.2 million) of unrecognized compensation cost
related to Canadian dollar stock options, all of which will be
recognized during 2010.
The following table summarizes activity related to stock options
denominated in U.S. dollars for the years ended
December 31, 2009, 2008, and 2007. The Company began
issuing these stock options subsequent to May 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding, beginning of period
|
|
|
958,800
|
|
|
$
|
17.17
|
|
|
|
536,000
|
|
|
$
|
21.88
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
195,107
|
|
|
$
|
26.50
|
|
|
|
510,950
|
|
|
$
|
13.03
|
|
|
|
595,000
|
|
|
$
|
22.05
|
|
Exercised
|
|
|
(85,288
|
)
|
|
$
|
15.85
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Expired
|
|
|
(525
|
)
|
|
$
|
20.09
|
|
|
|
(3,125
|
)
|
|
$
|
22.52
|
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(17,275
|
)
|
|
$
|
19.15
|
|
|
|
(85,025
|
)
|
|
$
|
21.76
|
|
|
|
(59,000
|
)
|
|
$
|
23.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
1,050,819
|
|
|
$
|
18.97
|
|
|
|
958,800
|
|
|
$
|
17.17
|
|
|
|
536,000
|
|
|
$
|
21.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period
|
|
|
285,253
|
|
|
$
|
19.32
|
|
|
|
141,625
|
|
|
$
|
20.76
|
|
|
|
17,500
|
|
|
$
|
22.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar options granted during 2009, 2008, and 2007
were primarily subject to a graded vesting schedule of four
years. U.S. dollar options granted expire five to seven
years from the grant date.
The following table summarizes the information about the
U.S. dollar stock options outstanding at December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
(In U.S. dollars)
|
|
|
$10.45 - $11.35
|
|
|
206,712
|
|
|
|
3.21
|
|
|
$
|
11.27
|
|
|
|
33,878
|
|
|
$
|
11.35
|
|
$12.60 - $18.11
|
|
|
320,250
|
|
|
|
3.48
|
|
|
$
|
14.83
|
|
|
|
88,875
|
|
|
$
|
14.92
|
|
$21.69 - $23.58
|
|
|
330,750
|
|
|
|
2.41
|
|
|
$
|
23.40
|
|
|
|
162,500
|
|
|
$
|
23.38
|
|
$25.54 - $54.22
|
|
|
193,107
|
|
|
|
6.48
|
|
|
$
|
26.52
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.45 - $54.22
|
|
|
1,050,819
|
|
|
|
3.64
|
|
|
$
|
18.97
|
|
|
|
285,253
|
|
|
$
|
19.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value and remaining contractual term of
exercisable stock options at December 31, 2009 was
$9.9 million and 2.80 years, respectively. The
aggregate intrinsic value and remaining contractual term of all
vested options and options that are expected to vest are
$36.7 million and 3.64 years, respectively. The
intrinsic value of options exercised during 2009 was
$2.5 million. There were no options exercised during 2008
or 2007. The total fair value of stock options which vested
during the years ended December 31, 2009, 2008, and 2007
was approximately $1.6 million, $0.8 million, and
$0.1 million, respectively.
As of December 31, 2009, there was $4.8 million of
unrecognized compensation cost related to U.S. dollar stock
options which is expected to be recognized over a
weighted-average period of 2.20 years.
|
|
(c)
|
Employee
Stock Purchase Plan:
|
On May 16, 2007, shareholders of the Company approved the
creation of the Employee Stock Purchase Plan (ESPP)
which allows eligible employees to withhold annually up to a
maximum of 15% of their base salary, or $25,000, subject to
U.S. Internal Revenue Service limitations, for the purchase
of the Companys common shares. Common shares will be
purchased on the last day of each offering period at a discount
of 5% of the fair market value of the common shares on such
date. The aggregate number of common shares that may be awarded
under the ESPP may not exceed 100,000 common shares.
During the first quarter of 2009, the ESPP was amended so that
the common shares available for purchase under the ESPP are
drawn from reacquired common shares purchased on behalf of the
Company in the open market. Prior to the amendment in 2009, the
common shares available for purchase under the ESPP were drawn
from either authorized but previously un-issued
73
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common shares or from reacquired common shares, including those
purchased by the Company in the open market. During 2009 and
2008, the Company issued 6,198 and 2,386 common shares,
respectively, under the ESPP. During 2007, no common shares were
issued under the ESPP.
The ESPP is not considered compensatory as the plan terms are no
more favorable than to all other share holders, and the purchase
discount does not exceed the per-share costs that would be
incurred through a public offering. Since the plan is not
considered compensatory, no portion of the costs related to ESPP
purchases is included in the Companys stock-based
compensation expense.
|
|
(d)
|
Restricted
Stock Units:
|
The Company assumed 170,500 restricted stock units
(RSUs) of NMHC after the acquisition, which
converted into 126,749 RSUs of the Company. The RSUs vest 33%
each in November 2008, November 2009 and November 2010.
In September 2008, the Company granted an additional 51,000 RSUs
with a grant date fair value of $15.90 per share to certain new
employees who were previous employees of NMHC. These restricted
stock units vest in one-fourth increments on each grant date
anniversary.
During 2009, the Company granted 172,205 RSUs to its employees
and non-employee directors with an average grant date fair value
of $26.21. Substantially all of these RSUs vest on a
straight-line basis over a range of three to four years. Certain
additional RSUs granted to senior management cliff vest based
upon reaching agreed upon three- year performance conditions.
At December 31, 2009, there were 227,420 RSUs outstanding.
The total intrinsic value of RSUs that vested during the year
was $2.2 million. At December 31, 2009, there was
$4.1 million of unrecognized compensation cost related to
RSUs which is expected to be recognized over a weighted-average
period of 3.38 years. The following table summarizes the
information about RSUs at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
|
|
|
Nonvested balance as of the beginning of the per
|
|
|
103,880
|
|
|
$
|
14.70
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Assumed
|
|
|
|
|
|
$
|
|
|
|
|
126,749
|
|
|
$
|
14.11
|
|
|
|
|
|
Granted
|
|
|
172,205
|
|
|
$
|
26.21
|
|
|
|
51,000
|
|
|
$
|
15.90
|
|
|
|
|
|
Vested
|
|
|
(46,165
|
)
|
|
$
|
14.44
|
|
|
|
(42,498
|
)
|
|
$
|
14.14
|
|
|
|
|
|
Forfeited
|
|
|
(2,500
|
)
|
|
$
|
25.54
|
|
|
|
(31,371
|
)
|
|
$
|
15.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance as of the end of the period
|
|
|
227,420
|
|
|
$
|
23.34
|
|
|
|
103,880
|
|
|
$
|
14.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
Stock-based
compensation:
|
For the years ended December 31, 2009, 2008 and 2007, the
Company recorded stock-based compensation expense of
$3.7 million, $4.1 million, and $3.0 million,
respectively.
