MedAssets 10Q 2011 Q3 Quarterly report

MedAssets (MDAS) Inactive 10-Q2011 Q3 Quarterly report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

¨	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: 001-33881

MEDASSETS, INC.

(Exact name of registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code: (678) 323-2500

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

N/A

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

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

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


Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(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 ¨ No þ

As of November 3, 2011, the registrant had 58,481,640 shares of common stock, par value $0.01 per share, outstanding.

MEDASSETS, INC.

FORM 10-Q


INDEX
		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		3
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010		4
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2011		5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		51
Item 4. Controls and Procedures		51
PART II. OTHER INFORMATION		52
Item 1. Legal Proceedings		52
Item 1A. Risk Factors		52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3. Defaults Upon Senior Securities		52
Item 4. [Removed and Reserved]		52
Item 5. Other Information		52
Item 6. Exhibits		52
Signatures		53

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MedAssets, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)


	September 30, 2011		December 31, 2010
ASSETS
Current assets
Cash and cash equivalents		$ 43,654		$ 46,836
Accounts receivable, net of allowances of $4,645 and $5,256 as of September 30, 2011 and December 31, 2010, respectively		94,938		100,020
Deferred tax asset, current		18,726		18,087
Prepaid expenses and other current assets		17,155		19,811

Total current assets		174,473		184,754
Property and equipment, net		85,900		77,737
Other long term assets
Goodwill		1,033,189		1,035,697
Intangible assets, net		423,321		484,438
Other		62,166		62,727

Other long term assets		1,518,676		1,582,862

Total assets		$ 1,779,049		$ 1,845,353


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$ 13,626		$ 18,107
Accrued revenue share obligation and rebates		67,001		57,744
Accrued payroll and benefits		24,307		22,149
Other accrued expenses		24,587		22,268
Deferred revenue, current portion		43,077		36,533
Deferred purchase consideration (Note 3)		119,617		119,912
Current portion of notes payable		6,350		6,350
Current portion of finance obligation		208		186

Total current liabilities		298,773		283,249
Notes payable, less current portion		573,888		628,650
Bonds payable (Note 6)		325,000		325,000
Finance obligation, less current portion		9,343		9,505
Deferred revenue, less current portion		13,421		9,597
Deferred tax liability		133,617		150,887
Other long term liabilities		8,049		2,882

Total liabilities		1,362,091		1,409,770

Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized; 58,661,000 and 58,410,000 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively		587		584
Additional paid-in capital		673,538		668,028
Accumulated other comprehensive loss		(4,497)		-
Accumulated deficit		(252,670)		(233,029)

Total stockholders’ equity		416,958		435,583

Total liabilities and stockholders’ equity		$ 1,779,049		$ 1,845,353

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

MedAssets, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(In thousands, except per share amounts)

Revenue:
Administrative fees, net		$ 62,635		$ 27,883		$ 179,032		$ 84,437
Other service fees		80,923		67,969		242,459		199,948

Total net revenue		143,558		95,852		421,491		284,385

Operating expenses:

Cost of revenue (inclusive of certain amortization expense)		29,528		22,697		90,571		67,176
Product development expenses		6,771		4,666		19,646		14,859
Selling and marketing expenses		12,853		8,671		43,454		35,348
General and administrative expenses		53,196		29,196		149,107		91,425
Acquisition and integration-related expenses		3,742		2,482		22,713		4,351
Depreciation		5,507		5,235		16,414		14,068
Amortization of intangibles		20,228		5,596		60,700		17,706

Total operating expenses		131,825		78,543		402,605		244,933

Operating income		11,733		17,309		18,886		39,452
Other income (expense):
Interest (expense)		(17,818)		(3,247)		(53,942)		(10,986)
Other income		2,490		84		2,770		286

(Loss) income before income taxes		(3,595)		14,146		(32,286)		28,752
Income tax (benefit) expense		(2,612)		5,685		(12,645)		11,477

Net (loss) income		$ (983)		$ 8,461		$ (19,641)		$ 17,275

Basic and diluted income per share:
Basic net (loss) income		$ (0.02)		$ 0.15		$ (0.34)		$ 0.31

Diluted net (loss) income		$ (0.02)		$ 0.14		$ (0.34)		$ 0.29

Weighted average shares - basic		57,410		56,717		57,334		56,238
Weighted average shares - diluted		57,410		59,786		57,334		59,340

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

MedAssets, Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2011


	Common Stock				Additional Paid-In		Accumulated Other Comprehensive		Accumulated		Total Stockholders’
	Shares		Par Value		Capital		Income (Loss)		Deficit		Equity
	(In thousands)
Balances at December 31, 2010		58,410		$ 584		$ 668,028		$ -		$ (233,029)		$ 435,583

Issuance of common stock from equity award exercises		309		2		1,794		-		-		1,796
Issuance of common restricted stock (net of forfeitures)		36		2		-		-		-		2
Stock compensation expense		-		-		2,945		-		-		2,945
Excess tax benefit from equity award exercises		-		-		1,748		-		-		1,748
Repurchase of common stock		(94)		(1)		(977)		-		-		(978)
Other comprehensive income (loss):
Unrealized loss from hedging activities (net of a tax of $1,663)		-		-		-		(4,497)		-		(4,497)
Net loss		-		-		-		-		(19,641)		(19,641)

