Catamaran Corp - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Catamaran Corp	Financial_Report.xls
EX-31.2 - Catamaran Corp	sxciex312.htm
EX-31.1 - Catamaran Corp	sxciex311.htm
EX-32.2 - Catamaran Corp	sxciex322.htm
EX-32.1 - Catamaran Corp	sxciex321.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2011



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

For the transition period from to .

Commission file number: 000-52073

SXC HEALTH SOLUTIONS CORP.

(Exact name of registrant as specified in its charter)



Yukon Territory		75-2578509
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

2441 Warrenville Road, Suite 610, Lisle, IL 60532-3642

(Address of principal executive offices, zip code)

(800) 282-3232

(Registrant’s phone number, including area code)

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 x 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or 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 x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

As of April 30, 2011, there were 61,876,578 of the Registrant’s common shares, no par value per share, outstanding.

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	Page
PART I — FINANCIAL INFORMATION	3

Item 1. Financial Statements (unaudited)	3

Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010	3

Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010	4

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2011 and 2010	5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010	6

Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2011 and 2010	7

Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25

Item 4. Controls and Procedures	25

PART II — OTHER INFORMATION	26

Item 1. Legal Proceedings	26

Item 1A. Risk Factors	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3. Defaults Upon Senior Securities	26

Item 4. Reserved	26

Item 5. Other Information	26

Item 6. Exhibits	27

SIGNATURE	28

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

SXC HEALTH SOLUTIONS CORP.

Consolidated Balance Sheets

(in thousands, except share data)



	March 31, 2011		December 31, 2010
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	325,929	$	321,284
Restricted cash	13,802		13,790
Accounts receivable, net of allowance for doubtful accounts of $3,280 (2010 — $3,553)	200,493		122,175
Rebates receivable	33,927		34,249
Prepaid expenses and other assets	5,671		4,888
Inventory	10,919		8,736
Income tax recoverable	923		5,285
Deferred income taxes	6,349		6,647
Total current assets	598,013		517,054
Property and equipment, net of accumulated depreciation of $32,731 (2010 — $35,861)	19,798		20,896
Goodwill	220,813		220,597
Other intangible assets, net of accumulated amortization of $35,246 (2010 — $31,687)	52,723		56,282
Deferred income taxes	562		665
Other assets	2,511		1,296
Total assets	$	894,420	$	816,790

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	37,470	$	30,930
Customer deposits	15,317		15,376
Salaries and wages payable	8,076		12,833
Accrued liabilities	19,102		21,652
Pharmacy benefit management rebates payable	61,204		61,364
Pharmacy benefit claim payments payable	137,319		84,599
Deferred revenue	11,707		11,177
Total current liabilities	290,195		237,931
Deferred income taxes	15,703		15,111
Other liabilities	10,231		10,492
Total liabilities	316,129		263,534
Commitments and contingencies (Note 12)
Shareholders’ equity
Common shares: no par value, unlimited shares authorized; 61,876,578 shares issued and outstanding at March 31, 2011 (December 31, 2010 — 61,602,997 shares)	385,775		381,736
Additional paid-in capital	27,698		24,973
Retained earnings	164,818		146,547
Total shareholders’ equity	578,291		553,256
Total liabilities and shareholders’ equity	$	894,420	$	816,790

See accompanying notes to the unaudited consolidated financial statements.

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SXC HEALTH SOLUTIONS CORP.

Consolidated Statements of Operations

(in thousands, except share and per share data)



	Three Months Ended March 31,
	2011			2010
	(unaudited)
Revenue:
PBM	$	1,071,923		$	427,502
HCIT	25,729			24,646
Total revenue	1,097,652			452,148
Cost of revenue:
PBM	1,020,188			389,166
HCIT	13,886			12,753
Total cost of revenue	1,034,074			401,919
Gross profit	63,578			50,229
Expenses:
Product development costs	3,360			3,073
Selling, general and administrative	27,438			21,308
Depreciation of property and equipment	1,594			1,481
Amortization of intangible assets	3,560			1,995
	35,952			27,857
Operating income	27,626			22,372
Interest income	(166		)	(149		)
Interest expense and other expense, net	453			592
Income before income taxes	27,339			21,929
Income tax expense:
Current	8,609			5,529
Deferred	459			1,608
	9,068			7,137
Net income	$	18,271		$	14,792
Earnings per share:
Basic	$	0.30		$	0.25
Diluted	$	0.29		$	0.24
Weighted average number of shares used in computing earnings per share:
Basic	61,801,036			60,187,002
Diluted	63,532,241			62,159,768

See accompanying notes to the unaudited consolidated financial statements.

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SXC HEALTH SOLUTIONS CORP.

Consolidated Statements of Comprehensive Income

(in thousands)



	Three Months Ended March 31,
	2011		2010
	(unaudited)
Net income	$	18,271	$	14,792
Other comprehensive income, net of tax
Unrealized gain on short-term investments (net of income tax expense of $1 for the three months ended March 31, 2010)	—		1
Comprehensive income	$	18,271	$	14,793

See accompanying notes to the unaudited consolidated financial statements.

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SXC HEALTH SOLUTIONS CORP.

Consolidated Statements of Cash Flows

(in thousands)



	Three Months Ended March 31,
	2011			2010
	(unaudited)
Cash flows from operating activities:
Net income	$	18,271		$	14,792
Items not involving cash:
Stock-based compensation	1,683			1,264
Depreciation of property and equipment	2,330			2,089
Amortization of intangible assets	3,560			1,995
Deferred lease inducements and rent	(122		)	(121		)
Deferred income taxes	459			1,608
Tax benefit on stock-based compensation plans	(3,323		)	(4,082		)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable	(78,169		)	(11,288		)
Rebates receivable	322			(14,500		)
Restricted cash	(12		)	(136		)
Prepaid expenses and other assets	(778		)	(159		)
Inventory	(2,183		)	(1,133		)
Income tax recoverable	8,219			3,643
Accounts payable	6,532			(2,383		)
Accrued liabilities	(7,782		)	(10,734		)
Pharmacy benefit claim payments payable	52,720			2,337
Pharmacy benefit management rebates payable	(160		)	11,997
Deferred revenue	523			1,388
Customer deposits	(59		)	651
Other	(1,249		)	105
Net cash provided (used) by operating activities	782			(2,667		)
Cash flows from investing activities:
Purchases of property and equipment	(1,198		)	(970		)
Proceeds from sales of short term investments	—			6,828
Purchases of short term investments	—			(2,208		)
Net cash (used) provided by investing activities	(1,198		)	3,650
Cash flows from financing activities:
Tax benefit on stock-based compensation plans	3,323			4,082
Proceeds from exercise of options	1,758			3,767
Net cash provided by financing activities	5,081			7,849
Effect of foreign exchange on cash balances	(20		)	39
Increase in cash and cash equivalents	4,645			8,871
Cash and cash equivalents, beginning of period	321,284			304,370
Cash and cash equivalents, end of period	$	325,929		$	313,241

See accompanying notes to unaudited consolidated financial statements.

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SXC HEALTH SOLUTIONS CORP.

Consolidated Statements of Shareholders’ Equity

(in thousands, except share data)



	Common Shares			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss
	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2010	61,602,997	$	381,736	$	24,973		$	146,547	$	—		$	553,256
Activity during the period (unaudited):
Net income	—	—		—			18,271		—			18,271
Exercise of stock options	243,633	2,531		(773		)	—		—			1,758
Vesting of restricted stock units	29,948	1,508		(1,508		)	—		—			—
Tax benefit on options exercised	—	—		3,323			—		—			3,323
Stock-based compensation	—	—		1,683			—		—			1,683
Balance at March 31, 2011 (unaudited)	61,876,578	$	385,775	$	27,698		$	164,818	$	—		$	578,291

Balance at December 31, 2009	60,114,562	$	361,530	$	15,153		$	81,812	$	(1	)	$	458,494
Activity during the period (unaudited):
Net income	—	—		—			14,792		—			14,792
Exercise of stock options	522,674	5,378		(1,611		)	—		—			3,767
Tax benefit on options exercised	—	—		4,082			—		—			4,082
Stock-based compensation	—	—		1,264			—		—			1,264
Other comprehensive income, net of tax	—	—		—			—		1			1
Balance at March 31, 2010 (unaudited)	60,637,236	$	366,908	$	18,888		$	96,604	$	—		$	482,400

See accompanying notes to the unaudited consolidated financial statements.

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SXC HEALTH SOLUTIONS CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.	Description of Business

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


2.	Basis of Presentation

Basis of presentation:

The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), pursuant to the Securities and Exchange Commission’s (“SEC”) rules and regulations for reporting on Form 10-Q, and following accounting policies consistent with the Company’s audited annual consolidated financial statements for the year ended December 31, 2010. The unaudited interim consolidated financial statements of the Company include its majority-owned subsidiaries and all significant intercompany transactions and balances have been eliminated in consolidation. Amounts in the unaudited interim consolidated financial statements and notes thereto are expressed in the Company’s functional currency, U.S. dollars, except where indicated. The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments), which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Certain reclassifications have been made to conform the prior year's consolidated financial statements to the current year's presentation.The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011. As of the issuance date of the Company’s financial statements, the Company has assessed whether subsequent events have occurred that require adjustment to or disclosure in these unaudited interim consolidated financial statements in accordance with Financial Accounting Standards Board’s (“FASB”) guidance.

