UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

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

Commission file number: 001-33881

MEDASSETS, INC.

(Exact name of registrant as specified in its charter)

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

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

(Former name, former address and former fiscal year, if changed since last report)
N/A

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

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

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

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

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

As of May 6, 2011, the registrant had 58,614,480 shares of common stock, par value $0.01 per share, outstanding.

 

 

MEDASSETS, INC.
FORM 10-Q

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010			3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010			4
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2011			5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			43
Item 4. [Removed and Reserved]			43
Item 5. Other Information			43
Item 6. Exhibits			43
Signatures			44
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MedAssets, Inc.

		March 31,				December 31,
		2011				2010
ASSETS
Current assets
Cash and cash equivalents		$	57,396			$	46,836
Accounts receivable, net of allowances of $4,741 and $5,256 as of March 31, 2011 and December 31, 2010, respectively			92,963				100,020
Deferred tax asset, current			18,314				18,087
Prepaid expenses and other current assets			18,656				19,811
Total current assets			187,329				184,754
Property and equipment, net			79,452				77,737
Other long term assets
Goodwill			1,034,470				1,035,697
Intangible assets, net			464,059				484,438
Other			62,971				62,727
Other long term assets			1,561,500				1,582,862
Total assets		$	1,828,281			$	1,845,353
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	25,625			$	18,107
Accrued revenue share obligation and rebates			55,234				57,744
Accrued payroll and benefits			20,709				22,149
Other accrued expenses			26,785				22,268
Deferred revenue, current portion			46,085				36,533
Deferred purchase consideration (Note 3)			120,739				119,912
Current portion of notes payable			6,350				6,350
Current portion of finance obligation			195				186
Total current liabilities			301,722				283,249
Notes payable, less current portion			627,063				628,650
Bonds payable (Note 6)			325,000				325,000
Finance obligation, less current portion			9,452				9,505
Deferred revenue, less current portion			11,740				9,597
Deferred tax liability			126,956				150,887
Other long term liabilities			1,614				2,882
Total liabilities			1,403,547				1,409,770
Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized; 58,606,000 and 58,410,000 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively			586				584
Additional paid-in capital			673,347				668,028
Accumulated deficit			(249,199	)			(233,029	)
Total stockholders’ equity			424,734				435,583
Total liabilities and stockholders’ equity		$	1,828,281			$	1,845,353

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

MedAssets, Inc.

		Three Months Ended
		March 31,
		2011				2010
		(In thousands, except
		per share amounts)
Revenue:
Administrative fees, net		$	56,582			$	28,590
Other service fees			73,977				64,816
Total net revenue			130,559				93,406
Operating expenses:
Cost of revenue (inclusive of certain amortization expense)			30,555				21,722
Product development expenses			6,673				5,370
Selling and marketing expenses			12,601				10,668
General and administrative expenses			49,141				32,151
Acquisition and integration-related expenses			12,143				—
Depreciation			5,679				4,293
Amortization of intangibles			20,240				6,084
Total operating expenses			137,032				80,288
Operating (loss) income			(6,473	)			13,118
Other income (expense):
Interest (expense)			(18,049	)			(3,932	)
Other income			171				67
(Loss) income before income taxes			(24,351	)			9,253
Income tax (benefit) expense			(8,181	)			3,733
Net (loss) income		$	(16,170	)		$	5,520
Basic and diluted income per share:
Basic net (loss) income		$	(0.28	)		$	0.10
Diluted net (loss) income		$	(0.28	)		$	0.09
Weighted average shares — basic			57,233				55,817
Weighted average shares — diluted			57,233				58,829

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

MedAssets, Inc.

										Additional								Total
		Common Stock								Paid-In				Accumulated				Stockholders’
		Shares				Par Value				Capital				Deficit				Equity
										(In thousands)
Balances at December 31, 2010			58,410			$	584			$	668,028			$	(233,029	)		$	435,583
Issuance of common stock from equity award exercises			195				2				1,358				—				1,360
Issuance of common restricted stock (net of forfeitures)			1				—				—				—				—
Stock compensation expense			—				—				3,343				—				3,343
Excess tax benefit from equity award exercises			—				—				617				—				617
Net loss			—				—				—				(16,170	)			(16,170	)
Balances at March 31, 2011			58,606			$	586			$	673,347			$	(249,199	)		$	424,734

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

MedAssets, Inc.

		Three Months Ended March 31,
		2011				2010
		(In thousands)
Operating activities
Net (loss) income		$	(16,170	)		$	5,520
Adjustments to reconcile (loss) income from continuing operations to net cash provided by
operating activities:
Bad debt expense			204				407
Depreciation			5,934				5,015
Amortization of intangibles			20,379				6,269
Loss on sale of assets			—				1
Noncash stock compensation expense			3,343				3,472
Excess tax benefit from exercise of equity awards			(655	)			(820	)
Amortization of debt issuance costs			1,865				458
Noncash interest expense, net			948				134
Deferred income tax (benefit) expense			(24,396	)			71
Changes in assets and liabilities:
Accounts receivable			8,239				(3,113	)
Prepaid expenses and other assets			1,153				(6,841	)
Other long-term assets			(2,062	)			(1,163	)
Accounts payable			7,894				1,439
Accrued revenue share obligations and rebates			(3,033	)			(4,865	)
Accrued payroll and benefits			(1,440	)			2,200
Other accrued expenses			4,111				2,316
Deferred revenue			11,695				6,575
Cash provided by operating activities			18,009				17,075
Investing activities
Purchases of property, equipment and software			(2,402	)			(4,493	)
Capitalized software development costs			(5,311	)			(3,798	)
Cash used in investing activities			(7,713	)			(8,291	)
Financing activities
Repayment of notes payable			(1,587	)			(11,897	)
Repayment of finance obligations			(164	)			(164	)
Excess tax benefit from exercise of equity awards			655				820
Issuance of common stock			1,360				1,940
Cash provided by (used in) financing activities			264				(9,301	)
Net increase (decrease) in cash and cash equivalents			10,560				(517	)
Cash and cash equivalents, beginning of period			46,836				5,498
Cash and cash equivalents, end of period		$	57,396			$	4,981

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

Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)

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

1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

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

     The accompanying unaudited Condensed Consolidated Financial Statements, and Condensed Consolidated Balance Sheet as of December 31, 2010, derived from audited financial statements, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01 of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ materially from those estimates. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2011.

     The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2010 included in our Form 10-K as filed with the SEC on March 1, 2011. These financial statements include the accounts of MedAssets, Inc. and our wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation.

Use of Estimates

     The preparation of the financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. During the three months ended March 31, 2011, we adjusted our estimates related to the following:

Customer Relationship Period

     We finalized a study of our customer relationship period using data based on our historical experience. As a result of the study, we changed our customer relationship period for which we recognize revenue related to implementation and setup fees charged for our SaaS-based services from an average of four years to six years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in customer relationship period will reduce our 2011 other service fee revenue by approximately $800, operating income by $600 and earnings per share by approximately $0.01 per share.

Internally Developed Software Useful Life

     We finalized a study of our internally developed software useful life based on our historical experience. As a result of the study, we changed our useful life for which we will recognize depreciation expense related to internally developed software from three years to up to but generally five years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in internally developed software useful life will reduce our 2011 depreciation expense by approximately $5,600 and increase our 2011 operating income by $5,600 and earnings per share by approximately $0.06 per share.

Cash and Cash Equivalents

     All of our highly liquid investments with original maturities of three months or less at the date of purchase are carried at cost which approximates fair value and are considered to be cash equivalents. Currently, our excess cash is voluntarily used to repay our swing-line credit facility, if any, on a daily basis and applied against our revolving credit facility on a routine basis when our swing-line credit facility is undrawn. Refer to Note 6 for additional information. In addition, we may periodically make voluntary repayments on our term loan. Cash and cash equivalents were $57,396 and $46,836 as of March 31, 2011 and December 31, 2010, respectively, and our revolver and swing-line balances were zero during those reporting periods. In the event our cash balance is zero at the end of a period, any outstanding checks are recorded as accrued expenses. See Note 6 for immediately available cash under our revolving credit facility.

     Additionally, we have a concentration of credit risk arising from cash deposits held in excess of federally insured amounts totaling $56,896 as of March 31, 2011.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In thousands, except share and per share amounts)

2. RECENT ACCOUNTING PRONOUNCEMENTS

Business Combinations

     In December 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update relating to supplemental pro forma information for business combinations. If a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplementary pro forma disclosures. The update was effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The update will only affect us if there are future business combinations.

Intangibles — Goodwill and Other

     In December 2010, the FASB issued an accounting standards update relating to when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The update affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The update was effective for fiscal years and interim periods within those years, beginning after December 15, 2010. The adoption of this update did not have an impact on our Condensed Consolidated Financial Statements.

Revenue Recognition

     In April 2010, the FASB issued new standards for vendors who apply the milestone method of revenue recognition to research and development arrangements. These new standards apply to arrangements with payments that are contingent, at inception, upon achieving substantively uncertain future events or circumstances. The guidance is applicable for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this guidance will impact our arrangements with one-time or nonrecurring performance fees that are contingent upon achieving certain results. Historically, we have recognized these types of performance fees in the period the respective performance target has been met. Upon adoption of this guidance on January 1, 2011, one-time or non-recurring performance fees will be recognized proportionately over the contract term. We will continue to recognize recurring performance fees in the period they are earned. We adopted this update on January 1, 2011 and the adoption did not have a material impact on our Condensed Consolidated Financial Statements.