Comprehensive loss		-		-		-		-		-		(24,138)

Balances at September 30, 2011		58,661		$ 587		$ 673,538		$ (4,497)		$ (252,670)		$ 416,958

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

MedAssets, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
	2011		2010
	(In thousands)
Operating activities
Net (loss) income		$ (19,641)		$ 17,275
Adjustments to reconcile (loss) income from continuing operations to net cash provided by operating activities:
Bad debt expense		781		643
Depreciation		17,231		16,236
Amortization of intangibles		61,117		18,216
Loss on sale of assets		116		91
Noncash stock compensation expense		2,945		8,653
Excess tax benefit from exercise of equity awards		(1,814)		(5,097)
Amortization of debt issuance costs		5,583		1,372
Noncash interest expense, net		2,974		399
Deferred income tax (benefit) expense		(17,203)		3,408
Changes in assets and liabilities:
Accounts receivable		4,191		(8,718)
Prepaid expenses and other assets		2,654		(6,159)
Other long-term assets		(4,215)		(1,189)
Accounts payable		(148)		3,743
Accrued revenue share obligations and rebates		8,832		(6,795)
Accrued payroll and benefits		1,518		(6,007)
Other accrued expenses		398		3,341
Deferred revenue		10,368		7,693

Cash provided by operating activities		75,687		47,105

Investing activities
Purchases of property, equipment and software		(7,592)		(9,577)
Capitalized software development costs		(18,847)		(11,897)
Acquisitions, net of cash acquired		-		(3,160)

Cash used in investing activities		(26,439)		(24,634)

Financing activities
Repayment of notes payable		(54,763)		(41,646)
Repayment of finance obligations		(496)		(493)
Excess tax benefit from exercise of equity awards		1,814		5,097
Issuance of common stock		1,796		9,081
Purchase of treasury shares		(781)		-

Cash used in financing activities		(52,430)		(27,961)

Net decrease in cash and cash equivalents		(3,182)		(5,490)
Cash and cash equivalents, beginning of period		46,836		5,498

Cash and cash equivalents, end of period		$ 43,654		$ 8

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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(In thousands, except share and per share amounts)

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

1.	BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

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

The accompanying unaudited Condensed Consolidated Financial Statements, and Condensed Consolidated Balance Sheet as of December 31, 2010, derived from audited financial statements, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01 of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the interim financial information have been included. When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements. Actual results could differ materially from those estimates. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2011.

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

Use of Estimates

The preparation of the financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. During the nine months ended September 30, 2011, we adjusted our estimates related to the following:

Customer Relationship Period

We finalized a study of our customer relationship period using data based on our historical experience. As a result of the study, effective January 1, 2011, we changed our customer relationship period for which we recognize revenue related to implementation and setup fees charged for our software as a service (“SaaS”) based services from an average of four years to six years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in customer relationship period will reduce our 2011 other service fee revenue by approximately $800, operating income by $600 and earnings per share by approximately $0.01 per share.

Internally Developed Software Useful Life

We finalized a study of our internally developed software useful life based on our historical experience. As a result of the study, effective January 1, 2011, we changed the useful life for which we will recognize depreciation expense related to internally developed software from three years to up to but generally five years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in internally developed software useful life will reduce our 2011 depreciation expense by approximately $5,600 and increase our 2011 operating income by $5,600 and earnings per share by approximately $0.06 per share.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

Cash and Cash Equivalents

All of our highly liquid investments with original maturities of three months or less at the date of purchase are carried at cost which approximates fair value and are considered to be cash equivalents. Currently, our excess cash is voluntarily used to repay our swing-line credit facility, if any, on a daily basis and applied against our revolving credit facility on a routine basis when our swing-line credit facility is undrawn. Refer to Note 6 for additional information. In addition, we may periodically make voluntary repayments on our term loan. Cash and cash equivalents were $43,654 and $46,836 as of September 30, 2011 and December 31, 2010, respectively, and our revolver and swing-line balances were zero as of such dates. In the event our cash balance is zero at the end of a period, any outstanding checks are recorded as accrued expenses. See Note 6 for immediately available cash under our revolving credit facility.

Additionally, we have a concentration of credit risk arising from cash deposits held in excess of federally insured amounts totaling $43,154 as of September 30, 2011.

2.	RECENT ACCOUNTING PRONOUNCEMENTS

Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update relating to comprehensive income. The update would require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update eliminates the option to present the components of other comprehensive income as part of the statement of equity. The update will be effective for fiscal years and interim periods within those years, beginning after December 15, 2011. We believe there will be no significant impact on our Condensed Consolidated Financial Statements.

Fair Value

In May 2011, the FASB issued an accounting standard update relating to fair value measurements and disclosures. The update provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. The update changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The update will be effective for fiscal years and interim periods within those years, beginning after December 15, 2011. We are currently assessing the impact of the adoption of this update but currently believe there will be no significant impact on our Condensed Consolidated Financial Statements.