Pursuant to the SEC rules and regulations for reporting on Form 10-Q, certain information and note disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or excluded. As a result, these unaudited interim consolidated financial statements do not contain all the disclosures required to be included in the annual consolidated financial statements and should be read in conjunction with the most recent audited annual consolidated financial statements and notes thereto for the year ended December 31, 2010.

Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, rebates, purchase price allocation in connection with acquisitions, valuation of property and equipment, valuation of intangible assets acquired and related amortization periods, impairment of goodwill, income tax uncertainties, contingencies and valuation allowances for receivables and income taxes. Actual results could differ from those estimates.


3.	Recent Accounting Pronouncements

a) Recent accounting standards implemented

No new standards have been implemented by the Company during the three-month period ended March 31, 2011.

b) Recent accounting standards issued

Management has concluded that there are no accounting standards that have been issued, but not yet adopted, that will have a material effect on the Company's consolidated financial statements.


4.	Stock Split

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

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5. Business Combinations

MedfusionRx Acquisition

On December 28, 2010, the Company, through its direct wholly owned subsidiary SXC Health Solutions, Inc. (“SXC Inc.”), completed the acquisition of MedfusionRx, L.L.C. and certain affiliated entities and certain assets of Medtown South, L.L.C. (collectively, "MedfusionRx"), a specialty pharmacy services provider with significant expertise in providing clinical services to patients with complex chronic conditions. The purchase price for MedfusionRx was $101.7 million in cash, subject to a customary post-closing working capital adjustment, and an opportunity for the former owners of MedfusionRx to earn an additional $5.5 million in cash, subject to the satisfaction of certain performance targets in the 2012 fiscal year, in each case based upon the terms and subject to the conditions contained in the Purchase Agreement. MedfusionRx's results of operations are included in the 2011 statement of operations in the unaudited interim consolidated financial statements commencing January 1, 2011. MedfusionRx's results of operations from the date of acquisition through December 31, 2010 were not material to the Company's results of operations for 2010.

The acquisition of MedfusionRx will help transform the Company's Specialty Service pharmacy business by expanding its presence and enhancing its capabilities in this rapidly growing segment of the PBM industry. The acquisition will also provide an opportunity to create new revenues and generate cost savings through purchasing synergies.

The purchase price of the acquired MedfusionRx operations was comprised of the following (in thousands):



Cash payment to MedfusionRx shareholders	$	101,716
Fair value of contingent purchase price	4,865
Total purchase price	$	106,581

The MedfusionRx Purchase Agreement includes contingent purchase price consideration in the form of an earn-out payment of up to $5.5 million contingent upon the MedfusionRx book of business meeting or exceeding certain gross profit targets for the 2012 fiscal year. The $4.9 million fair-value of the contingent purchase price was accrued at the date of acquisition as part of the total consideration transferred. The Company utilized a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent purchase price until the applicable earn-out period has lapsed. Any future changes to the fair value of the contingent purchase price will be recognized in earnings of the Company. As the fair value measurement for the contingent consideration is based on inputs not observed in the market, the measurement is classified as a Level 3 measurement as defined by fair value measurements guidance.

Costs related to the MedfusionRx acquisition of $2.4 million were included in selling, general and administrative expenses for the year ended December 31, 2010. No additional acquisition costs were incurred during the three months ended March 31, 2011. The costs incurred were comprised of legal, accounting, valuation, and professional services fees associated with the MedfusionRx acquisition.

Purchase Price Allocation

The MedfusionRx acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. All of the assets and liabilities recorded for the MedfusionRx acquisition are included within the Company's PBM segment. Goodwill is non-amortizing for financial statement purposes and the entire goodwill balance generated from the MedfusionRx acquisition is tax deductible.

The following summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed at the acquisition date and are subject to change. The purchase price allocation and related valuation process are not complete. Final determination of the fair values may result in further adjustments to the amounts presented below (in thousands):



Current assets	$	20,802
Property and equipment	360
Goodwill	78,755
Intangible assets	26,262
Total assets acquired	126,179
Current liabilities	19,598
Total liabilities assumed	19,598
Net assets acquired	$	106,581

During the three months ended March 31, 2011, the Company recognized $1.8 million of amortization expense from intangible assets acquired. Amortization for the remainder of 2011 is expected to be $5.3 million. Amortization for 2012 and 2013 is expected to be $4.9 million and $3.8 million, respectively.

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The estimated fair values and useful lives of intangible assets acquired are as follows (dollars in thousands):



	Fair Value		Useful Life
Trademarks/Trade names	$	10,000	10 years
Customer relationships	14,562		5 years
Non-compete agreements	1,400		5 years
License	300		3 years
Total	$	26,262

None of the acquired intangible assets will have any residual value at the end of the amortization periods. There were no in-process research and development assets acquired.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined historical results of operations of the Company and MedfusionRx as if the acquisition had occurred on the first day of the comparable period presented. The unaudited pro forma financial information includes certain adjustments related to the acquisition, such as increased amortization from the fair value of intangible assets acquired recorded as part of the purchase accounting, and consequential income tax effects from the acquisition. Unaudited pro forma results of operations are as follows (in thousands, except share and per share amounts):



	Three Months Ended March 31,
	2010
Revenue	$	515,934
Gross profit	$	56,084
Net income	$	16,233
Earnings per share:
Basic	$	0.27
Diluted	$	0.26
Weighted average shares outstanding:
Basic	60,187,002
Diluted	62,159,768

This unaudited pro forma financial information is not intended to represent or be indicative of what would have occurred if the transaction had taken place on the date presented and is not indicative of what the Company's actual results of operations would have been had the acquisition been completed at the beginning of the period indicated above. Further, the pro forma combined results do not reflect one-time costs to fully merge and operate the combined organization more efficiently, or anticipated synergies expected to result from the combination and should not be relied upon as being indicative of the future results that the Company will experience.

MedMetrics Health Partners Acquisition

The Company announced on April 12, 2011 that it entered into a definitive agreement to acquire substantially all of the assets of MedMetrics Health Partners, Inc. (“MedMetrics”), the full-service PBM subsidiary of Public Sector Partners, Inc. which is affiliated with a major medical school. The acquisition is subject to various closing conditions and is expected to be completed during the second quarter of 2011. MedMetrics manages approximately $200 million in annual drug spend; however, MedMetrics is currently a customer of the Company and its associated revenue is accounted for in the PBM segment. Taking into account deal-related closing expenses and related amortization, the acquisition is not expected to have a material impact to 2011 fully-diluted GAAP EPS.

The acquisition of MedMetrics is consistent with the Company's strategy to acquire assets that currently utilize SXC’s technology platform which eases the integration into the SXC business and will allow SXC the opportunity to sell additional services, such as mail and specialty services, to MedMetrics' customers. The acquisition will also help extend the Company's footprint in the northeastern part of the U.S. to continue to grow the SXC business in that market.

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6. Cash and Cash Equivalents

The components of cash and cash equivalents are as follows (in thousands):



	March 31, 2011			December 31, 2010
Cash on deposit	$	423,191		$	387,687
Payments in transit	(97,282		)	(66,423		)
Canadian dollar deposits (March 31, 2011 — Cdn. $19 at 0.9727; December 31, 2010 — Cdn. $20 at 1.0002)	20			20
	$	325,929		$	321,284

The Company determined the carrying amount reported in the consolidated balance sheets as cash and cash equivalents approximates fair value due to the short maturities of these instruments; accordingly, the valuation of these instruments are considered Level 1 measurements in the fair value hierarchy.

7. Goodwill and Other Intangible Assets

Goodwill and indefinite-lived intangible assets are reviewed for impairment annually or more frequently if impairment indicators arise. The Company allocates goodwill to both the PBM and HCIT segments. There were no impairments of goodwill or indefinite-lived intangible assets during the three months ended March 31, 2011 and 2010.

Definite-lived intangible assets are amortized over the useful lives of the related assets. The components of intangible assets were as follows (in thousands):



	March 31, 2011						December 31, 2010
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Customer relationships	$	68,624	$	28,621	$	40,003	$	68,624	$	25,493	$	43,131
Acquired software	3,765		3,335		430		3,765		3,272		493
Trademarks/Trade names	11,370		1,517		9,853		11,370		1,252		10,118
Non-compete agreements	2,910		1,564		1,346		2,910		1,492		1,418
Licenses	1,300		209		1,091		1,300		178		1,122
Total	$	87,969	$	35,246	$	52,723	$	87,969	$	31,687	$	56,282

Total amortization associated with intangible assets at March 31, 2011 is estimated to be $10.7 million for the remainder of 2011, $11.5 million in 2012, $9.6 million in 2013, $8.2 million in 2014, $6.0 million in 2015, and $6.7 million in total for years after 2015. The main driver of the future amortization is related to intangible assets acquired in the acquisitions of National Medical Health Card Systems, Inc. (“NMHC”) in 2008 and MedfusionRx in 2010.