The Company allocated stock-based compensation costs to the same
statement of operations line item as the cash compensation to
those employees. Accordingly, the allocation of the compensation
costs is as follows for the years ended December 31, 2009,
2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cost of revenue
|
|
$
|
664
|
|
|
$
|
590
|
|
|
$
|
335
|
|
Product development costs
|
|
|
182
|
|
|
|
251
|
|
|
|
283
|
|
Selling, general and administrative (SG&A)
|
|
|
2,811
|
|
|
|
3,239
|
|
|
|
2,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
3,657
|
|
|
$
|
4,080
|
|
|
$
|
3,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total income tax benefit, using the Companys statutory
tax rates, recognized in the statement of operations for
stock-based compensation arrangements for years ended
December 31, 2009, 2008, and 2007 was $1.4 million,
$1.5 million, and $1.1 million, respectively.
74
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Black-Scholes-Merton option-pricing model was used to
estimate the fair value of the options at grant date for the
years ended December 31, 2009, 2008 and 2007, based on the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Volatility
|
|
|
47.1 - 48.0
|
%
|
|
|
46.9 - 52.4
|
%
|
|
|
40.7 - 54.4
|
%
|
Risk-free interest rate
|
|
|
1.96 - 2.75
|
%
|
|
|
1.60 - 3.27
|
%
|
|
|
3.44 - 4.85
|
%
|
Expected life
|
|
|
4.5 years
|
|
|
|
2 - 5 years
|
|
|
|
1 - 5 years
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian dollar stock options
|
|
|
|
|
|
|
|
|
|
C$
|
5.57
|
|
U.S. dollar stock options
|
|
$
|
11.09
|
|
|
$
|
5.74
|
|
|
$
|
9.01
|
|
The volatility assumption is based on historical volatility at
the date of grant for the period equal to the expected life of
the option.
The expected life assumption is based on historical exercise
patterns. The options issued to employees typically have a
longer expected life of 4.5 to 5 years due to the vesting
schedules, whereas options issued to directors have a shorter
expected life of 1 to 2.5 years due to the immediate
vesting of some of their options.
The Company does not expect to pay dividends and, therefore, no
dividend yield assumption is used in calculating the fair value
of stock options.
The income tax effects of temporary differences that give rise
to significant portions of deferred income tax assets and
liabilities are as follows.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Non-capital loss carryforwards (NOL)
|
|
$
|
407
|
|
|
$
|
955
|
|
Deductible research and development expenses
|
|
|
777
|
|
|
|
906
|
|
Property and equipment and intangible assets
|
|
|
169
|
|
|
|
188
|
|
Capital loss carried forward
|
|
|
3,408
|
|
|
|
4,983
|
|
Lease inducements and deferred financing
|
|
|
2,237
|
|
|
|
2,644
|
|
Investment tax credits
|
|
|
926
|
|
|
|
629
|
|
Reserves and accruals
|
|
|
8,661
|
|
|
|
9,578
|
|
Stock-based compensation
|
|
|
2,619
|
|
|
|
2,606
|
|
Other
|
|
|
1,047
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,251
|
|
|
|
22,897
|
|
Less valuation allowance
|
|
|
3,649
|
|
|
|
5,712
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
16,602
|
|
|
$
|
17,185
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets current
|
|
$
|
9,875
|
|
|
$
|
10,219
|
|
Deferred tax assets long term
|
|
|
6,727
|
|
|
|
6,966
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,602
|
|
|
$
|
17,185
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment and intangible assets
|
|
$
|
18,382
|
|
|
$
|
20,542
|
|
Other
|
|
|
301
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,683
|
|
|
$
|
20,703
|
|
|
|
|
|
|
|
|
|
|
75
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2009, the Company had gross deferred tax
assets (DTAs) totaling $20.3 million compared
to $22.9 million at December 31, 2008. Of the
$20.3 million, $5.7 million of DTAs related to its
Canadian operations compared to $7.0 million at
December 31, 2008. The Company also had deferred tax
liabilities which decreased to $18.7 million at
December 31, 2009 from $20.7 million at
December 31, 2008.
The balance of the valuation allowance was $3.6 million at
December 31, 2009 compared to $5.7 million at
December 31, 2008. The valuation allowance arising from the
Canadian operations was $3.4 million at December 31,
2009 and $5.4 million at December 31, 2008. The
Canadian valuation allowance decreased during the year as a
result of prior year adjustments to the related DTAs, as well as
changes in exchange rates and a release of valuation allowance.
The amount of this valuation allowance is subject to adjustment
by the Company in future periods based upon its assessment of
evidence supporting the degree of probability that DTAs will be
realized.
At December 31, 2009, the Company had a DTA of
$0.4 million related to state NOLs that are available to
reduce future years taxable income and expire beginning in
2014. A valuation allowance of $0.2 million has been
established against a portion of the NOLs related to one of the
Companys prior acquisitions.
The Company has approximately $2.6 million of deductible
Scientific Research and Experimental Development
(SR&ED) costs which have not been deducted for
Canadian tax purposes in prior taxation years. These costs can
be carried forward indefinitely and deducted in future taxation
years. The Company has unused Investment Tax Credits of
approximately $0.9 million, which can be offset against
Canadian federal income tax payable in future taxation years.
These Investment Tax Credits expire in varying amounts from 2010
up to 2028. Successful closure of various taxation
authorities examinations of these Investment Tax Credits,
along with an expectation of future profitability, resulted in a
reversal of valuation allowance related to these Investment Tax
Credits, which impacted the Companys effective tax rate in
the period reversed.
The differences between the effective tax rate reflected in the
provision for income taxes and the U.S. statutory income
tax rate are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Corporate statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense on income before income taxes
|
|
$
|
23,830
|
|
|
$
|
7,107
|
|
|
$
|
6,095
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of federal graduated tax rate
|
|
|
|
|
|
|
(129
|
)
|
|
|
(96
|
)
|
State and local income taxes, net of federal benefit
|
|
|
1,622
|
|
|
|
385
|
|
|
|
499
|
|
Impact of foreign tax rates
|
|
|
387
|
|
|
|
122
|
|
|
|
785
|
|
Change in valuation allowance
|
|
|
(182
|
)
|
|
|
(993
|
)
|
|
|
(3,610
|
)
|
Investment tax credits utilized
|
|
|
|
|
|
|
|
|
|
|
(875
|
)
|
Cross-jurisdictional financing
|
|
|
(3,991
|
)
|
|
|
(1,458
|
)
|
|
|
|
|
Effect of foreign exchange
|
|
|
|
|
|
|
|
|
|
|
(312
|
)
|
Adjustment to tax reserves
|
|
|
273
|
|
|
|
(85
|
)
|
|
|
862
|
|
Other
|
|
|
85
|
|
|
|
242
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,024
|
|
|
$
|
5,191
|
|
|
$
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from U.S. operations before income taxes was
$66.8 million, $12.9 million, and $9.7 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. Income from Canadian operations before income
taxes, including taxable income attributable to intercompany
debt, was $1.3 million, $7.4 million, and
$8.6 million for the years ended December 31, 2009,
2008 and 2007, respectively.
76
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision for income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
22,100
|
|
|
$
|
3,994
|
|
|
$
|
3,810
|
|
Canada
|
|
|
185
|
|
|
|
872
|
|
|
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
$
|
22,285
|
|
|
|
4,866
|
|
|
|
5,258
|
|
Deferred tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
(245
|
)
|
|
|
(411
|
)
|
|
|
596
|
|
Canada
|
|
|
(16
|
)
|
|
|
736
|
|
|
|
(1,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense
|
|
$
|
(261
|
)
|
|
|
325
|
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
22,024
|
|
|
$
|
5,191
|
|
|
$
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain
Tax Positions
U.S. GAAP accounting guidance for uncertain tax positions
prescribes a recognition threshold and measurement attribute
criteria for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return.