     In October 2009, the FASB issued an accounting standards update for multiple-deliverable revenue arrangements. The update addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services separately rather than as a combined unit. The update also addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The amendments in the update significantly expand the disclosures related to a vendor’s multiple-deliverable revenue arrangements with the objective of providing information about the significant judgments made and changes to those judgments and how the application of the relative selling-price method of determining stand-alone value affects the timing or amount of revenue recognition. The accounting standards update is applicable for annual periods beginning after June 15, 2010. We adopted this update on January 1, 2011 and the adoption did not have a material impact on our Condensed Consolidated Financial Statements.

     As noted above, in October 2009, the FASB published an accounting standards update for multiple-deliverable arrangements. The guidance establishes a selling price hierarchy for determining the appropriate value of a deliverable. The hierarchy is based on: (a) vendor-specific objective evidence if available (“VSOE”); (b) third-party evidence (“TPE”) if vendor-specific objective is not available; or (c) estimated selling price (“ESP”) if neither VSOE nor TPE is available. The guidance also eliminated the residual method of allocation of contract consideration to elements in the arrangement and requires that arrangement consideration be allocated to all elements at the inception of the arrangement using the relative selling price method.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

     Effective January 1, 2011, we adopted the provisions of the new update on a prospective basis. Based on the selling price hierarchy established by the update, if we are unable to establish selling price using VSOE or TPE (see below), we will establish an ESP. ESP is the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We establish a best estimate of ESP considering internal factors relevant to pricing practices such as costs and margin objectives, standalone sales prices of similar services and percentage of the fee charged for a primary service relative to a related service. Additional consideration is also given to market conditions such as competitor pricing strategies and market trends. We regularly review VSOE and TPE for our services in addition to ESP.

     Upon adoption of the update, we did not experience a change in our units of accounting nor did we have a change in how we allocate arrangement consideration to our various units of accounting. Historically, we have been able to obtain VSOE or TPE for our significant service deliverables. In addition, we have had no changes in our assumptions, inputs or methodology used in determining VSOE or TPE. We still consider factors such as market size, the number of facilities, and the number of beds in a facility. Our pattern of revenue recognition will remain consistent with prior periods and we do not expect to have a material impact on our Condensed Consolidated Financial Statements.

     The following incorporates the applicable changes in our revenue recognition policy for services as a result of the adoption of the accounting standards update on multiple-deliverable revenue arrangements.

     We may bundle certain of our Spend and Clinical Resource Management (“SCM”) service and technology offerings into a single service arrangement. We may bundle certain of our Revenue Cycle Management (“RCM”) service and technology offerings into a single service arrangement. In addition, we may bundle both our SCM and RCM service and technology offerings together into a single service arrangement and market them as an enterprise deal.

     Service arrangements generally include multiple deliverables or elements such as group purchasing services, consulting services, and SaaS-based subscription and implementation services. Provided that the total arrangement consideration is fixed and determinable at the inception of the arrangement, we allocate the total arrangement consideration to the individual elements within the arrangement based on their relative selling price using VSOE, TPE, or ESP for each element of the arrangement. We generally establish VSOE, TPE, or ESP for each element of a service arrangement based on the price charged for a particular element when it is sold separately in a stand-alone arrangement. Revenue is then recognized for each element according to the following revenue recognition methodology: (i) group purchasing service revenue is recognized as administrative fees are reported to us (generally ratably over the contractual term), (ii) consulting revenue is recognized on a proportional performance method as services are performed and deliverables are provided; and (iii) SaaS-based subscription revenue is recognized ratably over the subscription period (upfront non-refundable fees on our Saas-based subscription services are recognized over the longer of the subscription period or the estimated customer relationship period) beginning with the period in which the SaaS-based services are accepted by the customer.

     The majority of our multi-element service arrangements that include group purchasing services are not fixed and determinable at the inception of the arrangement as the fee for the arrangement is earned as administrative fees are reported. Administrative fees are not fixed and determinable until the receipt of vendor reports (nor can they be reliably estimated prior to the receipt of the vendor reports). For these multi-element service arrangements, we recognize each element as the elements are delivered and as administrative fees are reported to us which is generally ratable over the contract term.

     In addition, certain of our arrangements include performance targets or other contingent fees that are not fixed and determinable at the inception of the arrangement. If the total arrangement consideration is not fixed and determinable at the inception of the arrangement, we allocate only that portion of the arrangement that is fixed and determinable to each element. As additional consideration becomes fixed, it is similarly allocated based on VSOE, TPE or ESP to each element in the arrangement and recognized in accordance with each elements revenue recognition policy based on proportional performance achieved to-date.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

     Performance targets generally relate to committed financial improvement to our customers from the use of our services. Revenue is only recognized provided there are no refund rights and the fees earned are fixed and determinable. In the event the performance targets are not achieved, we are obligated to refund or reduce a portion of our fees that have not been recognized into revenue. We receive customer acceptance as performance targets are achieved.

     In multi-element service arrangements that involve performance targets, the amount of revenue recognized on a particular delivered element is limited to the amount of revenue earned based on (i) the proportionate performance of the individual element compared with all elements in the arrangement using the relative selling price method; and (ii) the proportional performance of that individual element. In all cases, revenue recognition is deferred on each element until the contingency on the performance target has been removed and the related revenue is deemed fixed and determinable.

3. ACQUISITION

Broadlane Acquisition

     On November 16, 2010, pursuant to a Stock Purchase Agreement (the “Purchase Agreement”) with Broadlane Holdings, LLC, a Delaware limited liability company (“Broadlane LLC”), and Broadlane Intermediate Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of Broadlane LLC (“Broadlane”), we acquired all of the outstanding shares of capital stock of Broadlane (the “Broadlane Acquisition”) from Broadlane LLC.

     We paid to Broadlane LLC approximately $725,000 in cash plus $20,895 for a working capital based purchase price adjustment for an aggregate preliminary purchase price of $745,895. In addition, we will make an additional payment in cash, subject to adjustment and to certain limitations, currently estimated at $123,100 on or before January 4, 2012 (the “deferred purchase consideration”).

     At closing, we recorded $119,505 on our balance sheet, representing the present value of the preliminary estimated $123,100 deferred purchase consideration amount. The deferred purchase consideration is subject to adjustment based on certain adjustments as defined in the Purchase Agreement. During the three months ended March 31, 2011, we recognized approximately $817, in imputed interest expense due to the accretion of this liability and we will record the remaining interest expense using the effective interest method to accrete the deferred purchase consideration to its face value by January 4, 2012. The balance of the deferred purchase consideration was $120,729 as of March 31, 2011 and has been recorded as a current liability in the accompanying Condensed Consolidated Balance Sheet.

     The preliminary purchase price is subject to change based upon final agreement of certain adjustments with the seller. We are currently in negotiations with the seller regarding final purchase price adjustments. Any subsequent change to the purchase price will be recorded as an increase or decrease to the deferred purchase consideration and goodwill.

Broadlane Purchase Price Allocation

     The following table summarizes the preliminary amounts of the assets acquired and liabilities assumed recognized at the acquisition date in addition to adjustments made in the first year after the acquisition date (measurement period adjustments). The measurement period adjustments did not have a significant impact on our earnings, balance sheets or cash flows in any period and, therefore, we have not retrospectively adjusted our financial statements.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

		Amounts Previously
		Recognized as of								Amounts Recognized
		Acquisition Date				Measurement Period				as of Acquisition
		(Provisional)(1)				Adjustments				Date (Adjusted)
Current assets(2)		$	56,402			$	909			$	57,311
Property and equipment			13,941				—				13,941
Other long term assets			110				—				110
Goodwill(3)			567,326				(1,227	)			566,099
Intangible assets			419,900				—				419,900
Total assets acquired			1,057,679				(318	)			1,057,361
Current liabilities(4)			35,832				523				36,355
Other long term liabilities(5)			156,447				(841	)			155,606
Total liabilities assumed			192,279				(318	)			191,961
Total purchase price		$	865,400			$	—			$	865,400

     We expect to continue to adjust our preliminary estimates during the measurement period for matters such as administrative fee receivable and related revenue share obligation as actual purchases are reported to us, certain liabilities including our self-insurance liability as we receive updated information that may cause the initial amount recorded at the time of the Broadlane Acquisition to change, deferred income taxes purchase price, goodwill and possibly other matters.

4. RESTRUCTURING ACTIVITIES

Broadlane Restructuring Plan

     In connection with the Broadlane Acquisition, our management approved, committed, and initiated a plan to restructure our operations resulting in certain management, system and organizational changes within our SCM segment. During the three months ended March 31, 2011, we expensed exit and integration related costs of approximately $12,143 associated with restructuring activities of the acquired operations consisting of severance and other restructuring and integration costs. These costs are included within the acquisition and integration-related expenses line on the accompanying statements of operations.

     As of March 31, 2011, the components of our restructuring plan are as follows:

•

Involuntary employee terminations — we are reorganizing our SCM workforce and plan to eliminate redundant or

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

			unneeded positions in connection with combining our business operations. In connection with the workforce restructuring, we expect to incur severance, benefits and other employee related costs in the range of $8,000 to $10,000 to be incurred over the next fifteen to twenty-one months. During the three months ended March 31, 2011, we expensed approximately $5,435 related to severance and other employee benefits in connection with our plan. As of March 31, 2011, we had approximately $4,235 included in current liabilities for these costs.
	•		System migration and standardization — we plan to integrate and standardize certain software platforms of the combined business operations. In connection with the system migration and standardization, we expect to incur costs in the range of $1,000 to $3,000 over the next nine to fifteen months. During the three months ended March 31, 2011, we expensed approximately $1,052 related to consulting and other third-party services in connection with our plan.
	•		Facilities consolidation — we expect to consolidate office space in areas where we have common or redundant locations. We expect to incur costs in the range of $0 to $1,400 over the next nine to fifteen months relating to ceasing use of certain facilities. During the three months ended March 31, 2011, we expensed approximately $5,656 relating to exit costs associated with our office space consolidation. As of March 31, 2011, we had approximately $4,460 included in current liabilities and $400 included in other long term liabilities for these costs.