8. Shareholders’ equity


(a)	Stock incentive plans:

Effective on March 11, 2009, the Board of Directors of the Company adopted the SXC Health Solutions Corp. Long-Term Incentive Plan (“LTIP”), which was approved by the shareholders of the Company at the Annual and Special Meeting of Shareholders on May 13, 2009. The LTIP provides for the grant of stock option awards, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other stock-based awards to eligible persons, including executive officers and directors of the Company. The purpose of the LTIP is to advance the interests of the Company by attracting and retaining high caliber employees and other key individuals who perform services for the Company, a subsidiary or an affiliate; align the interests of the Company’s shareholders and recipients of awards under the LTIP by increasing the proprietary interest of such recipients in the Company’s growth and success; and motivate award recipients to act in the best long-term interest of the Company and its shareholders. The LTIP replaced the previous stock option plan, and no further grants or awards will be issued under the previous stock option plan. The LTIP provides for a maximum of 2,140,000 common shares of the Company to be issued in addition to the common shares that remained available for issuance under the previous stock option plan.

There were 371,470 stock-based awards available for grant under the LTIP as of March 31, 2011 .


(b)	Employee Stock Purchase Plan:

The Company maintains an Employee Stock Purchase Plan (“ESPP”) which allows eligible employees to withhold annually up to a maximum of 15% of their base salary, or $25,000, subject to IRS limitations, for the purchase of the Company’s common

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shares. Common shares will be purchased on the last day of each offering period at a discount of 5% of the fair market value of the common shares on such date. The aggregate number of common shares that may be issued under the ESPP may not exceed 200,000 common shares.

The ESPP requires that common shares available for purchase under the ESPP be drawn from reacquired common shares purchased on behalf of the Company in the open market. During the three months ended March 31, 2011 and 2010, there were 3,133 and 4,086 shares delivered under the ESPP, respectively.

The ESPP is not considered compensatory as its purchase discount is not greater than 5%, the plan is available to substantially all employees, and the plan does not incorporate option features. Accordingly, no portion of the cost related to ESPP purchases is included in the Company’s stock-based compensation expense.


(c)	Outstanding shares and stock options:

At March 31, 2011, the Company had outstanding common shares of 61,876,578 and stock options outstanding of 1,685,800. At December 31, 2010, the Company had outstanding common shares of 61,602,997 and stock options outstanding of 1,749,459. As of March 31, 2011, stock options outstanding consisted of 148,728 options at a weighted-average exercise price of Canadian $5.65 and 1,537,072 options at a weighted-average exercise price of U.S. $17.10.


(d)	Restricted stock units:

During the three months ended March 31, 2011, the Company granted 106,046 time-based restricted stock units (“RSUs”) and 98,662 performance-based RSUs to its employees and non-employee directors with a weighted average grant date fair value of $50.20 per share. At March 31, 2011, there were 337,016 time-based RSUs and 327,222 performance-based RSUs outstanding.

Time-based RSUs vest on a straight-line basis over a range of two to four years and performance-based RSUs cliff vest based upon reaching agreed upon three-year cumulative performance conditions. The number of outstanding performance-based RSUs as of March 31, 2011 assumes the associated performance targets will be met at the maximum level.

9. Stock-based compensation

During the three-month periods ended March 31, 2011 and 2010, the Company recorded stock-based compensation expense of $1.7 million and $1.3 million, respectively. The Black-Scholes option-pricing model was used to estimate the fair value of the stock options at the grant date based on the following assumptions:



	Three Months Ended March 31,
	2011			2010
Total stock options granted	193,054			130,680
Volatility	49.09		%	48.50		%
Risk-free interest rate	2.13%-2.16%			2.36%-2.39%
Expected life (in years)	4.5			4.5
Dividend yield	—			—
Weighted-average grant date fair value	$	21.42		$	12.89

Fair value is established for RSUs based on the stock market price at the grant date.

As of March 31, 2011, there was $7.5 million and $16.3 million of unrecognized compensation cost related to stock options and RSUs, respectively, which is expected to be recognized over a weighted-average period of 3.2 years and 2.8 years, respectively.

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10. Segment information

The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment performance based upon revenue and gross profit. Financial information by segment is presented below (in thousands):



	Three Months Ended March 31,
	2011		2010
PBM:
Revenues	$	1,071,923	$	427,502
Cost of revenue	1,020,188		389,166
Gross profit	$	51,735	$	38,336
Total assets at March 31	$	638,308	$	437,994
HCIT:
Revenues	$	25,729	$	24,646
Cost of revenue	13,886		12,753
Gross profit	$	11,843	$	11,893
Total assets at March 31	$	256,112	$	251,489
Consolidated:
Revenues	$	1,097,652	$	452,148
Cost of revenue	1,034,074		401,919
Gross profit	$	63,578	$	50,229
Total assets at March 31	$	894,420	$	689,483

For the three-month period ended March 31, 2011, one customer accounted for 42% of total revenues. For the three-month period ended March 31, 2010, no one customer accounted for 10% or more of total revenues.

At March 31, 2011, one customer accounted for 31% of the outstanding accounts receivable balance. At December 31, 2010, no one customer accounted for 10% or more of the outstanding accounts receivable balance.

11. Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2011 and 2010 was 33.2% and 32.5%, respectively. The effective tax rate increased during the three months ended March 31, 2011 as compared to the same period in 2010, primarily due to an increase in the Company's pre-tax income.

The Company and its subsidiaries file income tax returns in Canadian and U.S. federal jurisdictions, and various provincial, state and local jurisdictions. With a few exceptions, the Company is no longer subject to tax examinations by tax authorities for years prior to 2005.

12. Commitments and Contingencies

On December 28, 2010, the Company completed its acquisition of MedfusionRx, a leading independent specialty pharmacy services provider. In October 2009, federal agents executed a search warrant at MedfusionRx’s Birmingham, Alabama facility and received information relating to the dispensing, ordering, billing, claim submission and payment of a type of hemophilia medication and MedfusionRx’s relationship with a former marketer and deliverer of such medication. Subsequent to the completion of the acquisition, MedfusionRx’s former accountants received a grand jury subpoena for certain tax records of MedfusionRx and its former owners. On March 24, 2011, three employees of MedfusionRx and several third parties were indicted for alleged violations of the federal anti-kickback statute prior to the closing of the acquisition. None of these employees is currently employed by MedfusionRx. MedfusionRx intends to cooperate fully with any requests received from governmental officials. While the Company believes that it is entitled to indemnification with respect to any costs or expenses arising from or relating to this matter pursuant to the terms of the MedfusionRx Purchase Agreement, we can give no assurances that such indemnification will be sufficient to cover all potential civil/criminal penalties and claims arising therefrom or relating thereto. As of March 31, 2011, the Company had not recorded any contingent liability in the consolidated financial statements relating to this matter.

From time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. The Company has considered these proceedings and disputes in determining the necessity of any reserves for losses that are probable and reasonably estimable. In addition, various aspects of the Company’s business may subject it to litigation and liability for damages arising from errors in the processing of prescription drug claims, failure to meet performance measures within certain contracts relating to its services, its ability to obtain certain levels of discounts for rebates on prescription purchases from retail pharmacies and drug manufacturers or other actions or omissions. The Company’s recorded reserves are based on estimates developed

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with consideration given to the potential merits of claims or quantification of any performance obligations. The Company also takes into account its history of claims, the limitations of any insurance coverage, advice from outside counsel and management’s strategy with regard to the settlement or defense of such claims and obligations. While the ultimate outcome of those claims, lawsuits or performance obligations cannot be predicted with certainty, the Company believes, based on its understanding of the facts of these claims and performance obligations, that adequate provisions have been recorded in the consolidated financial statements where required.

The Company provides routine indemnification to its customers against liability if the Company’s products infringe on a third party’s intellectual property rights. The maximum amount of potential indemnification liability cannot be reasonably estimated due to its uncertain nature. Historically, the Company has not made payments related to these indemnification provisions.

13. Derivative Instruments and Fair Value

The Company used variable rate debt to assist in financing its acquisition of NMHC in 2008. Prior to extinguishing the variable rate debt in December 2009, the Company was subject to interest rate risk related to the variable rate debt. When interest rates increased, interest expense could have increased. Conversely, when interest rates decreased, interest expense could also have decreased.

In order to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rates the Company entered into interest rate contracts with notional amounts equal to 50% of the borrowed amount, or $24 million, for a three-year period from the date of issue. The Company entered into a 3-year interest rate swap agreement with a notional amount of $14 million to fix the variable London Inter-Bank Offered Rate (“LIBOR”) rate on $14 million of the term loan at 4.31%, resulting in an effective rate of 7.56% after adding the 3.25% margin per the credit agreement. Under the interest rate swap, the Company receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent to fixed-rate debt. Additionally, the Company entered into a 3-year interest rate cap with a notional amount of $10 million to effectively cap the LIBOR rate on $10 million of the term loan at 4.50%, resulting in a maximum effective rate of 7.75% after adding the 3.25% margin per the credit agreement, excluding the associated fees. These interest rate contract derivative instruments were designated as cash flow hedges during 2008. After the Company repaid all of its long-term debt in the fourth quarter of 2009, the cash flow hedge treatment was discontinued as the future transactions that the interest rate contracts were hedging were no longer probable of occurring.

As of March 31, 2011, the interest rate contract derivative instruments are “out of the money” and the Company is not currently exposed to any credit risk for amounts reflected on the consolidated balance sheet should the counterparty in the agreement fail to meet its obligations under the agreement. The Company does not anticipate the instruments coming “out of the money” prior to their expiration in 2011. To manage credit risks, the Company selects counterparties based on credit assessments, limits overall exposure to any single counterparty, and monitors the market position with each counterparty. The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company does not enter into derivative instruments for any purpose other than hedging identified exposures. That is, the Company does not speculate using derivative instruments and has not designated any instruments as fair value hedges or hedges of the foreign currency exposure of a net investment in foreign operations.