As of December 31, 2009 and 2008, the Company has an
accrued liability on the consolidated balance sheet of
$0.5 million and $0.3 million, respectively, related
to various uncertain federal and state income tax matters, the
resolution of all of which would not have a material impact the
Companys effective tax rate.
The change from January 1, 2009 to December 31, 2009,
and from January 1, 2008 to December 31, 2008, were a
result of recognizing accrued interest and penalties related to
the liability for tax uncertainties, as well as the effect of a
change in accounting position for certain income tax
uncertainties.
The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. Accrued interest
at December 31, 2009 and 2008 was $0.1 million. It is
reasonably possible that the total amount of unrecognized tax
benefits will increase or decrease within twelve months of
December 31, 2009. The Company currently estimates that
such increases or decreases will not be material.
The Company and its subsidiaries file income tax returns in
Canadian and U.S. federal jurisdictions, and various
provincial, state and local jurisdictions. With few exceptions,
the Company is no longer subject to tax examinations by tax
authorities for years prior to 2005.
The following table sets forth the computation for basic and
diluted EPS for the years ended December 31, 2009, 2008,
and 2007 (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
46,061
|
|
|
$
|
15,113
|
|
|
$
|
13,146
|
|
Denominator for basic EPS weighted average common
shares outstanding
|
|
|
26,004,204
|
|
|
|
22,978,466
|
|
|
|
20,755,372
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
52,145
|
|
|
|
1,855
|
|
|
|
|
|
Stock options
|
|
|
741,024
|
|
|
|
432,690
|
|
|
|
807,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS
|
|
|
26,797,373
|
|
|
|
23,413,011
|
|
|
|
21,562,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.77
|
|
|
$
|
0.66
|
|
|
$
|
0.63
|
|
Diluted
|
|
$
|
1.72
|
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
77
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock options totalling 11,000, 728,166, and 451,000 were not
included in the computation of diluted EPS for 2009, 2008 and
2007, respectively, as the exercise prices were greater than the
average market price of the common shares for the periods.
|
|
11.
|
Supplemental
cash flow information
|
(a) The components of cash and cash equivalents are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash on deposit
|
|
$
|
86,384
|
|
|
$
|
46,532
|
|
Payments in transit
|
|
|
(87,500
|
)
|
|
|
(55,559
|
)
|
U.S. money market funds
|
|
|
305,453
|
|
|
|
76,713
|
|
Canadian dollar deposit (December 31, 2009 Cdn.
$35,000 at 1.0517; December 31, 2008 Cdn.
$35,000 at 1.2168)
|
|
|
33
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,370
|
|
|
$
|
67,715
|
|
|
|
|
|
|
|
|
|
|
(b) Other non-cash activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Property and equipment purchased with lease inducements
|
|
$
|
|
|
|
$
|
373
|
|
|
$
|
391
|
|
Amortization of deferred lease inducements
|
|
$
|
469
|
|
|
$
|
378
|
|
|
$
|
338
|
|
Change in accounting for income tax uncertainties
|
|
$
|
|
|
|
$
|
|
|
|
$
|
155
|
|
Equity shares issued as a result of the NMHC acquisition
|
|
$
|
4
|
|
|
$
|
40,926
|
|
|
$
|
|
|
|
|
|
|
(c)
|
Cash paid (received) for income taxes and interest was as
follows for the years ended December 31, 2009, 2008, and
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Income taxes paid
|
|
$
|
15,698
|
|
|
$
|
4,168
|
|
|
$
|
3,892
|
|
Interest paid
|
|
$
|
3,870
|
|
|
$
|
3,345
|
|
|
$
|
112
|
|
Interest received
|
|
$
|
(787
|
)
|
|
$
|
(2,294
|
)
|
|
$
|
(4,927
|
)
|
|
|
12.
|
Employee
Benefit Plans
|
The Company has a 401(k) savings plan that allows eligible
employees to defer a percentage of their salary, not to exceed
$16,500 and $15,500 in 2009 and 2008, respectively. The Company
matches an amount equal to 50% of the contributions, up to 5%.
All participant contributions are 100% vested. Employer
contributions become 100% vested after completion of three years
of service. For 2009, 2008 and 2007, the Companys
contributions to this plan were $1.3 million,
$0.8 million, and $0.5 million, respectively.
78
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Commitments
and contingencies
|
The Company maintains operating lease agreements for office
space in its main operating locations. The Company also leases
certain office equipment. Aggregate future minimum payments in
respect of non-cancellable operating lease agreements as of
December 31, 2009, which extend until 2018, are as follows
(in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2010
|
|
$
|
4,068
|
|
2011
|
|
|
2,801
|
|
2012
|
|
|
1,844
|
|
2013
|
|
|
1,569
|
|
2014
|
|
|
1,616
|
|
After 2014
|
|
|
5,276
|
|
|
|
|
|
|
|
|
$
|
17,174
|
|
|
|
|
|
|
The total rental expense under operating leases for the years
ended December 31, 2009, 2008, and 2007 was
$6.5 million, $5.3 million, and $2.0 million,
respectively. The lease renewal terms have not been factored
into the commitments noted above as not renewing these leases
would not have a detrimental impact on the Company. The Company
terminated its Port Washington, New York lease effective May
2009, and paid an early termination fee of approximately
$1.9 million. This cost was included in the purchase price
of the acquisition in accordance with purchase accounting
guidance in place at the time of acquisition.
The Company leases office equipment and computer software under
various capital leases. As a result, the present value of the
remaining future minimum lease payments is recorded as a
capitalized lease asset within property and equipment and
related capital lease obligation within accrued liabilities and
other liabilities long term, in the accompanying consolidated
balance sheets.
The future minimum capital lease payments as of
December 31, 2009, are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2010
|
|
$
|
326
|
|
2011
|
|
|
130
|
|
2012
|
|
|
32
|
|
2013
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
487
|
|
Amount representing interest
|
|
|
(25
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
462
|
|
Current portion
|
|
|
(308
|
)
|
|
|
|
|
|
Total long-term portion
|
|
$
|
154
|
|
|
|
|
|
|
From time to time in connection with its operations, the Company
is named as a defendant in actions for damages and costs
allegedly sustained by the plaintiffs. The Company has
considered these proceedings and disputes in determining the
necessity of any reserves for losses that are probable and
reasonably estimable. In addition, various aspects of the
Companys business may subject it to litigation and
liability for damages arising from errors in processing the
pricing of prescription drug claims, failure to meet performance
measures within certain contracts relating to its services
performed, its ability to obtain certain levels of discounts or
rebates on prescription purchases from retail pharmacies and
drug manufacturers or other actions or omissions. The
Companys recorded reserves are based on estimates
developed with consideration given to the potential merits of
claims or quantification of any performance obligations. The
Company takes into account its history of claims, the
limitations of any
79
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
insurance coverage, advice from outside counsel, and
managements strategy with regard to the settlement or
defense of such claims and obligations. While the ultimate
outcome of those claims, lawsuits or performance obligations
cannot be predicted with certainty, the Company believes, based
on its understanding of the facts of these claims and
performance obligations, that adequate provisions have been
recorded in the accounts where required.