     The changes in the plan during the three months ended March 31, 2011 are summarized as follows:

		Accrued, December												Accrued, March 31,
		31, 2010				Costs Incurred				Cash Payments				2011
Broadlane Restructuring Plan
Involuntary employee terminations		$	3,488			$	5,435			$	(4,688	)		$	4,235
System migration and integration			—				1,052				(1,052	)			—
Facility consolidation			—				5,656				(796	)			4,860
Total Broadlane Restructuring Costs		$	3,488			$	12,143			$	(6,536	)		$	9,095

5. DEFERRED REVENUE

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

		March 31,				December 31,
		2011				2010
Software and implementation fees		$	18,212			$	15,290
Service fees			21,620				26,970
Administrative fees			13,371				2,573
Other fees			4,622				1,297
Deferred revenue, total			57,825				46,130
Less: Deferred revenue, current portion			(46,085	)			(36,533	)
Deferred revenue, non-current portion		$	11,740			$	9,597

     As of March 31, 2011 and December 31, 2010, deferred revenue included in our Condensed Consolidated Balance Sheets that was contingent upon meeting performance targets was $6,037 and $4,841, respectively. Advance billings on arrangements that include contingent performance targets are recorded in accounts receivable and deferred revenue when billed. Only certain contingent performance targets are billed in advance of meeting the target.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

6. NOTES AND BONDS PAYABLE

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

		March 31,				December 31,
		2011				2010
Notes payable — senior		$	633,413			$	635,000
Bonds payable			325,000				325,000
Total notes and bonds payable			958,413				960,000
Less: current portions			(6,350	)			(6,350	)
Total long-term notes and bonds payable		$	952,063			$	953,650

Notes Payable

     The principal amount of our long term notes payable consists of our senior term loan facility which had an outstanding balance of $633,413 as of March 31, 2011. We had no amounts drawn on our revolving credit facility, and no amounts drawn on our swing-line component, resulting in approximately $149,000 of availability under our credit facility inclusive of the swing-line (after giving effect to $1,000 of outstanding but undrawn letters of credit on such date) as of March 31, 2011. The applicable weighted average interest rate (inclusive of the applicable bank margin) on our senior term loan facility at March 31, 2011 was 5.25%.

     Total interest paid during the three months ended March 31, 2011 and 2010 was approximately $11,506 and $3,160, respectively.

     The Credit Agreement contains certain customary negative covenants, including but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on fundamental changes, limitations on asset sales and sale leasebacks, limitations on investments, limitations on dividends or distributions on, or redemptions of, equity interests, limitations on prepayments or redemptions of unsecured or subordinated debt, limitations on negative pledge clauses, limitations on transactions with affiliates and limitations on changes to the Company’s fiscal year. The Credit Agreement also includes certain maintenance covenants (beginning March 31, 2011) including but not limited to, a maximum total leverage ratio of consolidated indebtedness to consolidated EBITDA and a minimum consolidated interest coverage ratio of consolidated EBITDA to consolidated cash interest expense (as defined in the Credit Agreement). The Company was in compliance with these covenants as of March 31, 2011.

     We are also required to prepay our debt obligations based on an excess cash flow calculation for the applicable fiscal year which is determined in accordance with the terms of our Credit Agreement. Our first excess cash flow calculation will be completed during the first quarter of 2012 for the fiscal year ended December 31, 2011. Our current portion of notes payable does not include an amount with respect to any 2012 excess cash flow payment. We will reclassify a portion of our long-term notes payable to a current classification at such time that any 2012 excess cash flow payment becomes estimable.

First Amendment to the Credit Agreement

     On March 31, 2011, we entered into the first amendment to our existing credit agreement (the “First Amendment”). The First Amendment redefined the swing line lender as Bank of America, N.A. from Barclays Bank. In connection with the First Amendment, we executed an auto borrowing plan with Bank of America, N.A. This enabled the Company to reinstitute our cash management practice of voluntarily applying any excess cash to repay our swing line credit facility, if any, on a daily basis or against our revolving credit facility on a routine basis when our swing line credit facility is undrawn.

Bonds Payable

     In connection with the financing of the Broadlane Acquisition, the Company closed the offering of an aggregate principal amount of $325,000 of senior notes due 2018 (the “Notes”) in a private placement (the “Notes Offering”). The Notes are jointly and severally guaranteed on a senior unsecured basis by each of the Company’s existing restricted subsidiaries and each of the Company’s future domestic restricted subsidiaries in each case that guarantees the Company’s obligations under the Credit Agreement. The Notes and the guarantees are senior unsecured obligations of the Company.

     The Notes were issued pursuant to an indenture dated as of November 16, 2010 (the “Indenture”) among the Company, its subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Pursuant to the Indenture, the Notes will mature on November 15, 2018 and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year,

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

beginning on May 15, 2011.

     The Indenture contains certain customary negative covenants, including but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on consolidations or mergers, limitations on asset sales, limitations on certain restricted payments and limitations on transactions with affiliates. The Indenture also contains customary events of default. The Company was in compliance with these covenants as of March 31, 2011.

     The Company has the option to redeem all or part of the Notes as follows: (i) at any time prior November 15, 2013, the Company may at its option redeem up to 35% of the aggregate original principal amount of Notes issued; and (ii) on or after November 15, 2014, the Company may at its option, redeem all or a part of the Notes after the required notification procedures have been performed, at the following redemption prices:

Year		Percentage
2014			104	%
2015			102	%
2016 and thereafter			100	%

     The Notes also contain a redemption feature that would require the repurchase of 101% of the aggregate principal amount plus accrued and unpaid interest at the option of the holders upon a change in control.

     As of March 31, 2011, the Company’s 8% senior notes due 2018 were trading at approximately 101.9% of par value.

     As of March 31, 2011, we had approximately $43,720 of debt issuance costs related to our Credit Agreement and Notes which will be amortized into interest expense using the effective interest method until the maturity date. For the three months ended March 31, 2011 and 2010, we recognized approximately $1,864 and $458, respectively, in interest expense related to the amortization of debt issuance costs.

     The following table summarizes our stated debt maturities and scheduled principal repayments as of March 31, 2011:

Year		Term Loan				Senior Unsecured Notes				Total
2011		$	4,763			$	—			$	4,763	(1)
2012			6,350				—				6,350
2013			6,350				—				6,350
2014			6,350				—				6,350
2015			6,350				—				6,350
Thereafter			603,250				325,000				928,250
		$	633,413			$	325,000			$	958,413

7. COMMITMENTS AND CONTINGENCIES

Performance Targets

     In the ordinary course of contracting with our customers, we may agree to make some or all of our fees contingent upon the customer’s achievement of financial improvement targets from the use of our services and software. These contingent fees are not recognized as revenue until the customer confirms achievement of the performance targets. We generally receive customer acceptance as and when the performance targets are achieved. If we invoice contingent fees prior to customer confirmation that a performance target has been achieved, we record invoiced contingent fees as deferred revenue on our Condensed Consolidated Balance Sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

Legal Proceedings

     From time to time, we become involved in legal proceedings arising in the ordinary course of business. As of March 31, 2011, we are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse affect on our business, operating results or financial condition.

8. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

     During the three months ended March 31, 2011, we issued approximately 195,000 shares of common stock in connection with employee stock option and stock-settled stock appreciation right (or “SSAR”) exercises for aggregate exercise proceeds of $1,360.

Share-Based Compensation

     As of March 31, 2011, we had restricted common stock, SSARs and common stock option equity awards outstanding under three share-based compensation plans. As of March 31, 2011, we had approximately 828,000 shares reserved under our 2008 equity incentive plan available for grant.

     The share-based compensation expense related to equity awards charged against income was $3,343 and $3,472 for the three months ended March 31, 2011 and 2010, respectively. The total income tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based compensation arrangements related to equity awards was $1,276 and $1,309 for the three months ended March 31, 2011 and 2010, respectively. There were no capitalized share-based compensation expenses at March 31, 2011.

     Total share-based compensation expense (inclusive of restricted common stock, SSARs and common stock options) for the three months ended March 31, 2011 and 2010 as reflected in our Condensed Consolidated Statements of Operations is as follows:

		Three Months Ended March 31,
		2011				2010
Cost of revenue		$	1,019			$	566
Product development			55				197
Selling and marketing			290				614
General and administrative			1,979				2,095
Total share-based compensation expense		$	3,343			$	3,472

Employee Stock Purchase Plan

     In 2010, the Company established the MedAssets, Inc. Employee Stock Purchase Plan (the “Plan”). Under the Plan, eligible employees may purchase shares of our common stock at a discounted price through payroll deductions. The price per share of the common stock sold to participating employees will be 95% of the fair market value of such share on the applicable purchase date. The Plan requires that all stock purchases be held by participants for a period of 18 months from the purchase date. A total of 500,000 shares of our common stock are authorized for purchase under the Plan. On February 28, 2011, we purchased approximately 19,100 shares of our common stock under the Plan which amounted to approximately $257.

Equity Award Grants

     During the three months ended March 31, 2011, we granted the following equity awards to certain of our employees:

Common Stock Option Awards

     During the three months ended March 31, 2011, we did not grant any stock option awards.

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

     During the three months ended March 31, 2011, approximately 116,000 options were forfeited.

     As of March 31, 2011, there was approximately $2,752 of total unrecognized compensation expense related to all outstanding stock option awards that will be recognized over a weighted-average period of 1.4 years.