Fair value measurement guidance defines a three-level hierarchy to prioritize the inputs to valuation techniques used to measure fair value into three broad levels, with level 1 considered the most reliable. For assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets, the table below categorizes fair value measurements across the three levels as of March 31, 2011 and December 31, 2010 (in thousands):



	March 31, 2011
	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities:
Derivatives	$	—	$	280	$	—	$	280
Contingent purchase price consideration	$	—	$	—	$	4,928	$	4,928



	December 31, 2010
	Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Liabilities:
Derivatives	$	—	$	274	$	—	$	274
Contingent purchase price consideration	$	—	$	—	$	4,865	$	4,865

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When available and appropriate, the Company uses quoted market prices in active markets to determine fair value, and classifies such items within Level 1. Level 1 values only include instruments traded on a public exchange. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability or can be derived principally from or corroborated by observable market data. If the Company were to use one or more significant unobservable inputs for a model-derived valuation, the resulting valuation would be classified in Level 3.

The Company acquired MedfusionRx, a specialty pharmacy services provider on December 28, 2010. The selling members of MedfusionRx have the opportunity to earn an additional $5.5 million in cash, subject to the satisfaction of certain performance targets in the 2012 fiscal year. The fair-value of the contingent purchase price consideration was $4.9 million as of March 31, 2011. The change in the value of the contingent purchase price of $0.1 million from December 31, 2010 was recorded to interest expense representing the change in the present value of the amount expected to be paid in the future for the contingent purchase price consideration. The Company utilized a probability weighted discounted cash flow method to arrive at the fair value of the contingent consideration based on the expected results of MedfusionRx in 2012. As the fair value measurement for the contingent consideration is based on inputs not observed in the market, the measurement is classified as a Level 3 measurement as defined by fair value measurements guidance. As of March 31, 2011 and December 31, 2010, the contingent purchase price consideration is classified as other liabilities in the consolidated balance sheets.

The Company has classified derivative liabilities as accrued liabilities in the consolidated balance sheets as of March 31, 2011 and December 31, 2010. The fair values represent quoted prices from a financial institution which are derived from movements in the underlying interest rate markets. The total fair value was $0.3 million for the periods ended March 31, 2011 and December 31, 2010, and was mostly recognized as other (income) expense in the consolidated statements of operations.

During the period ended March 31, 2011 there were no movements of fair value measurements between Levels 1, 2 and 3.

14. Earnings Per Share

The Company calculates basic earnings per share (“EPS”) using the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the same method as basic EPS but the Company adds the number of additional common shares that would have been outstanding for the period if the dilutive potential common shares had been issued. The following is the reconciliation between the number of weighted average shares used in the basic and diluted EPS calculations for the three-month periods ended March 31, 2011 and 2010:



	Three Months Ended March 31,
	2011	2010
Weighted average number of shares used in computing basic EPS	61,801,036	60,187,002
Add dilutive common stock equivalents:
Outstanding stock options	1,181,095	1,718,026
Outstanding restricted stock units	550,110	254,740
Weighted average number of shares used in computing diluted EPS	63,532,241	62,159,768

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

The following discussion should be read in conjunction with the Management’s Discussion and Analysis (“MD&A”) section of the Company’s 2010 Annual Report on Form 10-K. Results of the interim periods presented are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Caution Concerning Forward-Looking Statements

Certain information in this MD&A, in various filings with regulators, in reports to shareholders and in other communications is forward-looking within the meaning of certain securities laws and is subject to important risks, uncertainties and assumptions. This forward-looking information includes, among other things, information with respect to the Company’s objectives and the strategies to achieve those objectives, as well as information with respect to the Company’s beliefs, plans, expectations, anticipations, estimates and intentions. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include, but may not be limited to, the ability of the Company to adequately address: the risks associated with further market acceptance of the Company’s products and services; its ability to manage its growth effectively; its reliance on and ability to retain key customers and key personnel; industry conditions such as consolidation of customers, competitors and acquisition targets; the Company’s ability to acquire a company and manage integration and potential dilution associated therewith; the impact of technology changes on its products/service offerings, including impact on the intellectual property rights of others; the effects of regulatory and legislative changes in the healthcare industry; and the sufficiency and fluctuations of its liquidity and capital needs.

When relying on forward-looking information to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. In making the forward-looking statements contained in this MD&A, the Company does not assume any significant acquisitions, dispositions or one-time items. It does assume, however, the renewal of certain customer contracts. Every year, the Company has major customer contracts that come up for renewal. In addition, the Company also assumes new customer contracts. In this regard, the Company is pursuing large opportunities that present a very long and complex sales cycle which substantially affects its forecasting abilities. The Company has assumed certain timing for the realization of these opportunities which it thinks is reasonable but which may not be achieved. Furthermore, the pursuit of these larger opportunities does not ensure a linear progression of revenue and earnings since they may involve significant up-front costs followed by renewals and cancellations of existing contracts. The Company has assumed certain revenues which may not be realized. The Company has also assumed that the material factors referred to in the previous paragraph will not cause such forward-looking information to differ materially from actual results or events. The foregoing list of factors is not exhaustive and is subject to change and there can be no assurance that such assumptions will reflect the actual outcome of such items or factors. For additional information with respect to certain of these and other factors, refer to the Risk Factors section contained in Item 1A of the Company’s 2010 Annual Report on Form 10-K.

THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A REPRESENTS THE COMPANY’S CURRENT EXPECTATIONS AND, ACCORDINGLY, IS SUBJECT TO CHANGE. HOWEVER, THE COMPANY EXPRESSLY DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING INFORMATION, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY APPLICABLE LAW.

Overview

PBM Business

The Company provides comprehensive PBM services to customers, which include managed care organizations, local governments, unions, corporations, HMOs, employers, workers’ compensation plans, third party health care plan administrators and federal and state government programs through its network of licensed pharmacies throughout the United States. The PBM services include electronic point-of-sale pharmacy claims management, retail pharmacy network management, mail service pharmacy, specialty pharmacy, Medicare Part D services, benefit design consultation, preferred drug management programs, drug review and analysis, consulting services, data access and reporting and information analysis. The Company owns a mail service pharmacy (“Mail Service”) and specialty service pharmacies (“Specialty Service”). In addition, the Company is a national provider of drug benefits to its customers under the federal government’s Medicare Part D program.

Revenue primarily consists of sales of prescription drugs, together with any associated administrative fees, to customers and participants, either through the Company’s nationwide network of retail pharmacies, Mail Service pharmacy or Specialty Service pharmacies. Revenue related to the sale of prescription drugs is recognized when the claims are adjudicated and the prescription drugs are shipped. Claims are adjudicated at the point-of-sale using an on-line processing system. Profitability of the PBM segment is largely dependent on the volume and type of prescription drug claims adjudicated and sold. Growth in revenue and profitability of the PBM segment is dependent upon attracting new customers, retaining the Company’s current customers and providing additional services to the Company’s current customer base by offering a flexible and cost-effective alternative to traditional PBM offerings. The Company’s PBM offerings allow its customers to gain increased control of their pharmacy benefit dollars and maximize cost savings and quality of care through a full range of pharmacy spend management services, including: formulary administration, benefit plan design and management, pharmacy network management, drug utilization review, clinical services and consulting, reporting and information analysis solutions, mail and specialty pharmacy services and consumer web services.

Under the Company’s customer contracts, retail pharmacies are solely obligated to collect the co-payments from the participants. As such, the Company does not include participant co-payments to retail pharmacies in revenue or cost of revenue. If these amounts were included in revenue and cost of revenue, operating income and net income would not have been affected.

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The Company evaluates customer contracts to determine whether it acts as a principal or as an agent in the fulfillment of prescriptions through its retail pharmacy network. The Company acts as a principal in most of its transactions with customers and revenue is recognized at the prescription price (ingredient cost plus dispensing fee) negotiated with customers, plus an administrative fee, if applicable (“gross reporting”). Gross reporting is appropriate when the Company (i) has separate contractual relationships with customers and with pharmacies, (ii) is responsible to validate and manage a claim through the claims adjudication process, (iii) commits to set prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements), (iv) manages the overall prescription drug relationship with the patients, who are participants of customers’ plans, and (v) has credit risk for the price due from the customer. In instances where the Company merely administers a customer’s network pharmacy contract to which the Company is not a party and under which the Company does not assume pricing risk and credit risk, among other factors, the Company only records an administrative fee as revenue. For these customers, the Company earns an administrative fee for collecting payments from the customer and remitting the corresponding amount to the pharmacies in the customer’s network. In these transactions, the Company acts as an agent for the customer. As the Company is not the principal in these transactions, the drug ingredient cost is not included in revenue or in cost of revenue (“net reporting”). As such, there is no impact to gross profit based upon whether gross or net reporting is used.

HCIT Business

The Company is also a leading provider of HCIT solutions and services to providers, payors, and other participants in the pharmaceutical supply chain in North America. The Company’s product offerings include a wide range of software products for managing prescription drug programs and for drug prescribing and dispensing. The Company’s solutions are available on a license basis with on-going maintenance and support or on a transaction fee basis using an ASP model. The Company’s payor customers include managed care organizations, health plans, government agencies, employers and intermediaries such as pharmacy benefit managers. The solutions offered by the Company’s services assist both payors and providers in managing the complexity and reducing the cost of their prescription drug programs and dispensing activities.