Business Combinations

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

Intangibles — Goodwill and Other

In September 2011, the FASB issued an accounting standards update amending the guidance on the annual testing of goodwill for impairment. The update will allow companies to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The update will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We believe there will be no significant impact on our Condensed Consolidated Financial Statements.

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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

Revenue Recognition

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

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

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

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

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

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

Revenue Recognition — Multiple-Deliverable Revenue Arrangements

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

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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

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

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

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

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

3.	ACQUISITION

Broadlane Acquisition

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

At closing, we paid Broadlane LLC approximately $725,000 in cash plus $20,895 for a working capital based purchase price adjustment for an aggregate preliminary purchase price of $745,895. In addition, we will make an additional payment in cash, subject to adjustment and to certain limitations, that was originally estimated at $123,100 (the “deferred purchase consideration”).

At closing, we recorded $119,505 on our balance sheet, representing the present value of the estimated $123,100 deferred purchase consideration amount. As discussed below, during September 2011, we decreased the deferred purchase consideration by $2,811 based on an agreement with Broadlane LLC. During the three and nine months ended September 30, 2011, we recognized approximately $763 and $2,402, respectively, in imputed interest expense due to the accretion of this liability and we will record the remaining interest expense using the effective interest method to accrete the deferred purchase consideration to its face value by January 4, 2012. The balance of the deferred purchase consideration was $119,617 as of September 30, 2011 and has been recorded as a current liability in the accompanying Condensed Consolidated Balance Sheet.

During September 2011, we reached an agreement on the final purchase price with Broadlane LLC. As a result, we recorded a net adjustment of approximately $1,712 to the purchase price. The net adjustment includes a $2,811 reduction to our initial estimate of the deferred purchase consideration to adjust the deferred purchase consideration to the final agreed upon amount of $120,289. The final adjusted deferred purchase consideration amount of $120,289 will be paid on or before January 4, 2012. Refer to the table below for additional details.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

Broadlane Purchase Price Allocation

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


	Amounts Previously Recognized as of Acquisition Date (Provisional)(1)		Measurement Period Adjustments		Amounts Recognized as of Acquisition Date (Adjusted)
Current assets(2)		$ 56,402		$ 104		$ 56,506
Property and equipment		13,941		-		13,941
Other long term assets		110		-		110
Goodwill(3)		567,326		(2,508)		564,818
Intangible assets		419,900		-		419,900

Total assets acquired		1,057,679		(2,404)		1,055,275
Current liabilities(4)		35,832		1,018		36,850
Other long term liabilities(5)		156,447		(1,710)		154,737

Total liabilities assumed		192,279		(692)		191,587

Total purchase price		$ 865,400		$ (1,712)		$ 863,688

(1)

As previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

(2)

Represents: (i) a $1,121 increase to accounts receivable relating to administrative fees earned associated with customer purchases that occurred prior to the acquisition date in excess of what was originally estimated; (ii) a $779 reduction to accounts receivable relating to certain service fees earned as of the acquisition date adjusted based on our estimate of net realizable value; and (iii) a $238 reduction in deferred tax assets for the tax impact of the change in accounts receivable.

(3)

Represents the cumulative change to goodwill for the changes in current assets, current liabilities and other long term liabilities.

(4)

Represents: (i) revenue share obligation of $424 owed to customers associated with the additional administrative fees earned as noted above; (ii) a $475 increase in the self insurance liability assumed at the acquisition date; and (iii) a $119 increase in current liabilities primarily relating to payroll and other payroll benefits.

(5)

Represents: (i) an $841 reduction in our uncertain tax positions based on a federal audit of Broadlane completed by the Internal Revenue Service in which no tax liability had been identified; (ii) a $618 increase in other long-term liabilities based on our latest estimate of certain obligations; and (iii) a $1,487 reduction in deferred tax liabilities.

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

4.	RESTRUCTURING ACTIVITIES

Broadlane Restructuring Plan

In connection with the Broadlane Acquisition, our management approved and initiated a plan to restructure our operations resulting in certain management, system and organizational changes within our SCM segment. During the three and nine months ended September 30, 2011, we expensed exit and integration related costs of approximately $3,742 and $22,713, respectively, associated with restructuring activities of the acquired operations consisting of severance and other restructuring and integration costs. These costs are included within the acquisition and integration-related expenses line on the accompanying Condensed Consolidated Statements of Operations.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

As of September 30, 2011, the components of our restructuring plan are as follows:

—

Involuntary employee terminations — we reorganized our SCM workforce and eliminated redundant or unneeded positions in connection with combining our business operations. In connection with the workforce restructuring, we expect to incur severance, benefits and other employee related costs in the range of $1,700 to $3,700 to be incurred over the nine to fifteen months following September 30, 2011. During the three and nine months ended September 30, 2011, we expensed approximately $1,660 and $11,754, respectively, related to severance and other employee benefits in connection with our plan. As of September 30, 2011, we had approximately $2,763 included in current liabilities for these costs.