Restricted Common Stock Awards

     During the three months ended March 31, 2011, we granted approximately 27,500 shares of restricted common stock with a service vesting period of four years. The weighted-average grant date fair value of each restricted common stock share was $15.57.

     During the three months ended March 31, 2011, approximately 26,000 shares of restricted common stock were forfeited.

     As of March 31, 2011, there was approximately $11,669 of total unrecognized compensation expense related to all unvested restricted common stock awards that will be recognized over a weighted-average period of 1.6 years.

SSARs Awards

     During the three months ended March 31, 2011, we granted approximately 320,000 SSARs with a service vesting period of five years. The weighted-average grant date base price of each SSAR was $15.57 and the weighted-average grant date fair value of each SSAR granted during the three months ended March 31, 2011 was $6.78.

     During the three months ended March 31, 2011, approximately 81,000 SSARs were forfeited.

     As of March 31, 2011, there was approximately $15,083 of total unrecognized compensation expense related to all unvested SSARs that will be recognized over a weighted-average period of 1.7 years.

9. INCOME TAXES

     Income tax expense recorded during the three months ended March 31, 2011 and 2010 reflected an effective income tax rate of 33.6% and 40.3%, respectively. Due to significant, estimated book tax differences in 2011, such as amortization expense of intangibles for accounting purposes, we expect to pay federal and state taxes for the year ended December 31, 2011 although we currently expect to realize an overall pretax book loss. As a result, our annual estimated effective rate has reduced significantly compared to March 31, 2010.

     We reduced our liability for uncertain tax positions for the three months ended March 31, 2011 by $841. Prior to the Broadlane Acquisition, Broadlane recorded a liability of $841 of uncertain tax positions related to open tax years. In March 2011, Broadlane received notification stating the review of the federal audit resulted in no changes. As a result, we reduced our liability for uncertain tax positions. Refer to Note 3 for additional information.

10. INCOME (LOSS) PER SHARE

     We calculate earnings per share (or “EPS”) in accordance with the generally accepted accounting principles relating to earnings per share. Basic EPS is calculated by dividing reported net income (loss) by the weighted-average number of common shares outstanding for the reported period following the two-class method. Diluted EPS reflects the potential dilution that could occur if our stock options, stock settled stock appreciation rights, unvested restricted stock and stock warrants were exercised and converted into our common shares during the reporting periods.

     A reconciliation of basic and diluted weighted average shares outstanding for basic and diluted EPS is as follows:

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

		Three Months Ended March 31,
		2011				2010
Numerator for Basic and Diluted (Loss) Income Per Share:
Net (loss) income		$	(16,170	)		$	5,520
Denominator for basic (loss) income per share weighted average shares			57,233,000				55,817,000
Effect of dilutive securities:
Stock options			—				2,160,000
Stock settled stock appreciation rights			—				383,000
Restricted stock and stock warrants			—				469,000
Denominator for diluted (loss) income per share — adjusted weighted average shares and assumed conversions			57,233,000				58,829,000
Basic (loss) income per share:
Basic net (loss) income per common share		$	(0.28	)		$	0.10
Diluted net (loss) income per share:
Diluted net (loss) income per common share		$	(0.28	)		$	0.09

     During the three months ended March 31, 2011, basic and diluted EPS are the same as all potentially dilutive securities have been excluded from the calculation of diluted EPS given our net loss for the period. In addition, the effect of certain dilutive securities has been excluded for the three months ended March 31, 2010 because the impact is anti-dilutive as a result of the strike price of certain securities being greater than the average market price (or out of the money) during the periods presented. The following table provides a summary of those potentially dilutive securities that have been excluded from the above calculation of diluted EPS:

		Three Months Ended March 31,
		2011				2010
Stock options			1,459,000				77,000
SSARs			219,000				43,000
Restricted stock and stock warrants			226,000				—
Total			1,904,000				120,000

11. SEGMENT INFORMATION

     Beginning January 1, 2011, we reorganized our business to better align with our markets. We consolidated our decision support services operating unit into our SCM reporting unit to serve as a more comprehensive business tool with a market strategy aimed at focusing analytical and decision support services to assist customers in identifying, improving and creating efficiencies in their cost structure. Our senior management and chief operating decision maker determined this would be a better alignment of the components within our reporting segments. All prior period amounts have been retrospectively adjusted to reflect this reorganization.

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

	•		Revenue Cycle Management. Our RCM segment provides a comprehensive suite of software and services spanning the hospital, health system and other ancillary healthcare provider revenue cycle workflow — from patient admission and financial responsibility, patient financial liability estimation, charge capture, case management, contract management and health information management through claims processing and accounts receivable management. Our workflow solutions, together with our data management and business intelligence tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance.
	•		Spend and Clinical Resource Management. Our SCM segment provides a comprehensive suite of technology-enabled

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

services that help our customers manage their expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization (“GPO”) portfolio of contracts, consulting services and business intelligence tools.

     GAAP relating to segment reporting, defines reportable segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing financial performance. The guidance indicates that financial information about segments should be reported on the same basis as that which is used by the chief operating decision maker in the analysis of performance and allocation of resources. Management of the Company, including our chief operating decision maker, uses what we refer to as Segment Adjusted EBITDA as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. We define Segment Adjusted EBITDA as segment net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization (“EBITDA”) as adjusted for other non-recurring, non-cash or non-operating items. Our chief operating decision maker uses Segment Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period. Segment Adjusted EBITDA includes expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of the segment. General and administrative corporate expenses that are not specific to the segments are not included in the calculation of Segment Adjusted EBITDA. These expenses include the costs to manage our corporate offices, interest expense on our credit facilities and expenses related to being a publicly-held company. All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external customers.

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

     The following tables represent our results of operations, by segment, for the three months ended March 31, 2011 and 2010:

		Three Months Ended March 31, 2011
		RCM				SCM				Corporate				Total
Results of Operations:
Revenue:
Gross administrative fees(1)		$	—			$	90,325			$	—			$	90,325
Revenue share obligation(1)			—				(33,743	)			—				(33,743	)
Other service fees			51,225				22,752				—				73,977
Total net revenue			51,225				79,334				—				130,559
Total operating expenses			47,183				80,810				9,039				137,032
Operating income (loss)			4,042				(1,476	)			(9,039	)			(6,473	)
Interest (expense)			—				—				(18,049	)			(18,049	)
Other income			7				52				112				171
Income (loss) before income taxes		$	4,049			$	(1,424	)		$	(26,976	)		$	(24,351	)
Income tax expense (benefit)			1,352				(476	)			(9,057	)			(8,181	)
Net income (loss)			2,697				(948	)			(17,919	)			(16,170	)
Segment Adjusted EBITDA		$	11,470			$	36,150			$	(6,675	)		$	40,945

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

		As of March 31, 2011
		RCM				SCM				Corporate				Total
Financial Position:
Accounts receivable, net		$	49,328			$	43,282			$	353			$	92,963
Other assets			485,113				1,131,196				119,009				1,735,318
Total assets			534,441				1,174,478				119,362				1,828,281
Accrued revenue share obligation			—				55,234				—				55,234
Deferred revenue			31,716				26,109				—				57,825
Notes Payable			—				—				633,413				633,413
Bonds Payable			—				—				325,000				325,000
Other liabilities			12,014				26,359				293,702				332,075
Total liabilities		$	43,730			$	107,702			$	1,252,115			$	1,403,547

		Three Months Ended March 31, 2010
		RCM				SCM				Corporate				Total
Results of Operations:
Revenue:
Gross administrative fees(1)		$	—			$	43,029			$	—			$	43,029
Revenue share obligation(1)			—				(14,439	)			—				(14,439	)
Other service fees			51,901				12,915				—				64,816
Total net revenue			51,901				41,505				—				93,406
Total operating expenses			45,177				26,011				9,100				80,288
Operating income (loss)			6,724				15,494				(9,100	)			13,118
Interest (expense)			—				—				(3,932	)			(3,932	)
Other income (loss)			14				(57	)			110				67
Income (loss) before income taxes		$	6,738			$	15,437			$	(12,922	)		$	9,253
Income tax (benefit)			2,718				6,227				(5,212	)			3,733
Net income (loss)			4,020				9,210				(7,710	)			5,520
Segment Adjusted EBITDA		$	15,445			$	18,994			$	(6,627	)		$	27,812

     GAAP for segment reporting requires that the total of the reportable segments’ measures of profit or loss be reconciled to the Company’s consolidated operating results. The following table reconciles Segment Adjusted EBITDA to consolidated net (loss) income for the three months ended March 31, 2011 and 2010:

		Three Months Ended March 31,
		2011				2010
RCM Adjusted EBITDA		$	11,470			$	15,445
SCM Adjusted EBITDA			36,150				18,994
Total reportable Segment Adjusted EBITDA			47,620				34,439
Depreciation			(4,614	)			(3,470	)
Depreciation (included in cost of revenue)			(255	)			(722	)
Amortization of intangibles			(20,240	)			(6,084	)
Amortization of intangibles (included in cost of revenue)			(139	)			(185	)
Interest expense, net of interest income(1)			7				18
Income tax expense			(876	)			(8,945	)
Share-based compensation expense(2)			(2,167	)			(1,821	)
Purchase accounting adjustments(3)			(5,564	)			—
Acquisition and integration-related expenses(4)			(12,023	)			—
Total reportable segment net income			1,749				13,230
Corporate net loss			(17,919	)			(7,710	)
Consolidated net (loss) income		$	(16,170	)		$	5,520

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

(1)

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

(2)

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

(3)

Upon acquiring Broadlane, we made certain purchase accounting adjustments that reflects the fair value of administrative fees related to customer purchases that occurred prior to November 16, 2010 but were reported to us subsequent to that. Under our revenue recognition accounting policy, which is in accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases occurring prior to the transaction date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability. The $5,564 represents the net amount of (i) $8,613 in gross administrative fees and $1,394 in other service fees primarily based on vendor reporting received from January 1, 2011 through March 31, 2011; and (ii) a corresponding revenue share obligation of $4,443.The reduction of the deferred revenue balances materially affects period-to-period financial performance comparability and revenue and earnings growth in future periods subsequent to the acquisition and is not indicative of changes in underlying results of operations.