Profitability of the HCIT business depends primarily on revenue derived from transaction processing services, software license sales, hardware sales, maintenance and professional services. Recurring revenue remains a cornerstone of the Company’s business model and consists of transaction processing services and maintenance. Growth in revenue from recurring sources has been driven primarily by growth in the Company’s transaction processing business in the form of claims processing for its payor customers and switching services for its provider customers. Through the Company’s transaction processing business, where the Company is generally paid based on the volume of transactions processed, the Company continues to benefit from the growth in pharmaceutical drug use in the United States. The Company believes that aging demographics and increased use of prescription drugs will continue to generate demand in the transaction processing business. In addition to benefiting from this industry growth, the Company continues to focus on increasing recurring revenue in the transaction processing area by adding new transaction processing customers to its existing customer base. The recognition of revenue in the HCIT business depends on various factors including the type of service provided, contract parameters and any undelivered elements.

Operating Expenses

The Company’s operating expenses primarily consist of cost of revenue, product development costs, selling, general and administrative (“SG&A”) costs, depreciation and amortization. Cost of revenue includes the cost of drugs dispensed and shipped, costs related to the products and services provided to customers in the HCIT segment and costs associated with the operation and maintenance of the transaction processing centers. These costs include salaries and related expenses for professional services personnel, transaction processing centers’ personnel, customer support personnel, any hardware or equipment sold to customers and depreciation expense related to data center operations. Product development costs consist of staffing expenses to produce enhancements and new initiatives. SG&A costs relate to selling expenses, commissions, marketing, network administration and administrative costs, including legal, accounting, investor relations and corporate development costs. Depreciation expense relates to the depreciation of property and equipment used by the Company. Amortization expense relates to definite-lived intangible assets from business acquisitions.

Industry Overview

The PBM industry is intensely competitive, generally resulting in continuous pressure on gross profit as a percentage of total revenue. In recent years, industry consolidation and dramatic growth in managed healthcare have led to increasingly aggressive pricing of PBM services. Given the pressure on all parties to reduce healthcare costs, the Company expects this competitive environment to continue for the foreseeable future. In order to remain competitive, the Company looks to continue to drive purchasing efficiencies of pharmaceuticals to improve operating margins and target the acquisition of other businesses to achieve its strategy of expanding its product offerings and customer base. The Company also looks to retain and expand its customer base by improving the quality of service provided by enhancing its solutions and lowering the total drug spend for customers.

The HCIT industry is increasingly competitive as technologies continue to advance and new products continue to emerge. This rapidly developing industry requires the Company to perpetually improve its offerings to meet customer’s rising product standards. Recent governmental stimulus initiatives to improve the country’s electronic health records should assist the growth of the industry, but it may also increase competition as more players enter the expanding market.

The complicated environment in which the Company operates presents it with opportunities, challenges, and risks. The Company’s customers are paramount to its success; the retention of existing customers and winning of new customers and members pose the greatest opportunities, and the loss thereof represents an ongoing risk. The preservation of the Company’s relationships with pharmaceutical manufacturers and retail

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pharmacies is very important to the execution of its business strategies. The Company’s future success will hinge on its ability to drive mail volume and increase generic dispensing rates in light of the significant brand-name drug patent expirations expected to occur over the next several years. The Company’s ability to continue to provide innovative and competitive clinical and other services to customers and patients, including the Company’s active participation in the Medicare Part D benefit and the rapidly growing specialty pharmacy industry, also plays an important part in the Company’s future success.

The frequency with which the Company’s customer contracts come up for renewal, and the potential for one of the Company’s larger customers to terminate or elect not to renew its existing contract with the Company, creates the risk that the Company’s results of operations may be volatile. The Company’s customer contracts generally do not have terms longer than three years and, in some cases, are terminable by the customer on relatively short notice. The Company’s larger customers generally seek bids from other PBM providers in advance of the expiration of their contracts. If existing customers elect not to renew their contracts at the same service levels previously provided with the Company at the expiration of the current terms of those contracts, and in particular if one of the Company’s largest customers elects not to renew, the Company’s recurring revenue base will be reduced and results of operations will be adversely affected.

The Company operates in a competitive environment where customers and other payors seek to control the growth in the cost of providing prescription drug benefits. The Company’s business model is designed to reduce the level of drug cost. The Company helps manage drug cost primarily through programs designed to maximize the substitution of expensive brand drugs with equivalent but much lower cost generic drugs, obtaining competitive discounts from suppliers, securing rebates from pharmaceutical manufacturers and third party rebate administrators, securing discounts from retail pharmacies, applying the Company’s sophisticated clinical programs and efficiently administering prescriptions dispensed through the Company’s Mail Service and Specialty Service pharmacies.

Various aspects of the Company’s business are governed by federal and state laws and regulations, and because sanctions may be imposed for violations of these laws, compliance is a significant operational requirement. The Company believes it is in substantial compliance with all existing legal requirements material to the operation of its business. There are, however, significant uncertainties involving the application of many of these legal requirements to its business.

The U.S. health care reform legislation enacted in March 2010 could provide drug coverage for millions of people in the form of expanded Medicaid coverage. The Company is active in this market and believes that expansion could create growth opportunities for the Company. In addition, the reform bill provides a pathway for follow-on biologic development, giving more cost effective generic options to customers and the potential opportunity for margin expansion for the Company. As many aspects of the reform bill do not go into effect for several years, the Company cannot predict the overall impact the legislation will have on the Company’s financial results. In addition, there are numerous proposed health care laws and regulations at the federal and state levels, many of which could adversely affect the Company’s business, results of operations and financial condition. The Company is unable to predict what additional federal or state legislation or regulatory initiatives may be enacted in the future relating to its business or the health care industry in general, or what effect any such legislation or regulations might have on it. The Company also cannot provide any assurance that federal or state governments will not impose additional restrictions or adopt interpretations of existing laws or regulations that could have a material adverse effect on its business or financial performance.

Competitive Strengths

The Company has demonstrated its ability to serve a broad range of customers from large managed care organizations and state governments to employer groups with fewer than a thousand members. The Company believes its principal competitive strengths are:

Flexible, customized and independent services: The Company believes a key differentiator between itself and its competitors is not only the Company’s ability to provide innovative PBM services, but also to deliver these services on an à la carte basis. The informedRx suite offers the flexibility of broad product choice along the entire PBM continuum, enabling enhanced customer control, solutions tailored to the customers’ specific requirements, and flexible pricing. The market for the Company’s products is divided between large customers that have the sophisticated technology infrastructure and staff required to operate a 24-hour data center and other customers that are not able or willing to operate these sophisticated systems.

The Company’s business model allows its large customers to license the Company’s products and operate the Company’s systems themselves (with or without taking advantage of the Company’s significant customization, consulting and systems implementation services) and allows its other customers to utilize the Company’s systems’ capabilities on a fee-per-transaction or subscription basis through ASP processing from the Company’s data center.

Leading technology and platform: The Company’s technology is robust, scaleable and web-enabled. The Company’s payor offerings efficiently supported over 460 million transactions in 2010. The platform is able to instantly cross-check multiple processes, such as reviewing claim eligibility and adverse drug reaction and properly calculating member, pharmacy and payor payments. The Company’s technology is built on flexible, database-driven rule sets and broad functionality applicable for most any type of business. The Company believes it has one of the most comprehensive claims processing platforms in the market.

The Company’s technology platform allows it to provide more comprehensive PBM services through informedRx by offering customers a selection of services to choose from to meet their unique needs versus requiring them to accept a one-size-fits-all solution. The Company believes this à la carte offering is a key differentiator from its competitors.

Measurable cost savings for customers: The Company provides its customers with increased control over prescription drug costs and drug benefit programs. The Company’s pricing model and flexible product offerings are designed to deliver measurable cost savings to the Company’s

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customers. The Company believes its pricing model is a key differentiator from its competitors for the Company’s customers who want to gain control of their prescription drug costs. For example, the Company’s pharmacy network contracts and manufacturer rebate agreements are made available by the Company to each customer. For customers who select the Company’s pharmacy network and manufacturer rebate services on a fixed fee per transaction basis, there is clarity to the rebates and other fees payable to the customer. The Company believes that its pricing model together with the flexibility to select from a broad range of customizable services helps customers realize measurable results and cost savings.

Selected financial highlights for the three months ended March 31, 2011 compared to the same period in 2010

Selected financial highlights for the three months ended March 31, 2011 and 2010 are noted below:

•

Total revenue in the three months ended March 31, 2011 was $1.1 billion as compared to $452.1 million for the same period in 2010. The increase is largely attributable to an increase in PBM revenue of $644.4 million, primarily due to the implementation of the previously announced HealthSpring contract on January 1, 2011, the acquisition of MedfusionRx on December 28, 2010, and other new customer starts during the first three months of 2011. As a result, the Company's PBM segment adjusted prescription claim volume increased 81.9% to 21.3 million for the first quarter of 2011 as compared to 11.7 million for the first quarter of 2010.

•

Operating income increased $5.3 million, or 23.5%, for the three months ended March 31, 2011, to $27.6 million as compared to $22.4 million for the same period in 2010. This increase was driven by increased gross profit in the PBM segment due to new customer starts as compared to the same period in 2010 offset by an increase in SG&A expense and amortization expense due to the acquisition of MedfusionRx.