—

System migration and standardization — we are integrating and standardizing certain software platforms of the combined business operations. In connection with the system migration and standardization, we expect to incur costs up to $1,000 over the three to nine months following September 30, 2011. During the three and nine months ended September 30, 2011, we expensed approximately $1,357 and $4,434, respectively, related to consulting and other third-party services in connection with our plan.

—

Facilities consolidation — we are consolidating office space in areas where we have common or redundant locations. We expect to incur costs in the range of $0 to $575 over the three to nine months following September 30, 2011 relating to ceasing use of certain facilities. During the three and nine months ended September 30, 2011, we expensed approximately $725 and $6,525, respectively, relating to exit costs associated with our office space consolidation. As of September 30, 2011, we had approximately $2,666 included in current liabilities for these costs.

The changes in the plan during the nine months ended September 30, 2011 are summarized as follows:


	Accrued, December 31, 2010		Charges Incurred		Cash Payments		Accrued, September 30, 2011
Broadlane Restructuring Plan
Involuntary employee terminations		$ 3,488		$ 11,754		$ (12,479)		$ 2,763
System migration and integration		-		4,434		(4,434)		-
Facility consolidation		-		6,525		(3,859)		2,666

Total Broadlane Restructuring Costs		$ 3,488		$ 22,713		$ (20,772)		$ 5,429

RCM Management Restructuring Plan

Our management approved and initiated a plan to restructure our operations resulting in certain management changes within our RCM segment. During the three and nine months ended September 30, 2011, we expensed costs of approximately $1,204 associated with these restructuring activities consisting of severance costs. These costs are included within the product development and general and administrative expense line items on the accompanying Condensed Consolidated Statements of Operations.

The changes in the plan during the nine months ended September 30, 2011 are summarized as follows:


	Accrued, December 31, 2010		Charges Incurred		Cash Payments		Accrued, September 30, 2011
RCM Management Restructuring Plan
Employee terminations		$ -		$ 1,204		$ (286)		$ 918

5.	DEFERRED REVENUE

Deferred revenue consists of unrecognized revenue related to advanced customer billing or customer payments received prior to revenue being realized and earned. Substantially all of our deferred revenue consists of: (i) deferred administrative fees, net; (ii) deferred service fees; (iii) deferred software and implementation fees; and (iv) other deferred fees, including receipts for our annual customer and vendor meeting received prior to the event.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

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


	September 30, 2011		December 31, 2010
Software and implementation fees		$ 20,796		$ 15,290
Service fees		22,227		26,970
Administrative fees		12,735		2,573
Other fees		740		1,297

Deferred revenue, total		56,498		46,130
Less: Deferred revenue, current portion		(43,077)		(36,533)

Deferred revenue, non-current portion		$ 13,421		$ 9,597

As of September 30, 2011 and December 31, 2010, deferred revenue included in our Condensed Consolidated Balance Sheets that was contingent upon meeting performance targets was $9,001 and $4,841, respectively. Advance billings on arrangements that include contingent performance targets are recorded in accounts receivable and deferred revenue when billed. Only certain contingent performance targets are billed in advance of meeting the target.

6.	NOTES AND BONDS PAYABLE

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


	September 30, 2011		December 31, 2010
Notes payable - senior		$ 580,238		$ 635,000
Bonds payable		325,000		325,000

Total notes and bonds payable		905,238		960,000
Less: current portions		(6,350)		(6,350)

Total long-term notes and bonds payable		$ 898,888		$ 953,650

Notes Payable

The principal amount of our long term notes payable consists of our senior term loan facility which had an outstanding balance of $580,238 as of September 30, 2011. We had no amounts drawn on our revolving credit facility, and no amounts drawn on our swing-line component, resulting in approximately $149,000 of availability under our credit facility inclusive of the swing-line (after giving effect to $1,000 of outstanding but undrawn letters of credit on such date) as of September 30, 2011. During the nine months ended September 30, 2011, we made payments on our term loan which included two voluntary prepayments totaling $50,000 and scheduled principal payments of $4,763. The applicable weighted average interest rate (inclusive of the applicable bank margin) on our senior term loan facility at September 30, 2011 was 5.25%.

On November 16, 2010, in connection with the Broadlane Acquisition, we entered into a new credit agreement (the “Credit Agreement”) with Barclays Bank PLC and JP Morgan Securities LLC. The Credit Agreement contains certain customary negative covenants, including but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on fundamental changes, limitations on asset sales and sale leasebacks, limitations on investments, limitations on dividends or distributions on, or redemptions of, equity interests, limitations on prepayments or redemptions of unsecured or subordinated debt, limitations on negative pledge clauses, limitations on transactions with affiliates and limitations on changes to the Company’s fiscal year. The Credit Agreement also includes certain maintenance covenants (which took effect on March 31, 2011) including but not limited to, a maximum total leverage ratio of consolidated indebtedness to consolidated EBITDA and a minimum consolidated interest coverage ratio of consolidated EBITDA to consolidated cash interest expense (as defined in the Credit Agreement). The Company was in compliance with these covenants as of September 30, 2011.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