(4)

Amount was attributable to integration and restructuring-type costs associated with the Broadlane Acquisition, such as severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs. We expect to continue to incur costs in future periods to fully integrate the Broadlane Acquisition, including but not limited to the alignment of service offerings and the standardization of the legacy Broadlane accounting policies to our existing accounting policies and procedures.

12. FAIR VALUE MEASUREMENTS

     We measure fair value for financial instruments, such as non-financial assets, when a valuation is necessary, such as for impairment of long-lived and indefinite-lived assets when indicators of impairment exist in accordance with GAAP for fair value measurements and disclosures. This defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value.

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

	•		Cash and cash equivalents: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value due to the high credit standing of the financial institutions holding these items and their liquid nature;
	•		Accounts receivable, net: The carrying value reported in the Condensed Consolidated Balance Sheets is net of allowances for doubtful accounts which includes a degree of counterparty non-performance risk;
	•		Accounts payable and current liabilities: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company;
	•		Finance obligation: The carrying value of our finance obligation reported in the Condensed Consolidated Balance Sheets approximates fair value based on current interest rates; and
	•		Notes payable: The carrying value of our long-term notes payable reported in the Condensed Consolidated Balance Sheets approximates fair value since they bear interest at variable rates. Refer to Note 6.

13. RELATED PARTY TRANSACTION

     We have an agreement with John Bardis, our chief executive officer, for the use of an airplane owned by JJB Aviation, LLC, a

MedAssets, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) — (continued)
(In thousands, except share and per share amounts)

limited liability company, owned by Mr. Bardis. We pay Mr. Bardis at market-based rates for the use of the airplane for business purposes. The audit committee of the board of directors reviews such usage of the airplane annually. During the three months ended March 31, 2011 and 2010, we incurred charges of $382 and $581, respectively, related to transactions with Mr. Bardis.

14. SUBSEQUENT EVENTS

     On April 6, 2011, we made a voluntary payment of $25,000 on the term loan component of our Credit Agreement.

     On May 5, 2011, we entered into three separate hedging arrangements to convert 50% of our variable rate debt to a fixed or maximum rate debt, as required by our Credit Agreement. The arrangements consisted of: (i) a 3% LIBOR interest rate cap (exclusive of the applicable bank margin charged by our lender) on a $317,500 notional amount beginning May 13, 2011 and ending on February 16, 2013; (ii) a forward starting interest rate swap which fixes three-month LIBOR at 2.80% (exclusive of the applicable bank margin charged by our lender) on a $158,750 notional amount beginning February 16, 2013 and ending February 16, 2015; and (iii) a forward starting interest rate swap which fixes three-month LIBOR at 2.78% (exclusive of the applicable bank margin charged by our lender) on a $158,750 notional amount beginning February 16, 2013 and ending February 16, 2015.

     Other than the items noted above, we have evaluated subsequent events for recognition or disclosure in the Condensed Consolidated Financial Statements filed on Form 10-Q with the SEC and no other events have occurred that require disclosure.

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

NOTE ON FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “estimates,” “projects,” “targets,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this Quarterly Report on Form 10-Q, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.

     A number of important factors could cause our actual results to differ materially from those indicated by such forward-looking statements, including those described herein and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the SEC on March 1, 2011.

Overview

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

     Management’s primary metrics to measure the consolidated financial performance of the business are net revenue, non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted cash EPS.

     The table below highlights our primary results of operations for the three months ended March 31, 2011 and 2010 (unaudited):

		Three Months Ended March 31,
		2011				2010				Change
		Amount				Amount				Amount				%
						(In millions)
Gross fees(1)		$	164.3			$	107.8			$	56.5				52.4	%
Revenue share obligation(1)			(33.7	)			(14.4	)			(19.3	)			134.0
Total net revenue			130.6				93.4				37.2				39.8
Operating (loss) income			(6.5	)			13.1				(19.6	)			(149.6	)
Net (loss) income		$	(16.2	)		$	5.5			$	(21.7	)			(394.5	)%
Adjusted EBITDA(1)		$	40.9			$	27.8			$	13.1				47.1	%
Adjusted EBITDA margin(1)			31.3	%			29.8	%
Diluted Cash EPS(1)		$	0.17			$	0.19			$	(0.02	)			(10.5	)%

     The increases in non-GAAP gross fees and total net revenue during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 were primarily attributable to:

	•		the Broadlane Acquisition;
	•		growth in our RCM segment from our comprehensive revenue cycle technology solutions; and
	•		growth in our SCM segment from our vendor administrative fees.

     The operating loss during the three months ended March 31, 2011 compared to operating income for the three months ended March 31, 2010, was primarily attributable to the following:

	•		acquisition and integration-related expenses associated with our recent Broadlane Acquisition;
	•		increased cost of revenue attributable to: (i) a higher percentage of net revenue being derived from service-based engagements within our RCM and SCM segments; and (ii) higher direct costs relating to certain new and existing customer arrangements whereby the related revenue associated with these arrangements is contingent upon meeting financial performance targets. The related revenue is proportionally recognized as the performance targets are achieved. The increase in these types of arrangements was concentrated within our SCM segment;
	•		higher operating expenses related to new and existing salary-related compensation expense primarily associated with our expanding services-based businesses;
	•		an increase in amortization expense of acquired intangibles; and
	•		an increase in depreciation expense from additions of property and equipment including purchased software in conjunction with fixed assets acquired in the Broadlane Acquisition.

     For the three months ended March 31, 2011, increases in consolidated non-GAAP adjusted EBITDA and non-GAAP adjusted EBITDA margin compared to the three months ended March 31, 2010 were primarily attributable to the net revenue increase discussed above, as well as lower expense growth due to certain management cost control initiatives.

Recent Developments

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

Segment Reporting

     Beginning January 1, 2011, our decision support services (“DSS”) and performance analytics business operations became part of our SCM segment. This move helps us capitalize on the integration of our products and services and focus on offering data-driven tools and services to help bridge our customers’ clinical and financial gaps so they can produce the highest quality patient outcomes at the lowest cost. As a result, the financial results for the three months ended March 31, 2010 have been recast to reflect the move of DSS from our RCM to SCM reporting segment.

Broadlane Acquisition

     We consummated our acquisition of Broadlane on November 16, 2010. The Company is required to make a payment of approximately $123.1 million in cash (which represents the face value at maturity), subject to certain purchase price adjustments (e.g., payments made by the Company for working capital, inclusive of cash) and certain limitations, on or before January 4, 2012. The purchase consideration that was paid at closing is still subject to a final working-capital adjustment as defined by the purchase agreement.

Purchase Accounting

     In connection with the Broadlane Acquisition, we recorded an administrative fee and other service revenue fee adjustment, which was determined as part of purchase accounting and recorded as part of the purchase price allocation. The purchase accounting adjustment was recorded as an accounts receivable relating to these administrative fees with a related revenue share obligation. This change only impacted our SCM segment. We include a purchase accounting adjustment line item in our adjusted EBITDA reconciliation to account for these adjustments as it relates to the Broadlane Acquisition. We may experience further adjustments to these amounts up through the measurement period, or one year from the acquisition date.

Credit Facility and Notes Offering

     On November 16, 2010, in connection with the Broadlane Acquisition, we entered into a new credit agreement (the “Credit Agreement”) with Barclays Bank PLC and JP Morgan Securities LLC and closed a private placement offering of senior notes due 2018.

The Company used the entire borrowings from the Credit Agreement and the net proceeds from the offering of senior notes to finance the purchase price of the Broadlane Acquisition and repay outstanding indebtedness of the Company and Broadlane.

Credit Facility

     The Credit Agreement consists of a six-year $635.0 million senior secured term loan facility and a five-year $150.0 million senior secured revolving credit facility, including a letter of credit sub-facility of $25.0 million and a swing line sub-facility of $25.0 million. Both the senior secured term loan and revolving credit facility charge a variable interest rate of LIBOR or an alternate base rate plus and applicable margin.

     On March 31, 2011, we entered into the first amendment to our existing credit agreement (the “First Amendment”). The First Amendment redefined the swing line lender as Bank of America, N.A. from Barclays Bank. In connection with the First Amendment, we executed an auto borrowing plan with Bank of America, N.A. This enabled the Company to reinstitute our cash management practice of voluntarily applying any excess cash to repay our swing line credit facility, if any, on a daily basis or against our revolving credit facility on a routine basis when our swing line credit facility is undrawn.

Notes Offering

     Also in connection with the Broadlane Acquisition, the Company closed the offering of an aggregate principal amount of $325.0 million of senior notes due 2018 (the “Notes”) in a private placement. The Notes will mature on November 15, 2018, and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011.

Use of Estimates

     The preparation of the financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. During the three months ended March 31, 2011, we adjusted our estimates related to our customer relationship period and internally developed software useful life, as discussed below. These changes in estimates were factored into our 2011 financial guidance.

     We finalized a study of our customer relationship period using data based on our historical experience. As a result of the study, we changed our customer relationship period for which we recognize revenue related to implementation and setup fees charged for our SaaS-based services from an average of four years to six years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in customer relationship period will reduce our 2011 other service fee revenue by approximately $0.8 million.