•

The Company reported net income of $18.3 million, or $0.29 per share (fully-diluted), for the three months ended March 31, 2011, as compared to $14.8 million, or $0.24 per share (fully-diluted), for the same period in 2010. The increase is driven by higher gross profit attributable to an increase in PBM revenues due to new customer starts offset by an increase in SG&A expense and amortization expense due to the acquisition of MedfusionRx. Amortization expense included in net income was $3.6 million for the three months ended March 31, 2011 as compared to $2.0 million for the same period in 2010.

Results of Operations

Three months ended March 31, 2011 as compared to the three months ended March 31, 2010



	Three Months Ended March 31,
In thousands, except per share data	2011			2010
Revenue	$	1,097,652		$	452,148
Cost of revenue	1,034,074			401,919
Gross profit	63,578			50,229
Product development costs	3,360			3,073
SG&A	27,438			21,308
Depreciation of property and equipment	1,594			1,481
Amortization of intangible assets	3,560			1,995
Operating income	27,626			22,372
Interest income	(166		)	(149		)
Interest expense and other expense, net	453			592
Income before income taxes	27,339			21,929
Income tax expense	9,068			7,137
Net income	$	18,271		$	14,792
Diluted earnings per share	$	0.29		$	0.24

Revenue

Revenue increased $645.5 million, or 142.8%, to $1.1 billion for the three months ended March 31, 2011, primarily due to the implementation of HealthSpring on January 1, 2011, the acquisition of MedfusionRx on December 28, 2010, and other new customer starts during the first three months of 2011. Accordingly, adjusted prescription claim volume in the PBM segment increased 81.9% to 21.3 million as compared to 11.7 million for the three months ended March 31, 2010.

Cost of Revenue

Cost of revenue increased $632.2 million, or 157.3%, to $1.0 billion for the three months ended March 31, 2011, primarily due to increased PBM transaction volumes in 2011 as noted in the revenue discussion, driven by the HealthSpring implementation, the addition of prescriptions processed at MedfusionRx, and other additions to the customer base. Cost of revenue in the PBM segment substantially relates to the actual cost of the prescription drugs sold, plus any applicable shipping costs.

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Gross Profit

Gross profit increased $13.3 million, or 26.6%, to $63.6 million for the three months ended March 31, 2011, mostly due to incremental PBM revenues generated from the HealthSpring contract and MedfusionRx acquisition as compared to the same period in 2010. Gross profit percentage has decreased from 11.1% of revenue to 5.8% of revenue due to HealthSpring transactions carrying a significantly lower gross profit percentage as compared to the historical PBM business, coupled with the significant volume associated with the HealthSpring business representing a large proportion of revenue.

Product Development Costs

Product development costs were $3.4 million and $3.1 million for the three months ended March 31, 2011 and 2010, respectively. Product development continues to be a key focus of the Company as it continues to pursue enhancements of existing products, as well as the development of new offerings, to support its market expansion.

SG&A Costs

SG&A costs for the three months ended March 31, 2011 were $27.4 million as compared to $21.3 million for the three months ended March 31, 2010, an increase of $6.1 million, or 28.8%. SG&A costs consist primarily of employee costs in addition to professional services costs, facilities and costs not related to cost of revenue. SG&A costs also include stock-based compensation cost of $1.5 million and $1.0 million for the three months ended March 31, 2011 and 2010, respectively. The increase in stock-based compensation during the three months ended March 31, 2011 as compared to the same period in 2010 is due to annual awards granted to the Company’s employees in 2011 and an increase in the value of those awards. The increase in the stock-based compensation valuations is directly attributable to the increase in the market value of the Company’s common shares as compared to the value at, and prior to, March 31, 2010. SG&A costs have also increased due to operating costs related to MedfusionRx, as well as due to additional resources added to support the growth of the PBM segment.

Depreciation

Depreciation expense relates to property and equipment used in all areas of the Company except for those depreciable assets directly related to the generation of revenue, which is included in cost of revenue in the consolidated statements of operations. Depreciation expense was $1.6 million for the three months ended March 31, 2011, an increase of $0.1 million as compared to the same period in 2010. Depreciation expense will fluctuate based on the level of new asset purchases, as well as the timing of assets becoming fully depreciated. Depreciation expense remained relatively flat for the three months ended March 31, 2011 as compared to the same period in 2010 since purchases and the amount of assets reaching full depreciation levels did not fluctuate significantly.

Amortization

Total amortization expense for the three months ended March 31, 2011 and 2010 was $3.6 million and $2.0 million, respectively, an increase of $1.6 million, or 78.4%. Amortization expense is driven mainly by amortization of intangible assets acquired in the MedfusionRx and NMHC acquisitions. For the three months ended March 31, 2011, amortization expense increased due to $1.8 million of amortization derived from intangible assets recognized in the MedfusionRx acquisition. This increase was offset by a $0.2 million decrease in amortization from intangible assets related to NMHC. NMHC amortization expense has decreased due to the amortization methodology used for these intangible assets. These intangible assets are amortized in line with their estimated future economic benefits, which for certain assets is greater at the beginning of their life versus the end. Accordingly, over time amortization will decrease. Amortization expense on all the Company’s intangible assets is expected to be approximately $10.7 million for the remainder of 2011. Refer to Note 7-Goodwill and Other Intangible Assets in the notes to the unaudited interim consolidated financial statements for more information on amortization expected in future years.

Interest Income and Interest Expense and Other Expense, net

Interest income for the three months ended March 31, 2011 was substantially consistent with the same period in 2010, due primarily to cash balances and interest rates remaining at similar levels in each period. Interest expense and other expense, net decreased to $0.5 million for the three months ended March 31, 2011 from $0.6 million for the same period in 2010, primarily due to the Company's focus on reducing banking costs and fees.

Income Taxes

The Company recognized income tax expense of $9.1 million for the three months ended March 31, 2011, representing an effective tax rate of 33.2%, as compared to a $7.1 million income tax expense, representing an effective tax rate of 32.5%, for the same period in 2010. The effective tax rate increased primarily due to the increase in the Company's pre-tax income, offset by additional tax benefits realized from the acquisition of MedfusionRx.

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Segment Analysis

The Company reports in two operating segments: PBM and HCIT. The Company evaluates segment performance based on revenue and gross profit. A reconciliation of the Company’s business segments to the unaudited consolidated financial statements for the three months ended March 31, 2011 and 2010 is as follows (in thousands):



	PBM						HCIT						Consolidated
	2011			2010			2011			2010			2011			2010
Revenue	$	1,071,923		$	427,502		$	25,729		$	24,646		$	1,097,652		$	452,148
Cost of revenue	1,020,188			389,166			13,886			12,753			1,034,074			401,919
Gross profit	$	51,735		$	38,336		$	11,843		$	11,893		$	63,578		$	50,229
Gross profit %	4.8		%	9.0		%	46.0		%	48.3		%	5.8		%	11.1		%

PBM

Revenue was $1.1 billion for the three months ended March 31, 2011, an increase of $644.4 million, or 150.7%, as compared to the same period in 2010. The increase in revenue is primarily due to the implementation of the HealthSpring contract and other new customers as well as revenues generated from the acquisition of MedfusionRx on December, 28, 2010. As a result of these additions, adjusted prescription claim volume for the PBM segment was 21.3 million for the first quarter of 2011 as compared to 11.7 million for the first quarter of 2010.

Cost of revenue was $1.0 billion for the three months ended March 31, 2011 as compared to $389.2 million for the same period in 2010. Cost of revenue has increased in line with the increase in PBM revenues and is driven by the increase in prescriptions processed under the HealthSpring contract and dispensed at MedfusionRx. Cost of revenue in the PBM segment is predominantly comprised of the cost of prescription drugs from retail network transactions, and cost of prescriptions dispensed at the Company's Mail Service and Specialty Service pharmacies. Generic drug usage continues to be a focus of the industry and the Company to help drive down health care costs. The Company will continue to seek opportunities for increased generic prescription drug usage to help reduce overall prescription drug costs to its customers and the Company.

Gross profit was $51.7 million for the three months ended March 31, 2011 as compared to $38.3 million for the same period in 2010. Gross profit increased during the three months ended March 31, 2011 due to the incremental revenue generated from the HealthSpring contract and MedfusionRx acquisition as compared to the same period in 2010. Gross profit percentage was 4.8% and 9.0% for the three months ended March 31, 2011 and 2010, respectively. Gross profit percentage has decreased for the three months ended March 31, 2011 as compared to the same period in 2010 due to HealthSpring transactions carrying a significantly lower gross profit percentage as compared to the historical PBM business, coupled with the significant volume associated with the HealthSpring business representing a large proportion of revenue.

HCIT

HCIT revenue consists of transaction processing, professional services, system sales and maintenance contracts on system sales. Total HCIT revenue increased $1.1 million, or 4.4%, to $25.7 million for the three months ended March 31, 2011 as compared to $24.6 million for the same period in 2010. The increase was primarily due to an increase in revenues earned for transaction processing, offset by a decrease in system sales revenues.

Transaction processing revenue consists of claims processing and generally fluctuates as a result of the launch of new contracts as well as changes in volumes of services provided to existing customers. Professional services revenue is derived from providing support projects for both system sales and transaction processing customers, on an as-needed basis. Professional services revenue is dependent on customers initiating new projects and system enhancements which require the Company to assist them on both a fixed bid and time and materials basis. System sales are derived from license upgrades and additional applications for existing and new customers, as well as software and hardware sales to pharmacies that purchase the Company’s pharmacy system. Maintenance revenue is generated from maintenance services provided on related system or license sales.