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

First Amendment to the Credit Agreement

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

Bonds Payable

In connection with the financing of the Broadlane Acquisition, the Company closed the offering of an aggregate principal amount of $325,000 of senior notes due 2018 (the “Notes”) in a private placement (the “Notes Offering”). The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing domestic subsidiaries and each of the Company’s future domestic restricted subsidiaries in each case that guarantees the Company’s obligations under the Credit Agreement. Each of the subsidiary guarantors is 100% owned by the Company; the guarantees by the subsidiary guarantors are full and unconditional; the guarantees by the subsidiary guarantors are joint and several; the Company has no independent assets or operations; and any subsidiaries of the Company other than the subsidiary guarantors are minor. The Notes and the guarantees are senior unsecured obligations of the Company and the subsidiary guarantors, respectively.

The Notes were issued pursuant to an indenture dated as of November 16, 2010 (the “Indenture”) among the Company, its subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Pursuant to the Indenture, the Notes will mature on November 15, 2018 and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011.

The Indenture contains certain customary negative covenants, including but not limited to, limitations on the incurrence of debt, limitations on liens, limitations on consolidations or mergers, limitations on asset sales, limitations on certain restricted payments and limitations on transactions with affiliates. The Indenture does not contain any significant restrictions on the ability of the Company or any subsidiary guarantor to obtain funds from the Company or any other subsidiary guarantor by dividend or loan. The Indenture also contains customary events of default. The Company was in compliance with these covenants as of September 30, 2011.

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

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

As of September 30, 2011, the Company’s 8% senior notes due 2018 were trading at approximately 94.9% of par value.

As of September 30, 2011, we had approximately $40,266 of debt issuance costs related to our Credit Agreement and Notes which will be amortized into interest expense using the effective interest method until the maturity date. For the nine months ended September 30, 2011 and 2010, we recognized approximately $5,583 and $1,372, respectively, in interest expense related to the amortization of debt issuance costs.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

The following table summarizes our stated debt maturities and scheduled principal repayments as of September 30, 2011:

		Senior Unsecured		Senior Unsecured		Senior Unsecured		Senior Unsecured
Year	Term Loan		Senior Unsecured Notes		Total
2011	$	1,588	$	-	$	1,588	(1)
2012		6,350		-		6,350
2013		6,350		-		6,350
2014		6,350		-		6,350
2015		6,350		-		6,350
Thereafter		553,250		325,000		878,250

	$	580,238	$	325,000	$	905,238

(1)

Represents the remaining quarterly principal payments due during the fiscal year ending December 31, 2011.

Total interest paid on our notes and bonds payable during the nine months ended September 30, 2011 and 2010 was approximately $40,305 and $8,887, respectively.

7.	COMMITMENTS AND CONTINGENCIES

Performance Targets

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

Legal Proceedings

From time to time, we become involved in legal proceedings arising in the ordinary course of business. As of September 30, 2011, we are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse affect on our business, operating results or financial condition.

Insurance Settlement

During the three months ended September 30, 2011, we received an insurance settlement of $2,340 relating to a 2006 litigation matter that was covered under an insurance policy in effect at the time. We recorded the insurance settlement in other income in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 as certain initial costs related to this matter were expensed in other expense in our Consolidated Statement of Operations in the applicable prior period.

8.	STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

During the nine months ended September 30, 2011, we issued approximately 309,000 shares of common stock in connection with employee stock option and stock-settled stock appreciation right (or “SSAR”) exercises for aggregate exercise proceeds of $1,796.

Repurchase of Common Stock

On August 23, 2011, our Board of Directors authorized a share repurchase program of up to $25,000 of our common stock. The share repurchase program expires the earlier of twelve months from the authorization by our Board of Directors or the repurchase of $25,000 of our common stock. The following table shows the amount and cost of shares we repurchased for the three months ended September 30, 2011 under the share repurchase program.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)


	Three Months Ended September 30,
	2011		2010
Number of shares repurchased		94,747		-
Cost of shares repurchased(1)		$ 978		-

(1) Our share repurchase program requires a three-day cash settlement period with our broker. We made purchases during the last two days of September amounting to 20,000 shares totaling $197, which were settled in October 2011. The cost of these shares is included in other accrued expenses on our Condensed Consolidated Balance Sheet.

As of September 30, 2011, $24,022 remained available for additional purchases under our share repurchase program. The repurchased shares have not been retired and constitute authorized but unissued shares.

Share-Based Compensation

As of September 30, 2011, we had restricted common stock, SSARs and common stock option equity awards outstanding under three share-based compensation plans. As of September 30, 2011, we had approximately 925,000 shares reserved and available for grant under the 2008 MedAssets, Inc. Long-Term Performance Incentive Plan.

As described further below, we performed our quarterly probability assessment during the three months ended June 30, 2011 on the performance achievement of certain performance-based restricted stock grants and performance-based SSAR grants. As a result, we recorded an adjustment to share-based compensation for these grants during the three months ended June 30, 2011. During the three months ended September 30, 2011, we did not make any additional adjustments to share-based compensation for these grants.