     We finalized a study of our internally developed software useful life based on our historical experience. As a result of the study, we changed our useful life for which we will recognize depreciation expense related to internally developed software from three years to up to but generally five years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in internally developed software useful life will reduce our 2011 depreciation expense by approximately $5.6 million.

Segment Structure and Revenue Streams

     We deliver our solutions through two business segments, Revenue Cycle Management (“RCM”) and Spend and Clinical Resource Management (“SCM”). Management’s primary metrics to measure consolidated and segment financial performance are net revenue, non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP diluted cash EPS and Segment Adjusted EBITDA. All of our revenues are from external customers and inter-segment revenues have been eliminated. See Note 11 of the Notes to our Condensed Consolidated Financial Statements herein for discussion on Segment Adjusted EBITDA and certain items of our segment results of operations and financial position.

Revenue Cycle Management

     Our RCM segment provides a comprehensive suite of products and services spanning the hospital revenue cycle workflow — from patient access and financial responsibility, charge capture and integrity, pricing analysis, claims processing and denials management, payor contract management, revenue recovery and accounts receivable services. Our workflow solutions, together with our data management, compliance and audit tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance. Our RCM segment revenue is listed under the caption “Other service fees” on our Condensed Consolidated Statements of Operations and consists of the following components:

	•		Subscription and implementation fees. We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our SaaS-based solutions. We may also charge our customers non-refundable upfront fees for implementation of our SaaS-based services. These non-refundable upfront fees are earned over the subscription period or estimated customer relationship period, whichever is longer.
			We defer costs related to implementation services and expense these costs in proportion to the revenue earned over the subscription period or customer relationship period, as applicable. We completed a study on our customer relationship period based on historical attrition rates. This resulted in an increase to the customer relationship period from four to six years.
			In addition, we defer upfront sales commissions related to subscription and implementation fees and expense these costs ratably over the related contract term.
	•		Transaction fees. For certain of our revenue cycle management solutions, we earn fees that vary based on the volume of customer transactions or enrolled members.

•

Service fees. For certain of our RCM solutions, we earn fees based on a percentage of cash remittances collected, fixed-fee and cost-plus consulting arrangements. The related revenues are earned as services are rendered.

Spend and Clinical Resource Management

     On November 16, 2010, we completed the acquisition of Broadlane, a leading provider of group purchasing, supply chain outsourcing and centralized procurement services, capital equipment lifecycle management, clinical and lean process consulting, and clinical workforce optimization solutions. With the addition of Broadlane, our SCM segment provides a comprehensive suite of cost management services and supply chain analytics and data capabilities that help our customers manage many of their high and low expense categories. Our solutions lower supply and medical device costs and help to improve clinical resource utilization by managing the procurement process through our strategic sourcing of supplies and purchased services, discounted pricing through our group purchasing organization’s portfolio of contracts, consulting services and business analytics and intelligence tools. Our SCM segment revenue consists of the following components:

	•		Administrative fees and revenue share obligation. We earn administrative fees from manufacturers, distributors and other vendors (collectively referred to as “vendors”) of products and services with whom we have contracts under which our group purchasing organization customers may purchase products and services. Administrative fees represent a percentage, which we refer to as our administrative fee ratio, typically ranging from 0.25% to 3.00% of the purchases made by our group purchasing organization customers through contracts with our vendors.
			Our group purchasing organization customers make purchases, and receive shipments, directly from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.
			Some customer contracts require that a portion of our administrative fees be contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until we receive customer acceptance on the achievement of those contractual performance targets. Prior to receiving customer acceptance of performance targets, we record contingent administrative fees as deferred revenue on our consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees.
			Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customer’s purchases from our vendors. Our total net revenue on our Consolidated Statements of Operations is shown net of the revenue share obligation.
	•		Other service fees. The following items are included as “Other service fees” in our Condensed Consolidated Statement of Operations:

	•		Consulting fees. We consult with our customers regarding the costs and utilization of medical devices and physician preference items (“PPI”) and the efficiency and quality of their key clinical service lines. Our consulting projects are typically fixed fee projects with an average duration of six to nine months, and the related revenues are earned as services are rendered. We generate revenue from consulting contracts that also include performance targets. The performance targets generally relate to committed financial improvement to our customers from the use and implementation of initiatives that result from our consulting services. Performance targets are measured as our strategic initiatives are identified and implemented, and the financial improvement can be quantified by the customer. In the event the performance targets are not achieved, we are obligated to refund or reduce a portion of our fees.
	•		Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these Company-hosted SaaS-based solutions.
	•		Licensed-software fees. We earn license, implementation, maintenance and other software-related service fees for our business intelligence, decision support and other software products. These software revenues are typically recognized ratably over the contract period as these are effectively annual licenses. We have certain SCM contracts that are sold in multiple-element arrangements and include software products. We have considered Rule 5-03 of Regulation S-X for these types of multiple-element arrangements that include software products and determined the amount is below the threshold that would require separate disclosure on our consolidated statement of operations.

Operating Expenses

     We classify our operating expenses as follows:

	•		Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor costs consist primarily of salaries, benefits, and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers (indirect labor costs for these personnel are included in general and administrative expenses). As the majority of our services are generated internally, our costs to provide these services are primarily labor-driven. A less significant portion of our cost of revenue consists of costs of third- party products and services and customer reimbursed out-of-pocket costs. Cost of revenue does not include certain expenses relating to hosting our services and providing support and related data center capacity (which is included in general and administrative expenses), and allocated amounts for rent, depreciation, amortization or other indirect operating costs because we do not consider the inclusion of these items in cost of revenue relevant to our business. However, cost of revenue does include the amortization for the cost of software to be sold, leased, or otherwise marketed. As a result of the Broadlane Acquisition and related integration, there may be some re-allocation of expenses primarily between cost of revenue and general and administrative expense resulting from the implementation of our accounting expense allocation policies that could affect period over period and acquisition-affected comparability. In addition, any changes in revenue mix between our RCM and SCM segments, including changes in revenue mix towards SaaS-based revenue and consulting services, may cause significant fluctuations in our cost of revenue and have a favorable or unfavorable impact on operating income.
	•		Product development expenses. Product development expenses primarily consist of the salaries, benefits, incentive compensation and share-based compensation expense of the technology professionals who develop, support and maintain our software-related products and services. Product development expenses are net of capitalized software development costs for both internal and external use.
	•		Selling and marketing expenses. Selling and marketing expenses consist primarily of costs related to marketing programs (including trade shows and brand messaging), personnel-related expenses for sales and marketing employees (including salaries, benefits, incentive compensation and share-based compensation expense), certain meeting costs and travel-related expenses.
	•		General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for administrative employees and indirect time related to operational service-based employees (including salaries, benefits, incentive compensation and share-based compensation expense) and travel-related expenses, occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses.
	•		Acquisition and integration-related expenses. Acquisition and integration-related expenses may consist of: (i) costs incurred to complete acquisitions including due diligence, consulting and other related fees; (ii) integration and restructuring-type costs relating to our completed acquisitions; and (iii) acquisition-related fees associated with unsuccessful acquisition attempts.
	•		Depreciation. Depreciation expense consists primarily of depreciation of fixed assets and the amortization of software, including capitalized costs of software developed for internal use.
	•		Amortization of intangibles. Amortization of intangibles includes the amortization of all identified intangible assets (with the exception of software), primarily resulting from acquisitions.

Results of Operations

Consolidated Tables

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

		Three Months Ended March 31,
		2011				2010
		(Unaudited, in thousands)
						(recast)
Net revenue:
Revenue Cycle Management		$	51,225			$	51,901
Spend and Clinical Resource Management
Gross administrative fees(1)			90,325				43,029
Revenue share obligation(1)			(33,743	)			(14,439	)
Other service fees			22,752				12,915
Total Spend and Clinical Resource Management			79,334				41,505
Total net revenue			130,559				93,406
Operating expenses:
Revenue Cycle Management			47,183				45,177
Spend and Clinical Resource Management			80,810				26,011
Total segment operating expenses			127,993				71,188
Operating (loss) income
Revenue Cycle Management			4,042				6,724
Spend and Clinical Resource Management			(1,476	)			15,494
Total segment operating income			2,566				22,218
Corporate expenses(2)			9,039				9,100
Operating (loss) income			(6,473	)			13,118
Other income (expense):
Interest expense			(18,049	)			(3,932	)
Other income (expense)			171				67
(Loss) income before income taxes			(24,351	)			9,253
Income tax (benefit) expense			(8,181	)			3,733
Net (loss) income			(16,170	)			5,520
Reportable segment adjusted EBITDA(3):
Revenue Cycle Management			11,470				15,445
Spend and Clinical Resource Management		$	36,150			$	18,994
Reportable segment adjusted EBITDA margin(4):
Revenue Cycle Management			22.4	%			29.8	%
Spend and Clinical Resource Management			45.6	%			45.8	%

Comparison of the Three Months Ended March 31, 2011 and March 31, 2010

		Three Months Ended March 31,
		2011								2010								Change
						% of								% of
		Amount				Revenue				Amount				Revenue				Amount				%
		(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management		$	51,225				39.2	%		$	51,901				55.6	%		$	(676	)			-1.3	%
Spend and Clinical Resource Management
Gross administrative fees(1)			90,325				69.2				43,029				46.1				47,296				109.9
Revenue share obligation(1)			(33,743	)			(25.8	)			(14,439	)			(15.5	)			(19,304	)			133.7
Other service fees			22,752				17.4				12,915				13.8				9,837				76.2
Total Spend and Clinical Resource Management			79,334				60.8				41,505				44.4				37,829				91.1
Total net revenue		$	130,559				100.0	%		$	93,406				100.0	%		$	37,153				39.8	%

     Total net revenue. Total net revenue for the three months ended March 31, 2011 was $130.6 million, an increase of $37.2 million, or 39.8%, from total net revenue of $93.4 million for the three months ended March 31, 2010. The increase in total net revenue was comprised of an increase of $37.8 million in SCM revenue offset by a $0.6 million decrease in RCM revenue.

     Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the three months ended March 31, 2011 was $51.2 million, a decrease of $0.6 million, or 1.3%, from net revenue of $51.9 million for the three months ended March 31, 2010. The decrease was primarily attributable to a $3.8 million decrease in revenue from our comprehensive revenue cycle service engagements primarily because of the timing of revenue with our significant revenue cycle services engagements moving into a technology only phase as well as a large performance fee that did not recur in 2011. The decrease was partially offset by a $3.2 million increase in revenue from our revenue cycle technology tools. As we engage new customers, renew with existing customers and complete existing contracts, we will experience certain fluctuations in our revenue cycle service financial performance given the magnitude of the contract value for these types of customers.

     Spend and Clinical Resource Management net revenue. Spend and Clinical Resource Management net revenue for the three months ended March 31, 2011 was $79.3 million, an increase of $37.8 million, or 91.1%, from net revenue of $41.5 million for the three months ended March 31, 2010. The increase was the result of an increase in gross administrative fees of $47.3 million, or 109.9%, partially offset by a $19.3 million increase in revenue share obligation, and an increase in other service fees of $9.8 million.

	•		Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $47.3 million, or 109.9%, as compared to the prior period, due to the inclusion of Broadlane purchase activity, higher purchasing volumes by new and existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors as well as an increase in the average administrative fee percentage realized from our manufacturer and distributor contracts. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies.
	•		Revenue share obligation. Non-GAAP revenue share obligation increased $19.3 million, or 133.7%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees including administrative fees not subject to a variable revenue share obligation (or the “revenue share ratio”). Our revenue share ratio was 37.4% and 33.6% for the three months ended March 31, 2011 and 2010, respectively. This increase was primarily attributable to an increase in customers who are entitled to a higher revenue share percentage due to increased purchasing volume. We may experience fluctuations in our revenue share ratio in the future because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.
	•		Broadlane related revenue. $37.8 million of the net revenue increase was attributable to the Broadlane Acquisition, which was comprised of $27.2 million in net administrative fee revenue and $10.6 million in other service fee revenue. As discussed further below, approximately $5.6 million of estimated net administrative and other service fees associated with the Broadlane Acquisition was excluded from our financial results because of GAAP relating to business combinations.
			Given the significant impact of the Broadlane Acquisition on our SCM segment, we believe acquisition-affected measures are useful for the comparison of our period over period net revenue growth. SCM non-GAAP acquisition-affected net revenue for the three months ended March 31, 2011 was $84.9 million, an increase of $0.9 million, or 1.1%, from SCM non-GAAP

acquisition-affected net revenue of $84.0 million for the three months ended March 31, 2010. The following table sets forth the reconciliation of SCM non-GAAP acquisition-affected net revenue to GAAP net revenue:

		Three Months Ended March 31,
		2011				2010				Change
		Amount				Amount				Amount				%
		(Unaudited, in thousands)
SCM net revenue		$	79,334			$	41,505			$	37,829				91.1	%
Broadlane acquisition-related adjustment(1)			—				42,506				(42,506	)			(100.0	)
Broadlane purchase accounting revenue adjustment(1)(2)			5,564				—				5,564				100.0
Total SCM acquisition-affected net revenue(1)		$	84,898			$	84,011			$	887				1.1	%

•

Other service fees. The $9.8 million, or 76.2%, increase in other service fees was related to $11.4 million in higher revenues from medical device consulting and strategic sourcing services (inclusive of Broadlane). The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers coupled with other service fee revenue relating to consulting and sourcing services from the Broadlane Acquisition. The increase was partially offset by $1.6 million decrease in revenue relating to our DSS business primarily due to a scheduled and planned step down in license fees from a large decision support customer.

Total Operating Expenses

		Three Months Ended March 31,
		2011								2010								Change
						% of								% of
		Amount				Revenue				Amount				Revenue				Amount				%
		(Unaudited, in thousands)
Operating expenses:
Cost of revenue		$	30,555				23.4	%		$	21,722				23.3	%		$	8,833				40.7	%
Product development expenses			6,673				5.1				5,370				5.7				1,303				24.3
Selling and marketing expenses			12,601				9.7				10,668				11.4				1,933				18.1
General and administrative expenses			49,141				37.6				32,151				34.4				16,990				52.8
Acquisition and integration-related expenses			12,143				9.3				—				0.0				12,143				100.0
Depreciation			5,679				4.3				4,293				4.6				1,386				32.3
Amortization of intangibles			20,240				15.5				6,084				6.5				14,156				232.7
Total operating expenses			137,032				105.0				80,288				86.0				56,744				70.7
Operating expenses by segment:
Revenue Cycle Management			47,183				36.1				45,177				48.4				2,006				4.4
Spend and Clinical Resource Management			80,810				61.9				26,011				27.8				54,799				210.7
Total segment operating expenses			127,993				98.0				71,188				76.2				56,805				79.8
Corporate expenses			9,039				6.9				9,100				9.7				(61	)			(0.7	)
Total operating expenses		$	137,032				105.0	%		$	80,288				86.0	%		$	56,744				70.7	%

     Cost of revenue. Cost of revenue for the three months ended March 31, 2011 was $30.6 million, or 23.4% of total net revenue, an

increase of $8.8 million, or 40.7%, from cost of revenue of $21.7 million, or 23.3% of total net revenue, for the three months ended March 31, 2010.

     The $8.8 million increase was comprised of $9.4 million associated with cost of revenue for the Broadlane Acquisition offset by a $0.6 million decrease in cost of revenue in our RCM segment. The RCM decrease is primarily attributable to the corresponding decrease in revenue from our comprehensive revenue cycle services engagements, which generally is more labor intensive and produces higher direct costs.

     Excluding the impact of the Broadlane Acquisition, our cost of revenue as a percentage of related net revenue decreased from 23.3% to 22.8% period over period.

     We may experience higher cost of revenue if: (i) the revenue mix continues to shift towards RCM segment products and services and more specifically if the revenue mix within the RCM segment shifts towards more service-related engagements; and (ii) we experience continued growth in our consulting services, supply chain outsourcing and centralized procurement services within the SCM segment.

     In addition, as a result of the Broadlane Acquisition and related integration, there may be some re-allocation of expenses primarily between cost of revenue and general and administrative expense resulting from the implementation of our accounting expense allocation policies that could affect period over period and acquisition-affected comparability.

     Product development expenses. Product development expenses for the three months ended March 31, 2011 were $6.7 million, or 5.1% of total net revenue, an increase of $1.3 million, or 24.3%, from product development expenses of $5.4 million, or 5.7% of total net revenue, for the three months ended March 31, 2010.

     The increase during the three months ended March 31, 2011 was primarily attributable to a $1.5 million increase in compensation expense to new and existing employees. The increase was partially offset by a $0.2 million decrease in share-based compensation expense resulting from the use of the accelerated method of expense attribution used for our service-based equity awards that are subject to graded vesting, which comprises a majority of our total equity awards. This method results in a continual decrease in annual share-based compensation expense over the requisite service period of each grant. Our product development capitalization rate for the three months ended March 31, 2011 and 2010, was 44.3% and 41.4%, respectively.

     Excluding the impact of the Broadlane Acquisition, our product development expenses as a percentage of related net revenue increased from 5.7% to 6.0% period over period, for the reasons described above.

     We plan to continue to focus on development efforts designed to integrate, enhance and standardize our products. We also plan to continue to develop a number of new RCM and SCM products and services and enhance our existing products in both segments. We expect to maintain or increase our product development spending in future periods.

     Selling and marketing expenses. Selling and marketing expenses for the three months ended March 31, 2011 were $12.6 million, or 9.7% of total net revenue, an increase of $1.9 million, or 18.1%, from selling and marketing expenses of $10.7 million, or 11.4% of total net revenue, for the three months ended March 31, 2010.

     The increase was primarily attributable to a $1.5 million increase in compensation expense relating to new and existing employees and a $0.5 million increase in meetings expense. The increase was partially offset by a $0.3 million decrease in share-based compensation expense (for the reason described under “Product development expenses”).

     Excluding the impact of the Broadlane Acquisition, selling and marketing expenses, as a percentage of related net revenue, increased from 11.4% to 12.0% period over period, for the reasons described above.

     General and administrative expenses. General and administrative expenses for the three months ended March 31, 2011 were $49.1 million, or 37.6% of total net revenue, an increase of $16.9 million, or 52.8%, from general and administrative expenses of $32.2 million, or 34.4% of total net revenue, for the three months ended March 31, 2010.

     Of the increase, $11.3 million was attributable to the Broadlane Acquisition. The remaining increase was attributable to a $4.1 million increase in compensation expense to new and existing employees, primarily operational service-based employees; a $0.5 million increase in rent expense; a $0.5 million increase in telecommunications expense; and a $0.5 million increase in other operating infrastructure expense.

     In addition, as a result of the Broadlane Acquisition and related integration, there may be some re-allocation of expenses primarily between cost of revenue and general and administrative expense resulting from the implementation of our accounting expense allocation policies that could affect period over period and acquisition-affected comparability.

     Excluding the impact of the Broadlane Acquisition, our general and administrative expenses as a percentage of related net revenue increased from 34.4% to 40.8% period over period, for the reasons described above.