The Company provides routine indemnification to its customers
against liability if the Companys products infringe on a
third partys intellectual property rights. The maximum
amount of these indemnifications cannot be reasonably estimated
due to their uncertain nature. Historically, the Company has not
made payments related to these indemnifications.
The Company operates in two geographic areas as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Canada
|
|
U.S.
|
|
Total
|
|
Revenue
|
|
$
|
2,825
|
|
|
$
|
1,435,809
|
|
|
$
|
1,438,634
|
|
Property and equipment
|
|
$
|
107
|
|
|
$
|
19,773
|
|
|
$
|
19,880
|
|
Goodwill
|
|
$
|
|
|
|
$
|
141,787
|
|
|
$
|
141,787
|
|
Deferred tax assets
|
|
$
|
2,035
|
|
|
$
|
9,481
|
|
|
$
|
11,516
|
|
Deferred tax liability
|
|
$
|
|
|
|
$
|
13,597
|
|
|
$
|
13,597
|
|
Net assets
|
|
$
|
172,491
|
|
|
$
|
286,003
|
|
|
$
|
458,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Canada
|
|
U.S.
|
|
Total
|
|
Revenue
|
|
$
|
3,937
|
|
|
$
|
859,002
|
|
|
$
|
862,939
|
|
Property and equipment
|
|
$
|
103
|
|
|
$
|
20,653
|
|
|
$
|
20,756
|
|
Goodwill
|
|
$
|
|
|
|
$
|
143,751
|
|
|
$
|
143,751
|
|
Deferred tax assets
|
|
$
|
1,421
|
|
|
$
|
10,121
|
|
|
$
|
11,542
|
|
Deferred tax liability
|
|
$
|
|
|
|
$
|
15,060
|
|
|
$
|
15,060
|
|
Net assets
|
|
$
|
12,058
|
|
|
$
|
182,105
|
|
|
$
|
194,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Canada
|
|
U.S.
|
|
Total
|
|
Revenue
|
|
$
|
3,925
|
|
|
$
|
89,246
|
|
|
$
|
93,171
|
|
With the acquisition of NMHC during 2008, the Company changed
its internal organization structure and began reporting in two
operating segments: PBM and HCIT.
PBM
Segment
The Company provides comprehensive PBM services to customers,
which include managed care organizations, local governments,
unions, corporations, HMOs, employers, workers
compensation plans, third party health care plan administrators,
and federal and state government programs through its network of
licensed pharmacies throughout the United States. The PBM
services include electronic
point-of-sale
pharmacy claims management, retail pharmacy network management,
mail service pharmacy claims management, specialty pharmacy
claims management, Medicare Part D services, benefit design
consultation, preferred drug management programs, drug review
and analysis, consulting services, data access and reporting and
information analysis. The Company owns a mail service pharmacy
and a specialty service pharmacy. In addition, the Company is a
national provider of drug benefits to its customers under the
federal governments Medicare Part D program.
Revenue primarily consists of sales of prescription drugs,
together with any associated administrative fees, to customers
and participants, either through the Companys nationwide
network of pharmacies, Mail Service pharmacy or Specialty
Service pharmacy. Revenue related to the sales of prescription
drugs is recognized when the claims are adjudicated and the
prescription drugs are shipped. Claims are adjudicated at the
point-of-sale
using an on-line processing system.
80
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
HCIT
Segment
The Company is also a leading provider of HCIT solutions and
services to providers, payors and other participants in the
pharmaceutical supply chain in North America. The Companys
product offerings include a wide range of software products for
managing prescription drug programs and for drug prescribing and
dispensing. The Companys solutions are available on a
license basis with on-going maintenance and support or on a
transaction fee basis using an ASP model. The Companys
payor customers include managed care organizations, Blue Cross
Blue Shield organizations, government agencies, employers and
intermediaries such as pharmacy benefit managers. The
Companys provider customers include over 1,900
independent, regional chain, institutional, and mail-order
pharmacies. The solutions offered by the Companys services
assist both payors and providers in managing the complexity and
reducing the cost of their prescription drug programs and
dispensing activities. The Companys profitability from
HCIT depends primarily on revenue derived from transaction
processing services, software license sales, hardware sales,
maintenance, and professional services.
The Company evaluates segment performance based upon revenue and
gross profit. Results for periods reported prior to the three
months ended June 30, 2008 (the period in which the Company
acquired NMHC) were reported in one operating segment, HCIT.
Selling, general and administrative expenses, product
development, depreciation and amortization are reported as
corporate expenses. In addition, interest and other income and
interest expense are reported within the corporate category.
Prior period results have not been restated because to do so
would be impracticable.
Financial information by segment is presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
PBM
|
|
HCIT
|
|
Corporate
|
|
Total
|
|
Revenues
|
|
$
|
1,335,961
|
|
|
$
|
102,673
|
|
|
$
|
|
|
|
$
|
1,438,634
|
|
Cost of revenue
|
|
|
1,197,757
|
|
|
|
54,277
|
|
|
|
|
|
|
|
1,252,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
138,204
|
|
|
|
48,396
|
|
|
|
|
|
|
|
186,600
|
|
Other corporate expenses
|
|
|
|
|
|
|
|
|
|
|
118,515
|
|
|
|
118,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,085
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
1,423
|
|
|
$
|
7,571
|
|
|
$
|
|
|
|
$
|
8,994
|
|
Property and equipment, net
|
|
$
|
1,945
|
|
|
$
|
17,935
|
|
|
$
|
|
|
|
$
|
19,880
|
|
Goodwill
|
|
$
|
122,122
|
|
|
$
|
19,665
|
|
|
$
|
|
|
|
$
|
141,787
|
|
Total assets
|
|
$
|
393,965
|
|
|
$
|
268,115
|
|
|
$
|
|
|
|
$
|
662,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
PBM
|
|
HCIT
|
|
Corporate
|
|
Total
|
|
Revenues
|
|
$
|
771,840
|
|
|
$
|
91,099
|
|
|
$
|
|
|
|
$
|
862,939
|
|
Cost of revenue
|
|
|
702,333
|
|
|
|
45,120
|
|
|
|
|
|
|
|
747,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
69,507
|
|
|
|
45,979
|
|
|
|
|
|
|
|
115,486
|
|
Other corporate expenses
|
|
|
|
|
|
|
|
|
|
|
95,182
|
|
|
|
95,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,304
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
360
|
|
|
$
|
8,050
|
|
|
$
|
|
|
|
$
|
8,410
|
|
Property and equipment, net
|
|
$
|
4,110
|
|
|
$
|
16,646
|
|
|
$
|
|
|
|
$
|
20,756
|
|
Goodwill
|
|
$
|
125,388
|
|
|
$
|
18,363
|
|
|
$
|
|
|
|
$
|
143,751
|
|
Total assets
|
|
$
|
309,845
|
|
|
$
|
118,498
|
|
|
$
|
|
|
|
$
|
428,343
|
|
81
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
PBM
|
|
|
HCIT
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
93,171
|
|
|
$
|
|
|
|
$
|
93,171
|
|
Cost of revenue
|
|
|
|
|
|
|
39,595
|
|
|
|
|
|
|
|
39,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
53,576
|
|
|
|
|
|
|
|
53,576
|
|
Other corporate expenses
|
|
|
|
|
|
|
|
|
|
|
36,132
|
|
|
|
36,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,444
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
|
|
|
$
|
7,651
|
|
|
$
|
|
|
|
$
|
7,651
|
|
Property and equipment, net
|
|
$
|
|
|
|
$
|
13,629
|
|
|
$
|
|
|
|
$
|
13,629
|
|
Goodwill
|
|
$
|
|
|
|
$
|
15,996
|
|
|
$
|
|
|
|
$
|
15,996
|
|
The Companys HCIT revenue consists of the following for
the years ended December 31, 2009, 2008, and 2007
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction processing
|
|
$
|
61,225
|
|
|
$
|
52,773
|
|
|
$
|
54,273
|
|
Maintenance
|
|
|
18,427
|
|
|
|
16,397
|
|
|
|
16,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring
|
|
|
79,652
|
|
|
|
69,170
|
|
|
|
70,749
|
|
Non-Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
|
15,336
|
|
|
|
13,480
|
|
|
|
14,031
|
|
System sales
|
|
|
7,685
|
|
|
|
8,449
|
|
|
|
8,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-recurring
|
|
|
23,021
|
|
|
|
21,929
|
|
|
|
22,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
102,673
|
|
|
$
|
91,099
|
|
|
$
|
93,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2009, one customer
accounted for 12.6% of total revenue and another for 11.7% of
total revenue. During the year ended December 31, 2008, one
customer accounted for 12.3% of total revenue and another for
11.2% of total revenue. During the year ended December 31,
2007, one customer accounted for 10.8% of total revenue. In 2009
and 2008, the customers were included in the PBM segment. In
2007, the customer was included in the HCIT segment.