The total share-based compensation expense related to equity awards was $2,123 and $2,142 for the three months ended September 30, 2011 and 2010, respectively. The total income tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based compensation arrangements related to equity awards was $801 and $813 for the three months ended September 30, 2011 and 2010, respectively.

The total share-based compensation expense related to equity awards charged against income was $2,945 and $8,653 for the nine months ended September 30, 2011 and 2010, respectively. The total income tax benefit recognized in the Condensed Consolidated Statement of Operations for share-based compensation arrangements related to equity awards was $1,116 and $3,283 for the nine months ended September 30, 2011 and 2010, respectively. There were no capitalized share-based compensation expenses during the three and nine months ended September 30, 2011.

Total share-based compensation expense (inclusive of restricted common stock, SSARs and common stock options) for the three and nine months ended September 30, 2011 and 2010 as reflected in our Condensed Consolidated Statements of Operations is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenue		$ 459		$ 616		$ 1,053		$ 1,843
Product development		97		124		177		457
Selling and marketing		492		433		242		1,849
General and administrative		1,075		969		1,473		4,504

Total share-based compensation expense		$ 2,123		$ 2,142		$ 2,945(1)		$ 8,653

(1) During the three months ended June 30, 2011, we recorded an adjustment to share-based compensation expense based on our probability assessment of performance achievement relating to certain performance-based restricted stock grants and SSAR grants. Refer to the footnote disclosure for further details.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

Equity Award Expense Attribution

For service-based equity awards, compensation cost is recognized using an accelerated method over the vesting or service period and is net of estimated forfeitures. For performance-based equity awards, compensation cost is recognized using a straight-line method over the vesting or performance period and is adjusted each reporting period in which a change in performance achievement is determined and is net of estimated forfeitures. We evaluate the probability of performance achievement each reporting period and, if necessary, adjust share-based compensation expense based on expected performance achievement.

In connection with our quarterly probability assessment of performance achievement during the three months ended June 30, 2011 for the performance-based SSARs and performance-based restricted common stock that were granted under the MedAssets, Inc. Long-Term Performance Incentive Plan in 2008, we no longer believed it to be probable that we would achieve a compounded annual growth rate of diluted adjusted EPS (which we formerly referred to as non-GAAP diluted cash EPS) of greater than 15% for the three-year period ending December 31, 2011. As a result, during the three months ended June 30, 2011, we reversed 100% of the share-based compensation expense recorded to-date for the performance-based SSARs amounting to approximately ($3,659) and 50% of the share-based compensation expense recorded to-date for the performance-based restricted stock amounting to approximately ($2,878).

Employee Stock Purchase Plan

In 2010, we established the MedAssets, Inc. Employee Stock Purchase Plan (the “Plan”). Under the Plan, eligible employees may purchase shares of our common stock at a discounted price through payroll deductions. The price per share of the common stock sold to participating employees will be 95% of the fair market value of our common stock on the applicable purchase date. The Plan requires that all stock purchased be held by participants for a period of 18 months from the purchase date. A total of 500,000 shares of our common stock are authorized for purchase under the Plan. For the nine months ended September 30, 2011, we purchased approximately 45,600 shares of our common stock under the Plan which amounted to approximately $545.

Equity Award Grants

Information regarding equity awards for the nine months ended September 30, 2011 is as follows:

Common Stock Option Awards

During the nine months ended September 30, 2011, we did not grant any stock option awards.

During the nine months ended September 30, 2011, approximately 298,000 stock option awards were forfeited.

As of September 30, 2011, there was approximately $1,597 of total unrecognized compensation expense related to all outstanding stock option awards that will be recognized over a weighted-average period of 1.3 years.

Restricted Common Stock Awards

During the nine months ended September 30, 2011, we granted approximately 239,000 shares of restricted common stock. Approximately 197,000 shares vest over five years; 28,000 shares vest over four years; and 14,000 vest ratably each month through December 31, 2011. The weighted-average grant date fair value of each restricted common stock share was $15.58.

During the nine months ended September 30, 2011, approximately 203,000 shares of restricted common stock were forfeited.

As of September 30, 2011, there was approximately $8,704 of total unrecognized compensation expense related to all unvested restricted common stock awards that will be recognized over a weighted-average period of 2.0 years.

SSARs Awards

During the nine months ended September 30, 2011, we granted approximately 726,000 SSARs. Approximately 605,000 have a service vesting period of five years; and approximately 121,000 vest ratably each month through December 31, 2011. The weighted-average grant date base price of each SSAR was $14.87 and the weighted-average grant date fair value of each SSAR granted during the nine months ended September 30, 2011 was $6.31.

During the nine months ended September 30, 2011, approximately 462,000 SSARs were forfeited.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

As of September 30, 2011, there was approximately $9,528 of total unrecognized compensation expense related to all unvested SSARs that will be recognized over a weighted-average period of 1.8 years.