Cost of revenue was $13.9 million and $12.8 million for the three months ended March 31, 2011 and 2010, respectively. Cost of revenue includes the direct support costs for the HCIT business as well as depreciation expense of $0.7 million and $0.6 million for the three-month periods ended March 31, 2011 and 2010, respectively. Cost of revenue increased for the three months ended March 31, 2011 as compared to the same period in 2010 due primarily to additional expenditures required to support the increasing transaction volumes of the Company.

Gross profit decreased by $0.1 million, or 0.4%, to $11.8 million for the three months ended March 31, 2011 as compared to $11.9 million for the same period in 2010. Gross profit percentage was 46.0% for the three months ended March 31, 2011 as compared to 48.3% for the three months ended March 31, 2010.

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Liquidity and Capital Resources

The Company’s sources of liquidity have primarily been cash provided by operating activities, proceeds from its public offerings, and proceeds from credit facilities. The Company’s principal uses of cash have been to fund working capital, finance capital expenditures, satisfy contractual obligations and to meet acquisition and investment needs. The Company anticipates that these uses will continue to be the principal demands on cash in the future.

At March 31, 2011 and December 31, 2010, the Company had cash and cash equivalents totalling $325.9 million and $321.3 million, respectively. The Company believes that its cash on hand, together with cash generated from operating activities, will be sufficient to support planned operations for the foreseeable future. At March 31, 2011, cash and cash equivalents consist of cash on hand, deposits in banks, and bank term deposits with original maturities of 90 days or less. During the first quarter of 2010, the Company repositioned its funds previously placed in money market funds and moved the funds into cash on deposit accounts. The Company assessed that it would earn a greater return from cash on deposit accounts due to the historically low rates paid on the U.S. money market funds. Further, the Company reduced expenses by moving the funds to cash on deposit accounts as the fees charged for those accounts are lower than the U.S. money market fund accounts.

As of March 31, 2011, all of the Company’s cash and cash equivalents were exposed to market risks, primarily changes in U.S. interest rates. Declines in interest rates over time would reduce interest income related to these balances.

Consolidated Balance Sheets

Selected balance sheet highlights at March 31, 2011 are as follows:


•	Cash and cash-equivalents totaled $325.9 million, up $4.6 million from $321.3 million at December 31, 2010. The increase was primarily driven by profitable operations of the Company and proceeds from stock option exercises partially offset by capital expenditures. The Company’s cash is primarily held in deposit accounts with major financial institutions with high credit ratings.

•

Accounts receivable are made up of trade accounts receivable from both the PBM and HCIT segment customers. Accounts receivable increased $78.3 million to $200.5 million at March 31, 2011 from $122.2 million at December 31, 2010, driven by increases in revenue during the three-month period ended March 31, 2011, largely attributable to the HealthSpring implementation on January 1, 2011 and other new customer starts. The accounts receivable balance is impacted by changes in revenues, as well as the timing of collections, and is continually monitored by the Company to ensure timely collections and to assess the need for any changes to the allowance for doubtful accounts. The increase in accounts receivable corresponds to the increase in pharmacy benefits claims payable.

•

Rebates receivable of $33.9 million relate to billed and unbilled PBM receivables from pharmaceutical manufacturers and third party administrators in connection with the administration of the rebate program where the Company is the principal contracting party. The receivable and related payables are based on estimates, which are subject to final settlement. Rebates receivable decreased $0.3 million from $34.2 million at December 31, 2010. The balance remained consistent due to similar levels of transactions which were outstanding as of each period end. Although PBM revenue increased by 150.7% during the three months ended March 31, 2011 as compared to the same period in 2010, the Company does not process rebates for all customers, and accordingly the rebate receivable balance does not always fluctuate proportionately with changes in revenues and prescription claim volumes.


•	The Company’s inventory balance of $10.9 million consists predominantly of prescription drugs and medical supplies at its Mail Service and Specialty Service pharmacies. Changes in the inventory balance from period to period are caused by some seasonality in certain products, taking advantage of buying opportunities, and changing inventory levels to properly support new customers.

•

The accounts payable balance of $37.5 million represents amounts owed to the Company's suppliers for prescription drugs at the Mail Service and Specialty Service pharmacies, as well as amounts due to vendors for general operating expenses. As of March 31, 2011, the accounts payable balance has increased $6.5 million from the balance at December 31, 2010, due to an increase in purchases from the Company's suppliers for prescription drugs resulting from an increase in prescription claims volume, as well as the timing of payments made to the Company's vendors.

•

Pharmacy benefit management rebates payable represents amounts owed to customers for rebates from pharmaceutical manufacturers and third party administrators where the Company administers the rebate program on the customer’s behalf, and the Company is the principal contracting party. The payables are based on estimates, which are subject to final settlement. Pharmacy benefit management rebates payable decreased $0.2 million to $61.2 million from $61.4 million at December 31, 2010, due to changes in rebate rates and volume. Similar to the change in rebates receivables, the Company does not process rebates for all customers, and accordingly the rebate payables balance does not always fluctuate proportionately with changes in prescription claims processed.

•

Pharmacy benefit claim payments payable predominantly relates to amounts owed to retail pharmacies for prescription drug costs and dispensing fees in connection with prescriptions dispensed by the retail pharmacies to the members of the Company’s customers when the Company is the principal contracting party with the pharmacy. Pharmacy benefit claim payments payable increased $52.7 million to $137.3 million from $84.6 million at December 31, 2010 due to increased prescription claim transactions driven by HealthSpring and other customers implemented in 2011, as well as the timing of payments to the retail pharmacies.


•	Accrued liabilities decreased $2.6 million to $19.1 million at March 31, 2011 from $21.7 million at December 31, 2010, due primarily to the timing of payments made for professional services provided to the Company.

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•

Salaries and wages payable decreased $4.8 million to $8.1 million at March 31, 2011 as compared to $12.8 million at December 31, 2010, due primarily to the payment of annual bonuses during the first quarter of 2011. Salaries and wages payable will fluctuate based on the timing of the period end relative to the Company’s payment period. Payment periods that fall closer to the end of a period will cause the salaries and wages payable account to decrease; whereas, when the payment period falls further from the period end, the balance will be higher.

Cash flows from operating activities

For the three months ended March 31, 2011, the Company generated $0.8 million of cash through its operations, an increase of $3.4 million as compared to the same period in 2010. Cash provided by operating activities has increased mainly due to increased net income, including additional net income earned from the implementation of the HealthSpring contract, the acquisition of MedfusionRx and other new customer starts, plus the impact of non-cash expenses related to stock-based compensation, depreciation and amortization, offset by the timing of accounts receivable collections. Cash from operations consisted of net income of $18.3 million adjusted for $5.9 million in depreciation and amortization, $1.7 million in stock-based compensation expense, an increase in claims payable of $52.7 million driven by the increased prescription claim volume from the HealthSpring contract, an increase in accounts payable of $6.5 million due to an increase in purchases of prescription drugs from the Company's wholesale vendors arising from an increase in prescription claim volume, as well as increases in amounts payable to the Company's other vendors supporting general operating expenses, and a decrease in income tax recoverable of $8.2 million. These were offset by an increase in accounts receivable of $78.2 million due to the increase in revenues and billings from the HealthSpring contract, a decrease in accrued liabilities of $7.8 million due to payment of amounts accrued for professional services vendors and the payment of the Company's annual bonus, and $3.3 million in tax benefits from option exercises.

Changes in the Company’s cash from operations result primarily from increased gross profits and the timing of payments on accounts receivable, rebates receivable, and the payment or processing of its various accounts payable and accrued liabilities. The Company continually monitors its balance of trade accounts receivable and devotes ample resources to collection efforts on those balances. Rebates receivable and the related payable are primarily estimates based on claims submitted. Rebates are typically paid to customers on a quarterly basis upon receipt of the billed funds from the third-party rebate administrators and pharmaceutical manufacturers. The timing of the rebate payments to customers and collections of rebates from third-party rebate administrators and pharmaceutical manufacturers causes fluctuations on the balance sheet, as well as in the Company’s cash from operating activities.

Changes in non-cash items such as depreciation and amortization are caused by the purchase and acquisition of capital and intangible assets. In addition, as assets become fully depreciated or amortized, the related expenses will decrease.

Changes in operating assets and liabilities, as well as non-cash items related to income taxes, will fluctuate based on working capital requirements and the tax provision, which is determined by examining taxes actually paid or owed, as well as amounts expected to be paid or owed in the future.

For the three months ended March 31, 2010, the Company used $2.7 million of cash through its operations. Cash from operations consisted of net income of $14.8 million adjusted for $4.1 million in depreciation and amortization, $1.3 million in stock-based compensation expense, an increase in deferred revenue of $1.4 million driven by up front payments for professional services contracts, an increase in rebates payable of $12.0 million and an increase in pharmacy claims payable of $2.3 million. These were offset by an increase in rebates receivable of $14.5 million, an increase in accounts receivable of $11.3 million, a reduction in accrued liabilities of $10.7 million, a decrease in accounts payable of $2.4 million, and a $4.1 million tax benefit from option exercises.

Cash flows from investing activities

For the three months ended March 31, 2011, the Company used $1.2 million of cash from investing activities. The cash was used for purchases of property and equipment to support growth in the PBM segment, as shown by the increase in total transactions processed from 11.7 million for the three months ended March 31, 2010 to 21.3 million for the three months ended March 31, 2011.