At December 31, 2009 and 2008, no one customer accounted
for more than 10% of the total accounts receivable balance.
|
|
15.
|
Financial
instruments
|
The Company is subject to concentrations of credit risk through
cash and cash equivalents and accounts receivable. The Company
monitors the credit risk and credit standing of counterparties
on a regular basis.
Prior to the extinguishment of its long-term debt on
December 31, 2009, as discussed in Note 7, the Company
was subject to interest rate risk related to variable rate debt.
The Company used variable rate debt to finance its acquisition
of NMHC in 2008. When interest rates increased, interest expense
could increase. Conversely, when interest rates decreased,
interest expense could also decrease.
To protect itself against the interest rate exposures, and
pursuant to the terms of the Companys $48 million
credit agreement, the Company entered into interest rate
contracts with notional amounts equal to 50% of the borrowed
amount, or $24 million, for a three-year period from the
date of issue. The Company entered into a
3-year
interest rate swap agreement with
82
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a notional amount of $14 million to fix the LIBOR rate on
$14 million of the term loan at 4.31%, resulting in an
effective rate of 7.56% after adding the 3.25% margin per the
credit agreement see Note 7 for more
information. Under the interest rate swap, the Company receives
LIBOR-based variable interest rate payments and makes fixed
interest rate payments, thereby creating the equivalent to
fixed-rate debt. Additionally, the Company entered into a
3-year
interest rate cap with a notional amount of $10 million to
effectively cap the LIBOR rate on $10 million of the term
loan at 4.50%, resulting in a maximum effective rate of 7.75%
after adding the 3.25% margin per the credit agreement,
excluding the associated fees. These instruments were designated
as cash flow hedges during 2008. After the Company repaid all of
its long-term debt in the fourth quarter of 2009, the cash flow
hedge treatment was discontinued as the future transactions that
the interest contracts were hedging were no longer probable of
occurring.
As of December 31, 2009, both derivative instruments are
out of the money and the Company is not currently
exposed to any credit risk for amounts reflected on the
consolidated balance sheet should the counterparty in the
agreement fail to meet its obligations under the agreement. The
Company does not anticipate the instruments coming out of
the money prior to their expiration in 2011. To manage
credit risks, the Company selects counterparties based on credit
assessments, limits overall exposure to any single counterparty,
and monitors the market position with each counterparty. The
Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures
that may adversely impact expected future cash flows and by
evaluating hedging opportunities. The Company does not enter
into derivative instruments for any purpose other than hedging
identified exposures. That is, the Company does not speculate
using derivative instruments and has not designated any
instruments as fair value hedges or hedges of the foreign
currency exposure of a net investment in foreign operations.
Cash flow hedge accounting may be elected only for highly
effective hedges, based upon an assessment, performed at least
quarterly, of the historical and prospective future correlation
of changes in the fair value of the derivative instrument to
changes in the expected future cash flows of the hedged item. To
the extent cash flow hedge accounting is applied, the effective
portion of any changes in the fair value of the derivative
instruments is initially reported as a component of accumulated
other comprehensive income or loss (AOCI).
Ineffectiveness, if any, is immediately recognized in the
statement of operations. The amount in AOCI is reclassified to
earnings when the forecasted transaction occurs, even if the
derivative instrument is sold, extinguished or terminated prior
to the transaction occurring, if it is still probable that the
forecasted transactions will occur. If the forecasted
transaction is no longer probable of occurring, the amount in
AOCI is immediately reclassified to earnings. As noted
previously, the forecasted transactions were no longer probable
of occurring as of December 31, 2009 since the
Companys long-term debt has been fully extinguished.
Accordingly, the Company reclassified $0.3 million, net of
tax, from AOCI to earnings. The reclassification was made up of
a charge to other (income) expense of $0.6 million and a
benefit to income taxes of $0.3 million. This charge in
other (income) expense was offset by $0.2 million of net
gains related to the change in the fair value of the derivative
instruments subsequent to the cessation of cash flow hedge
accounting. The changes in the fair value of the interest rate
contracts will continue to be recorded in other (income) expense
due to the extinguishment of the Companys long-term debt
and the instruments no longer qualifying for cash flow hedge
accounting treatment. The fair value of the interest rate swap
derivative will continue to be recorded on the consolidated
balance sheet at each reporting period in other noncurrent
liabilities, and the fair value of the interest rate cap
derivative is recorded in other noncurrent assets. Both
instruments will be reclassified to current assets or
liabilities once the maturities reach less than one year.
Interest expense for the year ended December 31, 2008
includes $0.4 million of net losses related to the
aforementioned derivative instruments. This amount represents
the change in the fair value of the interest rate swap from the
date the transaction was entered into through the date that the
Company implemented cash flow hedge accounting and the change in
the fair value of the interest rate cap from the date the
transaction was entered into through the end of the year.
The estimated fair value of the Companys financial
instruments has been determined based on the Companys
assessment of available market information and appropriate
valuation methodologies. However, these estimates may not
necessarily be indicative of the amounts that the Company could
realize in a current market exchange. See Note 16 for the
Companys disclosure on the fair value of derivative
instruments. The Company has determined that it is not
meaningful to calculate the fair value of the non-current
accrued liabilities as a portion of this amount is an accrual
for tax uncertainties.
83
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(d)
|
Foreign
exchange risk:
|
The Company is subject to foreign exchange risk related to its
operations in Canada. The Company does not enter into derivative
instruments to mitigate this risk. Exposure to fluctuations in
Canadian-dollar denominated transactions is partially offset by
Canadian dollar-denominated assets and liabilities.