9.	INCOME TAXES

Income tax (benefit) expense recorded during the nine months ended September 30, 2011 and 2010 reflected an effective income tax rate of 39.2% and 39.9%, respectively. We experienced no significant changes to the accounting for our uncertain tax positions for the nine months ended September 30, 2011.

10.

INCOME (LOSS) PER SHARE

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

A reconciliation of basic and diluted weighted average shares outstanding for basic and diluted EPS for the three and nine months ended September 30, 2011 and 2010 is as follows:


	Three Months Ended September 30,
	2011		2010

Numerator for Basic and Diluted (Loss) Income Per Share:
Net (loss) income		$ (983)		$ 8,461
Denominator for basic (loss) income per share weighted average shares		57,410,000		56,717,000
Effect of dilutive securities:
Stock options		-		2,070,000
Stock settled stock appreciation rights		-		480,000
Restricted stock and stock warrants		-		519,000

Denominator for diluted (loss) income per share - adjusted weighted average shares and assumed conversions		57,410,000		59,786,000
Basic (loss) income per share:
Basic net (loss) income per common share		$ (0.02)		$ 0.15

Diluted net (loss) income per share:
Diluted net (loss) income per common share		$ (0.02)		$ 0.14

	Nine Months Ended September 30,
	2011		2010
Numerator for Basic and Diluted (Loss) Income Per Share:
Net (loss) income		$ (19,641)		$ 17,275
Denominator for basic (loss) income per share weighted average shares		57,334,000		56,238,000
Effect of dilutive securities:
Stock options		-		2,089,000
Stock settled stock appreciation rights		-		492,000
Restricted stock and stock warrants		-		521,000

Denominator for diluted (loss) income per share - adjusted weighted average shares and assumed conversions		57,334,000		59,340,000
Basic (loss) income per share:
Basic net (loss) income per common share		$ (0.34)		0.31

Diluted net (loss) income per share:
Diluted net (loss) income per common share		$ (0.34)		0.29

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

During the three and nine months ended September 30, 2011, basic and diluted EPS are the same as all potentially dilutive securities have been excluded from the calculation of diluted EPS given our net loss for the periods. In addition, the effect of certain dilutive securities has been excluded for the three and nine months ended September 30, 2010 because the impact is anti-dilutive as a result of the strike price of certain securities being greater than the average market price (or out of the money) during the periods presented. The following table provides a summary of those potentially dilutive securities that have been excluded from the above calculation of diluted EPS:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Stock options		888,000		26,000		1,234,000		25,000
SSARs		-		147,000		16,000		142,000
Restricted stock and stock warrants		446,000		-		459,000		-

Total		1,334,000		173,000		1,709,000		167,000

11.

SEGMENT INFORMATION

Beginning January 1, 2011, we reorganized our business to better align with our markets. We consolidated our decision support services (“DSS”) operating unit into our SCM reporting unit to serve as a more comprehensive business tool with a market strategy aimed at focusing on analytical and decision support services to assist customers in identifying, improving and creating efficiencies in their cost structure. All prior period amounts have been retrospectively adjusted to reflect this reorganization.

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

—

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

—

Spend and Clinical Resource Management. Our SCM segment provides a comprehensive suite of technology-enabled services that help our customers manage their expense categories. Our solutions lower supply and medical device pricing and utilization by managing the procurement process through our group purchasing organization (“GPO”) portfolio of contracts, consulting services and business intelligence tools.

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

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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

The following tables represent our results of operations, by segment, for the three and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30, 2011
	RCM		SCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)		$ -		$ 96,354		$ -		$ 96,354
Revenue share obligation(1)		-		(33,719)		-		(33,719)
Other service fees		53,120		27,803		-		80,923

Total net revenue		53,120		90,438		-		143,558
Total operating expenses		51,395		71,089		9,341		131,825

Operating income (loss)		1,725		19,349		(9,341)		11,733
Interest income (expense)		-		14		(17,832)		(17,818)
Other (expense) income		(90)		130		2,450		2,490

Income (loss) before income taxes		$ 1,635		$ 19,493		$ (24,723)		$ (3,595)
Income tax expense (benefit)		1,488		8,847		(12,947)		(2,612)

Net income (loss)		147		10,646		(11,776)		(983)

Segment Adjusted EBITDA		$ 9,928		$ 42,543		$ (7,266)		$ 45,205

(1)

These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.


	As of September 30, 2011
	RCM		SCM		Corporate		Total
Financial Position:
Accounts receivable, net		$ 43,940		$ 51,123		$ (125)		$ 94,938
Other assets		480,747		1,069,253		134,111		1,684,111

Total assets		524,687		1,120,376		133,986		1,779,049
Accrued revenue share obligation		-		67,001		-		67,001
Deferred revenue		30,954		25,544		-		56,498
Notes payable		-		-		580,238		580,238
Bonds payable		-		-		325,000		325,000
Other liabilities		16,617		26,831		289,906		333,354

Total liabilities		$ 47,571		$ 119,376		$ 1,195,144		$ 1,362,091


	Three Months Ended September 30, 2010
	RCM		SCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)		$ -		$ 43,625		$ -		$ 43,625
Revenue share obligation(1)		-		(15,742)		-		(15,742)
Other service fees		55,920		12,049		-		67,969