As the Company grows, it continues to purchase capital assets to support increases in network capacity and personnel. The Company monitors and budgets these costs to ensure that the expenditures aid in its strategic growth plan.

For the three months ended March 31, 2010, the Company provided $3.7 million of cash from investing activities, which consisted primarily of $6.8 million from the sale of short term investments, offset by $2.2 million in purchases of short-term investments. The Company sold all the short-term investments it held during the first quarter of 2010 and moved those funds into cash on deposit accounts. The Company also used $1.0 million for purchases of property and equipment to support increased transaction volume during the period.

Cash flows from financing activities

For the three months ended March 31, 2011, the Company generated $5.1 million of cash from financing activities, which consisted of proceeds from the exercise of stock options of $1.8 million and a $3.3 million tax benefit from stock-based compensation plans.

Cash flows from financing activities generally fluctuate based on the timing of option exercises by the Company’s employees, which are affected by market prices, vesting dates and expiration dates.

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For the three months ended March 31, 2010, the Company generated $7.8 million of cash from financing activities, which consisted of proceeds from the exercise of stock options of $3.8 million and a $4.1 million tax benefit on the exercise of stock options.

Future Capital Requirements

The Company’s future capital requirements depend on many factors, including its product development programs and data center operations. The Company expects to fund its operating and working capital needs and business growth requirements through cash flow from operations and its cash and cash equivalents on hand. The Company expects that purchases of property and equipment will remain consistent with prior years. The Company cannot provide assurance that its actual cash requirements will not be greater than expected as of the date of this report. In order to meet business growth goals, the Company will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which might impact liquidity requirements or cause the issuance of additional equity or debt securities. Any issuance of additional equity securities or convertible debt securities may result in dilution to shareholders, and the Company cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to the Company, or at all.

If sources of liquidity are not available or if it cannot generate sufficient cash flow from operations during the next twelve months, the Company might be required to obtain additional funds through operating improvements, capital markets transactions, asset sales or financing from third parties or a combination thereof. The Company cannot provide assurance that these additional sources of funds will be available or, if available, will be available on terms acceptable to the Company.

If adequate funds are not available, the Company may have to substantially reduce or eliminate expenditures for marketing, research and development, and testing of proposed products, or obtain funds through arrangements with partners that require the Company to relinquish rights to certain of its technologies or products. There can be no assurance that the Company will be able to raise additional capital if its capital resources are exhausted. A lack of liquidity and an inability to raise capital when needed may have a material adverse impact on the Company’s ability to continue its operations or expand its business.

Contingencies

For information on legal proceedings and contingencies, see Note 12 —Commitments and Contingencies in the notes to the unaudited interim consolidated financial statements.

Contractual Obligations

For the three months ended March 31, 2011, there have been no significant changes to the Company’s contractual obligations as disclosed in its 2010 Annual Report on Form 10-K.

Outstanding Securities

As of April 30, 2011, the Company had 61,876,578 common shares outstanding, 1,654,424 options outstanding and 660,138 restricted stock units outstanding. The options are exercisable on a one-for-one basis into common shares. The outstanding restricted stock units are subject to time-based and performance-based vesting restrictions. The number of outstanding restricted stock units as of April 30, 2011 assumes the maximum associated performance targets will be met for the performance-based restricted stock units. Upon vesting, the restricted stock units convert into common shares on a one-for-one basis.

Critical Accounting Estimates

See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2010 Annual Report on Form 10-K for a discussion of the Company’s critical accounting estimates.

Recent Accounting Standards

The Company does not currently expect any recently issued guidance to have a significant impact on the Company’s financial condition or future results of operations.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk in the normal course of its business operations, primarily the risk of loss arising from adverse changes in interest rates. See Note 13 — Derivative Instruments and Fair Value in the notes to the unaudited consolidated financial statements for a discussion of the Company’s interest rate risks. The Company generates some revenue in Canadian dollars, and is therefore also subject to foreign exchange rate risk when those results are translated into U.S. dollars for financial reporting purposes.

There has been no material change in the Company’s exposure to market risk during the three months ended March 31, 2011.

ITEM 4. Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation”).

In designing and evaluating the disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Based on the Evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in United States Securities and Exchange Commission rules and forms, and were effective to ensure that the information required to be disclosed in the reports filed or submitted by the Company under the Exchange Act, was accumulated and communicated to management, including to the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal controls over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f)) during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

For information on legal proceedings, see Note 12 —Commitments and Contingencies in the notes to the unaudited consolidated financial statements.

ITEM 1A. Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2010 includes a detailed discussion of certain material risk factors facing us. The information presented below describes updates and additions to such risk factors and should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K.

We are dependent on key customers.

We generate a significant portion of our revenue from a small number of customers. Our largest customer, HealthSpring, accounted for 43% of our PBM segment revenue and 42% of our total revenue for the three months ended March 31, 2011. Given the significant volume associated with the HealthSpring business and initial three-year term (with two additional one-year extensions) of the agreement, we expect to continue to generate a substantial portion of our revenues from HealthSpring for the foreseeable future. Although we continually seek to diversify our customer base, we may be unable to offset the effects of an adverse change in one of our key customer relationships (such as HealthSpring). For example, if our existing customers elect not to renew their contracts with us at the expiry of the current terms of those contracts, or reduce the level of service offerings the Company provides, our recurring revenue base will be reduced, which could have a material adverse effect on our results of operations. Furthermore, we sell most of our computer software and services to PBM organizations, Blue Cross/Blue Shield organizations, managed care organizations and retail/mail-order pharmacy chains. If the healthcare benefits industry or our customers in the healthcare benefits industry experience problems, they may curtail spending on our products and services and our business and financial results could be materially adversely affected. For example, we may suffer a loss of customers if there is any significant consolidation among firms in the healthcare benefits industry or other participants in the pharmaceutical supply chain or if demand for pharmaceutical claims processing services should decline.

Many of our clients put their contracts out for competitive bidding prior to expiration. Competitive bidding requires costly and time-consuming efforts on our behalf and, even after we have won such bidding processes, we can incur significant expenses in proceedings or litigation contesting the adequacy or fairness of these bidding processes. We could lose clients if they cancel their agreements with us, if we fail to win a competitive bid at the time of contract renewal, if the financial condition of any of our clients deteriorates or if our clients are acquired by, or acquire, companies with which we do not have contracts. Over the past several years, self-funded employers, third party administrators and other managed care companies have experienced significant consolidation. Consolidations by their very nature reduce the number of clients who may need our services. A client involved in a merger or acquisition by a company that is not a client of ours may not renew, and in some instances may terminate, its contract with us. Our clients have been and may continue to be, subject to consolidation pressure.

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

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Reserved

None.

ITEM 5. Other Information

Executive Stock Trading Plans

As part of an effort to diversify their personal holdings, in the first quarter of 2011, certain executive officers of the Company, including Mark A. Thierer, Chief Executive Officer, and Jeffrey Park, Chief Financial Officer, adopted written stock trading plans (the “Trading Plans”) in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (“Rule 10b5-1”), as well as the Company’s insider trading policies. Trading under the previously entered Trading Plans will begin at pre-determined dates set forth in the Trading Plans and end twelve months after the adoption date. Rule 10b5-1 trading plans are intended to permit the orderly disposition of a portion of their respective holdings of common stock of the Company, including stock that they have the right to acquire under outstanding stock options granted by the Company, as a part of their personal long term financial plans for asset diversification, liquidity and estate planning. Many of the Company’s stock options expire five years from the vesting date; as a result, it is necessary for Company insiders to prepare orderly disposition strategies. The number of shares of the Company expected to be sold under the Trading Plans represents less than 1.0% of the Company’s outstanding common stock. Transactions made under the Rule 10b5-1 trading plans will be reported to the Securities and Exchange Commission in accordance with applicable securities laws, rules and regulations. A Rule 10b5-1 plan must be entered into in good faith at a time when the insider is not aware of material, non-public information. Subsequent receipt by the insider of material, non-public information will not prevent prearranged transactions under the Rule 10b5-1 plan from being executed.

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ITEM 6. Exhibits



Exhibit Number	Description of Document	Reference
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2011and December 31,2010, (ii) the Consolidated Statement of Operations for the three months ended March 31, 2011 and 2010, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010, (iv) the Consolidated Statement of Cash Flows for the three months ended March 31, 2011 and 2010, (v) the Consolidated Statement of Shareholder's Equity for the three months ended March 31, 2011 and 2010, and (vi) the notes to the Consolidated Financial Statements.	Filed herewith

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SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	SXC Health Solutions Corp.
May 6, 2011	By:	/s/ Jeff Park
		Jeffrey Park
		Chief Financial Officer (on behalf of the registrant and as Chief Accounting Officer)

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EXHIBIT INDEX



Exhibit Number	Description of Document	Reference
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2011and December 31,2010, (ii) the Consolidated Statement of Operations for the three months ended March 31, 2011 and 2010, (iii) the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010, (iv) the Consolidated Statement of Cash Flows for the three months ended March 31, 2011 and 2010, (v) the Consolidated Statement of Shareholder's Equity for the three months ended March 31, 2011 and 2010, and (vi) the notes to the Consolidated Financial Statements.	Filed herewith

Catamaran Corp - FORM 10-Q - May 6, 2011

Attached files

Catamaran Corp Reports