Effective January 1, 2008, the FASB issued fair value
measurement guidance which defines a hierarchy to prioritize the
inputs to valuation techniques used to measure fair value into
three broad levels, with level 1 considered the most
reliable. For assets and liabilities measured at fair value on a
recurring basis in the consolidated balance sheet, the table
below categorizes fair value measurements across the three
levels as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
in Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
|
|
|
$
|
2,490
|
|
|
$
|
|
|
|
$
|
2,490
|
|
Other short term investments
|
|
$
|
|
|
|
$
|
2,149
|
|
|
$
|
|
|
|
$
|
2,149
|
|
Derivatives
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
7
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
|
|
|
$
|
695
|
|
|
$
|
|
|
|
$
|
695
|
|
When available and appropriate, the Company uses quoted market
prices in active markets to determine fair value, and classifies
such items within Level 1. Level 1 values include
instruments traded on a public exchange. Level 2 inputs are
inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the financial
instrument. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets that
are not active, or inputs other than quoted prices that are
observable for the asset or liability or can be derived
principally from or corroborated by observable market data. If
the Company were to use one or more significant unobservable
inputs for a model-derived valuation, the resulting valuation
would be classified in Level 3.
The corporate debt securities are recorded in short-term
investments in the 2009 consolidated balance sheet. The fair
values of these securities are based on quoted market prices for
the specific securities held based on a matrix of valuations
received from several pricing sources. Other short-term
investments represent certificates of deposits and treasury
bills that mature in over 90 days. These are recorded in
short-term investments in the 2009 balance sheet. The fair
values of these securities are based on quoted market prices for
the specific securities held based on a matrix of valuations
received from several pricing sources. The changes in fair value
of the debt securities and other short-term investments have
been insignificant since their initial purchase in the fourth
quarter of 2009. The amortized cost for the debt securities and
other short-term investments was $4.6 million as of
December 31, 2009.
The Company has classified derivative assets as other noncurrent
assets and derivative liabilities as other noncurrent
liabilities in the consolidated balance sheets. The fair values
represent quoted prices from a financial institution which are
derived from movements in the underlying interest rate markets.
Derivative assets relate to the interest rate cap for which the
Company paid $0.2 million upon entering into the agreement.
Derivative liabilities relate to the interest rate swap
discussed in Note 15. The total fair value adjustments for
both instruments was $0.2 million for the year ended 2009,
which was mostly recognized as other (income) expense in the
consolidated statement of operations.
84
SXC
HEALTH SOLUTIONS CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company made certain involuntary terminations during 2007
which reduced its workforce by approximately 7%. In accordance
with accounting guidance for exit and disposal activities,
the Company incurred severance costs of approximately
$0.7 million for the entire amount of benefits to be paid
to the terminated employees.
The benefits were settled within twelve months and the severance
costs are reflected in the Companys statement of
operations for the year ended December 31, 2007, as follows
(in thousands):
|
|
|
|
|
Cost of revenue
|
|
$
|
243
|
|
Product development costs
|
|
|
130
|
|
Selling, general and administrative
|
|
|
372
|
|
|
|
|
|
|
|
|
$
|
745
|
|
|
|
|
|
|
|
|
18.
|
Supplemental
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Charged to
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Adjustments
|
|
|
Balance
|
|
|
|
(In thousands)
|
|
|
Allowance for accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year end December 31, 2009
|
|
$
|
3,570
|
|
|
|
1,085
|
|
|
|
(1,784
|
)
|
|
$
|
2,871
|
|
Year end December 31, 2008
|
|
$
|
605
|
|
|
|
1,284
|
|
|
|
1,681
|
(1)
|
|
$
|
3,570
|
|
Year end December 31, 2007
|
|
$
|
214
|
|
|
|
412
|
|
|
|
(21
|
)
|
|
$
|
605
|
|
|
|
|
(1)
|
|
Includes $2,645 as a result of the
acquisition of NMHC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Charged to
|
|
|
|
|
|
Ending
|
|
|
|
Balance
|
|
|
Expense
|
|
|
Adjustments
|
|
|
Balance
|
|
|
|
(In thousands)
|
|
|
Valuation allowance for deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year end December 31, 2009
|
|
$
|
5,712
|
|
|
|
(1,881
|
)
|
|
|
(182
|
)
|
|
$
|
3,649
|
|
Year end December 31, 2008
|
|
$
|
5,263
|
|
|
|
1,442
|
|
|
|
(993
|
)
|
|
$
|
5,712
|
|
Year end December 31, 2007
|
|
$
|
3,066
|
|
|
|
5,807
|
|
|
|
(3,610
|
)
|
|
$
|
5,263
|
|
85
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
We conducted an evaluation (under the supervision and with the
participation of our management, including the Chief Executive
Officer and Chief Financial Officer), pursuant to
Rule 13a-15
promulgated under the Securities Exchange Act of 1934 (the
Exchange Act), of the effectiveness of our
disclosure controls and procedures as of December 31, 2009
(the Evaluation Date), which is the end of the
period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that as of the Evaluation Date such
disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports we
file or submit under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and were effective to ensure that
the information required to be disclosed in the reports filed or
submitted by the Company under the Exchange Act was accumulated
and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f).
Our internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that: (1) pertain to
the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the
assets of the Company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or
disposition of the Companys assets that could have a
material effect on the financial statements. All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009, based on
the criteria set forth in the Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, management has concluded that, as of
December 31, 2009, our internal control over financial
reporting is effective. Our independent registered public
accounting firm, KPMG LLP, has issued an audit report that the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009,
based on the criteria established in Internal
Control Integrated Framework issued by the COSO.
KPMG LLPs audit report is included in Item 8 of this
Form 10-K.
There were no changes in our internal control over financial
reporting (as such term is defined in Exchange Act
Rule 13a-15(f))
that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Effective as of December 31, 2009, the Companys
U.S. subsidiary, SXC Health Solutions, Inc., terminated its
Credit Agreement, dated as of April 25, 2008, with the
Company, other affiliates of the Company, General Electric
Capital Corporation, as lender, administrative agent and
collateral agent, and the other lenders party thereto. Pursuant
to the Credit Agreement, the Company had access to a
$10 million senior secured revolving credit facility and a
$48 million senior secured term loan facility. See
Note 7 to Item 8, Financial Statements and
Supplementary Data, to this Annual Report on
Form 10-K
for additional information regarding the terms and conditions of
the credit facilities. In connection with the termination, the
Company repaid all outstanding borrowings under the credit
facilities. The Company did not incur any prepayment penalty in
connection with this termination.
86
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information relating to directors is contained in the
Matters to be Acted Upon at the Meeting
Election of Directors section in the Proxy Statement and
is incorporated herein by reference.
Information relating to executive officers is contained in the
Executive Officers section in the Proxy Statement,
and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of
the Securities Exchange Act of 1934 is contained in the
Section 16(a) Beneficial Ownership Reporting
Compliance section in the Proxy Statement, and is
incorporated herein by reference.
Information relating to the audit committee and the audit
committee financial expert is contained in the Report of
Audit Committee and Statement of Corporate
Governance Practices sections in the Proxy Statement and
is incorporated herein by reference.
The Companys Code of Business Conduct and Ethics applies
to all directors, officers and employees. You can find the Code
of Business Conduct and Ethics on the Companys internet
website, www.sxc.com. The Company will post any
amendments to the Code of Business Conduct and Ethics, and any
waivers that are required to be disclosed by the rules of either
the SEC or NASDAQ, on its internet site.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information relating to executive and director compensation is
contained in the Executive Compensation section in
the Proxy Statement, and is incorporated herein by reference.