     Acquisition-related expenses. Acquisition and integration-related expenses for the three months ended March 31, 2011 were $12.1 million, or 9.3% of total net revenue, an increase of $12.1 million, from acquisition related expenses of zero, for the three months ended March 31, 2010. The increase was attributable to costs relating to our continued integration and restructuring associated with the

Broadlane Acquisition, including severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs.

     We expect to continue to incur significant costs in future periods to fully integrate Broadlane, including but not limited to the alignment of service offerings and the standardization of legacy Broadlane policies to our existing policies and procedures.

     Depreciation. Depreciation expense for the three months ended March 31, 2011 was $5.7 million, or 4.3% of total net revenue, an increase of $1.4 million, or 32.3%, from depreciation of $4.3 million, or 4.6% of total net revenue, for the three months ended March 31, 2010. The increase was primarily attributable to depreciation resulting from purchases of property and equipment and to a lesser extent increases to capitalized software development subsequent to March 31, 2010. The increase is partially offset by the change in estimated useful life of internally developed software.

     Excluding the impact of the Broadlane Acquisition, our depreciation expense as a percentage of related net revenue remained consistent decreasing from 4.6% to 4.5% period over period.

     Amortization of intangibles. Amortization of intangibles for the three months ended March 31, 2011 was $20.2 million, or 15.5% of total net revenue, an increase of $14.1 million, or 232.7%, from amortization of intangibles of $6.1 million, or 6.5% of total net revenue, for the three months ended March 31, 2010. Excluding the impact of additional amortization expense relating to the Broadlane Acquisition, which amounted to $15.4 million, amortization expense decreased compared to the prior year due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

     Excluding the impact of the Broadlane Acquisition, our amortization expense as a percentage of related net revenue decreased from 6.5% to 5.2% period over period, for the reasons described above.

Segment Operating Expenses

     Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the three months ended March 31, 2011 were $47.2 million, or 36.1% of total net revenue, an increase of $2.0 million, or 4.4%, from $45.2 million, or 48.4% of total net revenue, for the three months ended March 31, 2010.

     RCM operating expenses increased as a result of a $3.7 million increase in compensation expense to new and existing employees, primarily operational service-based employees and a $0.7 million increase in our operating infrastructure expense. The increase was partially offset by a $1.1 million decrease in amortization of intangibles due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization; a $1.0 million decrease in cost of revenue, exclusive of share-based compensation, in connection with lower direct labor costs associated with lower revenue in our large comprehensive revenue cycle services engagements period over period; and a $0.3 million decrease in telecommunications expense.

     As a percentage of RCM segment net revenue, segment expenses increased from 87.0% to 92.1% for the three months ended March 31, 2011 and 2010, respectively, for the reasons described above.

     Spend and Clinical Resource Management expenses. Spend and Clinical Resource Management operating expenses for the three months ended March 31, 2011 were $80.8 million, or 61.9% of total net revenue, an increase of $54.8 million, or 210.7%, from $26.0 million, or 27.8% of total net revenue for the three months ended March 31, 2010.

     Of the increase, $40.2 million of expenses were attributable to the Broadlane Acquisition. SCM operating expenses also increased as a result of $12.1 million attributable to integration and restructuring-type costs associated with the Broadlane Acquisition, including severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs; a $3.1 million increase in compensation expense to new and existing employees, primarily operational service-based employees, offset by a $0.5 million reduction in general operating expense.

     Excluding the impact of the Broadlane Acquisition, our SCM segment expenses as a percentage of related net revenue, increased from 62.7% to 68.8% for the three months ended March 31, 2011 and 2010, respectively, for the reasons described above.

     Corporate expenses. Corporate expenses for the three months ended March 31, 2011 were $9.0 million, a decrease of $0.1 million, or 0.7%, from $9.1 million for the three months ended March 31, 2010, or 6.9% and 9.7% of total net revenue, respectively. The decrease in corporate expenses was primarily attributable to a $0.5 million decrease in share-based compensation expense (for the reason described within “Product development expenses”) partially offset by a $0.4 million increase in other operating infrastructure expense.

Non-operating Expenses

     Interest expense. Interest expense for the three months ended March 31, 2011 was $18.0 million, an increase of $14.1 million, or

359.0% from interest expense of $3.9 million for the three months ended March 31, 2010. As of March 31, 2011, we had total indebtedness of $958.4 million compared to $203.3 million as of March 31, 2010. The increase in interest expense is attributable to the increase in our indebtedness period over period associated with the funding of the Broadlane Acquisition.

     The increase in our indebtedness will cause a significant increase in our interest expense in future periods.

     Other income. Other income for the three months ended March 31, 2011 was $0.2 million, comprised principally of $0.1 million in rental income and $0.1 million in foreign exchange transaction gains. Other income for the three months ended March 31, 2010 was comprised of $0.1 million in rental income.

     Income tax expense. Income tax benefit for the three months ended March 31, 2011 was $8.2 million, an increase of $11.9 million from an income tax expense of $3.7 million for the three months ended March 31, 2010. The income tax benefit recorded during the three months ended March 31, 2011 and income tax expense recorded during the three months ended March 31, 2010 reflected an effective tax rate of 33.6% and 40.3%, respectively. The decrease in our effective tax rate was primarily attributable to the expectation of an annual pre-tax book loss compared to an expectation of annual pre-tax book income at March 31, 2010.

     We expect the amount of our permanent differences, state taxes and credits for research and development expenditures to remain constant for 2011, meaning these are not directly related to the change in pre-tax book income or loss, Consequently, as pre-tax book income or losses fluctuate during the year, our estimated annual effective tax rate could be significantly impacted by this potential movement.

Critical Accounting Policies

     The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We base our estimates and judgments on historical experience and other assumptions that we find reasonable under the circumstances. Actual results may differ materially from such estimates under different conditions.

     Management considers an accounting policy to be critical if the accounting policy requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain. A summary of our critical accounting policies is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Liquidity and Capital Resources

     Our primary cash requirements involve payment of ordinary expenses, working capital fluctuations, debt service obligations and capital expenditures. Our capital expenditures typically consist of software purchases, internal product development capitalization and computer hardware purchases. Historically, the acquisition of complementary businesses has resulted in a significant use of cash. Our principal sources of funds have primarily been cash provided by operating activities and borrowings under our credit facilities.

     We believe we currently have adequate cash flow from operations, capital resources, available credit facilities and liquidity to meet our cash flow requirements including the following near term obligations (next 12 months): (i) our working capital needs; (ii) our debt service obligations; (iii) our $123.1 million deferred purchase payment relating to the Broadlane Acquisition due on January 4, 2012; (iv) planned capital expenditures for the remainder of the year; (v) our revenue share obligation and rebate payments; and (vi) estimated federal and state income tax payments.

     In connection with the Broadlane Acquisition, we entered into the Credit Agreement with Barclays Bank PLC and JP Morgan Securities LLC. The Credit Agreement consists of a six-year $635.0 million senior secured term loan facility and a five-year $150.0 million senior secured revolving credit facility that contains a letter of credit sub-facility of $25.0 million and a swing line sub-facility of $25.0 million.

     Also in connection with the Broadlane Acquisition, we closed the offering of an aggregate principal amount of $325.0 million of senior notes due 2018 (the “Notes”) in a private placement. The Notes are jointly and severally guaranteed on a senior unsecured basis by each of the Company’s existing restricted subsidiaries and each of the Company’s future domestic restricted subsidiaries in each case that guarantees the Company’s obligations under the Credit Agreement. The Notes and the guarantees are senior unsecured obligations of the Company. The Notes were issued pursuant to an indenture dated as of November 16, 2010 (the “Indenture”) among the Company, its subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Pursuant to the Indenture, the Notes will mature on November 15, 2018 and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011.

     Our expectation relating to the $123.1 million deferred purchase payment will be to fund the payment by the due date from a combination of our free cash flow generated during the year and drawing upon our existing revolving credit facility to fund any shortfall. If we do not have enough liquidity to fund the deferred purchase payment with the combination of our free cash flow and revolving credit facility, we can obtain additional funding under are Credit Agreement via incremental loan facilities or an increase in the aggregate commitments under the revolving credit facility. Lastly, we have the option of an equity issuance to raise cash to fund the deferred purchase payment.

     Historically, we have utilized federal net operating loss carryforwards for both regular and Alternative Minimum Tax payment purposes. Consequently, our federal cash tax payments in past reporting periods have been minimal. As of March 31, 2011, we have exhausted all of our federal net operating losses. Consequently, we expect our cash paid for taxes to increase significantly in future years.

     We have not historically utilized borrowings available under our existing credit agreement to fund operations. During September 2008, we voluntarily changed our cash management practice to reduce our interest expense. We instituted an auto-borrowing plan which caused all excess cash on hand to be used to repay our swing-line credit facility on a daily basis. As we changed lenders in the course of the Broadlane Acquisition, this practice was suspended. On March 31, 2011, we re-instituted this arrangement by amending our credit agreement and assigning the entire swing-line component of our revolving credit facility to our former lender. As a result, any excess cash on hand will be used to repay our swing-line balance, if any, on a daily basis. See Note 6 to the Condensed Consolidated Financial Statements for further details.

     As of March 31, 2011, we had zero dollars drawn on our revolving credit facility resulting in $149.0 million of availability under our revolving credit facility inclusive of the swing-line (netted for a $1.0 million letter of credit). We may observe fluctuations in cash flows provided by operations from period to period. Certain events may cause us to draw additional amounts under our swing-line or revolving facility and may include the following:

	•		changes in working capital due to inconsistent timing of cash receipts and payments for major recurring items such as trade accounts payable, revenue share obligation, incentive compensation, changes in deferred revenue, and other various items;
	•		transaction and integration related costs associated with the Broadlane Acquisition;
	•		acquisitions; and
	•		unforeseeable events or transactions.