The material incorporated herein by reference to the information
set forth under the subheading Compensation Committee
Report contained in the Executive Compensation
section in the Proxy Statement shall be deemed furnished, and
not filed, in this
Form 10-K
and shall not be deemed incorporated by reference into any
filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934 as a result of this furnishing, except to
the extent that is specifically incorporated by reference by the
Company.
Information relating to compensation committee interlocks and
insider participation is incorporated herein by reference to the
information under the heading Compensation Committee
Interlocks and Insider Participation in the Proxy
Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information relating to security ownership of certain beneficial
owners and management is contained in the Voting
Securities and Principal Shareholders Thereof section in
the Proxy Statement, and is incorporated herein by reference.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
Number of Securities
|
|
|
|
to be Issued
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Upon Exercise of
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
Outstanding Equity
|
|
|
Exercise Price of
|
|
|
Equity Compensation
|
|
Plan Category
|
|
Awards
|
|
|
Outstanding Options
|
|
|
Plans(2)
|
|
|
Equity compensation plan approved by security
holders Long-Term Incentive Plan(1)
|
|
|
1,702,369
|
|
|
|
(1
|
)
|
|
|
652,182
|
|
Equity compensation plan approved by security
holders Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Equity compensation plan not approved by security
holders restricted stock units(3)(4)
|
|
|
25,500
|
|
|
|
|
|
|
|
|
|
|
|
|
1. |
|
At December 31, 2009, the Company had outstanding 481,845
options denominated in Canadian dollars with a weighted average
exercise price of C$12.61. There are 1,050,819 options
outstanding that are denominated in U.S. dollars with a weighted
average exercise price of $18.97. The remaining 169,705
securities outstanding are restricted stock units with a
weighted average grant date fair value of $26.22. |
|
2. |
|
On March 11, 2009, the Employee Stock Purchase Plan was
amended to provide that all shares available thereunder would be
acquired solely on the open market and there would be no further
new issuances of shares. |
87
|
|
|
3. |
|
Represents 25,500 restricted stock units (RSUs)
granted to ten former NMHC employees on September 16, 2008,
issued under a plan assumed by the Company in connection with
the NMHC acquisition, in accordance with the rules of the Nasdaq
Stock Exchange and Toronto Stock Exchange. No additional RSUs
will be granted under this plan. |
|
4. |
|
Excludes 32,215 RSUs assumed by the Company in connection with
the acquisition of NMHC that were granted by NMHC prior to the
acquisition. |
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information about certain relationships and related transactions
and director independence is contained in the Related
Party Transactions and Board of
Directors Independence sections in the Proxy
Statement, and is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information on principal accountant fees and services is
contained in the Matters to be Acted Upon at the
Meeting Re-Appointment of Independent Registered
Public Accounting Firm section in the Proxy Statement, and
is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
a)
1) Financial Statements:
See Item 8, Financial Statements and Supplementary Data,
filed herewith, for a list of financial statements.
2) Financial Statement Schedules:
All financial statement schedules have been omitted because the
information either is not required or is otherwise included in
the consolidated financial statements and notes thereto.
3) Exhibits Filed:
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description of Document
|
|
Reference
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of February 25,
2008, by and among SXC Health Solutions Corp., SXC Health
Solutions, Inc., Comet Merger Corporation and National Medical
Health Card Systems, Inc.
|
|
Incorporated herein by reference to Exhibit 2.1 to the Current
Report on Form 8-K filed by SXC with the Securities and Exchange
Commission (the SEC) on February 27, 2008
|
|
2
|
.2
|
|
Amendment to Agreement and Plan of Merger, dated as of
April 29, 2008, by and among SXC Health Solutions Corp.,
SXC Health Solutions, Inc., Comet Merger Corporation, and
National Medical Health Card Systems, Inc.
|
|
Incorporated herein by reference to Exhibit (d)(6) to Amendment
No. 1 to the Schedule TO filed by SXC with the SEC on April 30,
2008
|
|
3
|
.1
|
|
Certificate of Amalgamation of SYSTEMS XCELLENCE INC.
|
|
Incorporated herein by reference to Exhibit 3.1 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
3
|
.2
|
|
Certificate of Continuance of SXC HEALTH SOLUTIONS CORP.
(formerly named SYSTEMS XCELLENCE INC.)
|
|
Incorporated herein by reference to Exhibit 3.2 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
3
|
.3
|
|
Amended and Restated Bylaws of SXC Health Solutions Corp.
|
|
Incorporated by reference to Exhibit 3.1 to the Current Report
on Form 8-K filed by SXC with the SEC on June 27, 2008
|
|
4
|
.1
|
|
Specimen of Common Stock Certificate
|
|
Incorporated herein by reference to Exhibit 4.1 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.1
|
|
SXC Health Solutions Corp. Long-Term Incentive Plan
|
|
Incorporated by reference to Exhibit 10.1 to SXC Health
Solutions Corp.s Current Report on Form 8-K filed on May
19, 2009.
|
88
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description of Document
|
|
Reference
|
|
|
10
|
.2
|
|
Form of SXC Health Solutions Corp. Stock Option Agreement for
certain Employees under the SXC Health Solutions Corp. Long-Term
Incentive Plan
|
|
Incorporated herein by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 7, 2009.
|
|
10
|
.3
|
|
Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock
Unit Award Agreement for certain Employees under the SXC Health
Solutions Corp. Long-Term Incentive Plan
|
|
Incorporated herein by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 7, 2009.
|
|
10
|
.4
|
|
Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock
Unit Award Agreement for Non-Employee Directors under the SXC
Health Solutions Corp. Long-Term Incentive Plan
|
|
Incorporated herein by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 7, 2009.
|
|
10
|
.5
|
|
Form of SXC Health Solutions Corp. Performance-Based Restricted
Stock Unit Award Agreement for certain Employees under the SXC
Health Solutions Corp. Long-Term Incentive Plan
|
|
Incorporated herein by reference to Exhibit 10.5 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 7, 2009.
|
|
10
|
.6
|
|
Form of SXC Health Solutions Corp. Time-Vesting Restricted Stock
Unit Award Agreement for certain Employees under the SXC Health
Solutions Corp. Long-Term Incentive Plan
|
|
Filed herewith
|
|
10
|
.7
|
|
SXC Health Solutions Corp. Amended and Restated Stock Option Plan
|
|
Incorporated herein by reference to Exhibit 4.1 to the Form S-8
(SEC File No. 333-145450) filed by SXC Health Solutions Corp. on
August 14, 2007
|
|
10
|
.8
|
|
Form of SXC Health Solutions Corp. Stock Option Agreement for
certain Employees, Non-Employee Directors and Service Providers
|
|
Incorporated herein by reference to Exhibit 10.19 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.9
|
|
Amended and Restated 2000 Restricted Stock Grant Plan of SXC
Health Solutions, Corp., effective September 16, 2008
|
|
Incorporated herein by reference to Exhibit 10.1 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
November 6, 2008
|
|
10
|
.10
|
|
Gordon Glenn Separation Agreement
|
|
Incorporated herein by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 11, 2008
|
|
10
|
.11
|
|
Employment Agreement, effective as of June 30, 2008, among
SXC Health Solutions Corp., SXC Health Solutions, Inc. and Mark
Thierer
|
|
Incorporated herein by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 11, 2008
|
|
10
|
.12
|
|
Employment Agreement, effective as of June 30, 2008, among
SXC Health Solutions Corp., SXC Health Solutions, Inc. and
Jeffrey G. Park
|
|
Incorporated herein by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
August 11, 2008
|
|
10
|
.13
|
|
Employment Agreement, effective as of November 6, 2008,
between SXC Health Solutions, Inc. and John Romza
|
|
Incorporated herein by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
November 6, 2008
|
|
10
|
.14
|
|
Employment Agreement, effective as of November 6, 2008,
between SXC Health Solutions, Inc. and Mike Bennof
|
|
Incorporated herein by reference to Exhibit 10.3 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
November 6, 2008
|
|
10
|
.15
|
|
Employment Agreement, effective as of November 6, 2008,
among SXC Health Solutions, Inc., informedRx and B. Greg Buscetto
|
|
Incorporated herein by reference to Exhibit 10.4 to the
Quarterly Report on Form 10-Q filed by SXC with the SEC on
November 6, 2008
|
|
10
|
.16
|
|
Employment Agreement, effective as of May 21, 2007, between
SXC Health Solutions, Inc. and Michael Meyer
|
|
Incorporated herein by reference to Exhibit 10.15 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.17
|
|
First Amendment to the Employment Agreement, effective as of
June 30, 2008, among SXC Health Solutions Corp., SXC Health
Solutions, Inc. and Mark Thierer
|
|
Incorporated herein by reference to Exhibit 10.15 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 13, 2009
|
89
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description of Document
|
|
Reference
|
|
|
10
|
.18
|
|
First Amendment to the Employment Agreement, effective as of
June 30, 2008, among SXC Health Solutions Corp., SXC Health
Solutions, Inc. and Jeffrey G. Park
|
|
Incorporated herein by reference to Exhibit 10.16 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 13, 2009
|
|
10
|
.19
|
|
SXC Health Solutions, Inc. Deferred Compensation Plan (Effective
January 1, 2009)
|
|
Incorporated herein by reference to Exhibit 10.17 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 13, 2009
|
|
10
|
.20
|
|
2007 Employee Stock Purchase Plan
|
|
Incorporated herein by reference to Exhibit 4.1 to the Form S-8
(SEC file No. 333-145449) filed by SXC Health Solutions Corp. on
August 14, 2007
|
|
10
|
.21
|
|
Amendment No. 1 to the SXC Health Solutions Corp. 2007
Employee Stock Purchase Plan, dated March 11, 2009
|
|
Incorporated herein by reference to Exhibit 10.18 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 13, 2009
|
|
10
|
.22
|
|
Amendment No. 2 to the SXC Health Solutions Corp. 2007
Employee Stock Purchase Plan, dated March 2, 2010
|
|
Filed herewith
|
|
10
|
.23
|
|
Lease Agreement between HINES VAF WESTWOOD OF LISLE II, L.P. and
SXC HEALTH SOLUTIONS, INC., dated March 24, 2006
|
|
Incorporated herein by reference to Exhibit 10.1 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.24
|
|
Memorandum and Amendment between GRIFFIN CAPITAL CORPORATION and
SXC HEALTH SOLUTIONS, INC., dated January 23, 2008
|
|
Incorporated herein by reference to Exhibit 10.2 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.25
|
|
Commencement Date Memorandum between PC 101, INC. and SXC HEALTH
SOLUTIONS, INC., dated January 25, 2007
|
|
Incorporated herein by reference to Exhibit 10.3 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.26
|
|
Office Lease Agreement between PC 101, INC. and SXC HEALTH
SOLUTIONS, INC., dated April 12, 2006
|
|
Incorporated herein by reference to Exhibit 10.4 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.27
|
|
First Amendment to Multi-Tenant Agreement between PC 101, INC.
and SXC HEALTH SOLUTIONS, INC., dated July 24, 2006
|
|
Incorporated herein by reference to Exhibit 10.5 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.28
|
|
Second Amendment to Multi-Tenant Agreement between PC 101, INC.
and SXC HEALTH SOLUTIONS, INC., dated October 29, 2007
|
|
Incorporated herein by reference to Exhibit 10.6 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.29
|
|
Agreement of Lease between Commonwealth Management Corporation
and Health Business Systems, Inc., dated July 1, 1996
|
|
Incorporated herein by reference to Exhibit 10.7 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.30
|
|
Amendment between Equivest Management Corporation and Health
Business Systems, Inc., dated April 24, 2000
|
|
Incorporated herein by reference to Exhibit 10.8 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.31
|
|
Second Amendment between 730 LOUIS DRIVE, L.P. and Health
Business Systems, Inc., dated November 13, 2002
|
|
Incorporated herein by reference to Exhibit 10.9 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 17, 2008
|
|
10
|
.32
|
|
Amendment to Employment Agreement, effective as of
September 1, 2009, among SXC Health Solutions, Inc.,
informedRx and B. Greg Buscetto
|
|
Filed herewith
|
|
10
|
.33
|
|
Amendment to Employment Agreement, effective as of
January 1, 2010, among SXC Health Solutions, Inc.,
informedRx and B. Greg Buscetto
|
|
Filed herewith
|
|
12
|
.1
|
|
Statement of computation of ratios of earnings to fixed charges
|
|
Filed herewith
|
|
18
|
.1
|
|
KPMG LLP Preferability Letter (United States)
|
|
Incorporated herein by reference to Exhibit 18.1 to the Annual
Report on Form 10-K filed by SXC with the SEC on March 13, 2009
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
Filed herewith
|
90
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Description of Document
|
|
Reference
|
|
|
23
|
.1
|
|
Consent of KPMG LLP (United States)
|
|
Filed herewith
|
|
23
|
.2
|
|
Consent of KPMG LLP (Canada)
|
|
Filed herewith
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act
|
|
Filed herewith
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act
|
|
Filed herewith
|
|
32
|
.1
|
|
Section 1350 Certification of CEO as adopted by
Section 906 of the Sarbanes-Oxley Act
|
|
Filed herewith
|
|
32
|
.2
|
|
Section 1350 Certification of CFO as adopted by
Section 906 of the Sarbanes-Oxley Act
|
|
Filed herewith
|
|
|
|
|
|
Indicates management contract or compensatory plan. |
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 5, 2010.
SXC HEALTH SOLUTIONS CORP.
Mark A. Thierer
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacity and on the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Mark
A. Thierer
Mark
A. Thierer
|
|
Chief Executive Officer
(Principal Executive Officer and Director)
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Jeffrey
Park
Jeffrey
Park
|
|
Chief Financial Officer and Executive Vice President, Finance
(Principal Financial and Accounting Officer)
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Terrence
C. Burke
Terrence
C. Burke
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Steven
Cosler
Steven
Cosler
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ William
J. Davis
William
J. Davis
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Anthony
R. Masso
Anthony
R. Masso
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Philip
R. Reddon
Philip
R. Reddon
|
|
Director
|
|
March 5, 2010
|
|
|
|
|
|
|
|
By:
|
|
/s/ Curtis
J. Thorne
Curtis
J. Thorne
|
|
Director
|
|
March 5, 2010
|
92