Total net revenue		55,920		39,932		-		95,852
Total operating expenses		45,429		22,317		10,797		78,543

Operating income (loss)		10,491		17,615		(10,797)		17,309
Interest (expense)		-		-		(3,247)		(3,247)
Other (expense) income		(68)		30		122		84

Income (loss) before income taxes		$ 10,423		$ 17,645		$ (13,922)		$ 14,146
Income tax expense (benefit)		4,179		6,664		(5,158)		5,685

Net income (loss)		6,244		10,981		(8,764)		8,461

Segment Adjusted EBITDA		$ 18,988		$ 20,813		$ (6,244)		$ 33,557

(1)

These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)


	Nine Months Ended September 30, 2011
	RCM		SCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)		$ -		$ 280,478		$ -		$ 280,478
Revenue share obligation(1)		-		(101,446)		-		(101,446)
Other service fees		160,607		81,852		-		242,459

Total net revenue		160,607		260,884		-		421,491
Total operating expenses		146,786		230,573		25,246		402,605

Operating income (loss)		13,821		30,311		(25,246)		18,886
Interest (expense)		-		-		(53,942)		(53,942)
Other (expense) income		(76)		170		2,676		2,770

Income (loss) before income taxes		$ 13,745		$ 30,481		$ (76,512)		$ (32,286)
Income tax expense (benefit)		5,723		12,690		(31,058)		(12,645)

Net income (loss)		8,022		17,791		(45,454)		(19,641)

Segment Adjusted EBITDA		$ 35,649		$ 116,048		$ (21,269)		$ 130,428

(1)

These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.


	Nine Months Ended September 30, 2010
	RCM		SCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)		$ -		$ 129,527		$ -		$ 129,527
Revenue share obligation(1)		-		(45,090)		-		(45,090)
Other service fees		160,324		39,624		-		199,948

Total net revenue		160,324		124,061		-		284,385
Total operating expenses		134,767		79,512		30,654		244,933

Operating income (loss)		25,557		44,549		(30,654)		39,452
Interest (expense)		-		-		(10,986)		(10,986)
Other (expense) income		(35)		(37)		358		286

Income (loss) before income taxes		$ 25,522		$ 44,512		$ (41,282)		$ 28,752
Income tax expense (benefit)		10,178		17,341		(16,042)		11,477

Net income (loss)		15,344		27,171		(25,240)		17,275

Segment Adjusted EBITDA		$ 51,375		$ 54,907		$ (19,519)		$ 86,763

(1)

These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

GAAP for segment reporting requires that the total of the reportable segments’ measures of profit or loss be reconciled to the Company’s consolidated operating results. The following table reconciles Segment Adjusted EBITDA to consolidated net (loss) income for the three and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010

RCM Adjusted EBITDA		$ 9,928		$ 18,988		$ 35,649		$ 51,375
SCM Adjusted EBITDA		42,543		20,813		116,048		54,907

Total reportable Segment Adjusted EBITDA		52,471		39,801		151,697		106,282
Depreciation		(4,077)		(3,950)		(12,650)		(11,081)
Depreciation (included in cost of revenue)		(306)		(726)		(815)		(2,167)
Amortization of intangibles		(20,228)		(5,596)		(60,700)		(17,706)
Amortization of intangibles (included in cost of revenue)		(139)		(139)		(417)		(509)
Interest expense, net of interest income(1)		15		44		15		98
Income tax expense		(10,336)		(10,843)		(18,413)		(27,518)
Share-based compensation expense(2)		(1,479)		(1,366)		(2,858)		(4,884)
Purchase accounting adjustments(3)		(182)		-		(6,245)		-
RCM management restructuring expenses(4)		(1,204)		-		(1,204)		-
Acquisition and integration-related expenses(5)		(3,742)		-		(22,593)		-

Total reportable segment net income		10,793		17,225		25,817		42,515
Corporate net loss		(11,776)		(8,764)		(45,458)		(25,240)

Consolidated net (loss) income		$ (983)		$ 8,461		$ (19,641)		$ 17,275

(1)

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

(2)

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

(3)

Upon acquiring Broadlane, we made certain purchase accounting adjustments that reflects the fair value of administrative fees related to customer purchases that occurred prior to November 16, 2010 but were reported to us subsequent to that. Under our revenue recognition accounting policy, which is in accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases occurring prior to the transaction date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability.

For the three months ended September 30, 2011, the $182 represents: (i) the net amount of $295 in gross administrative fees and $10 in other service fees primarily based on vendor reporting received from July 1, 2011 through September 30, 2011 that related to periods prior to the acquisition date; and (ii) a corresponding revenue share obligation of $123.

For the nine months ended September 30, 2011, the $6,245 represents: (i) the net amount of $9,451 in gross administrative fees and $1,582 in other service fees primarily based on vendor reporting received from January 1, 2011 through September 30, 2011 that related to periods prior to the acquisition date; and (ii) a corresponding revenue share obligation of $4,788. The reduction of the deferred revenue balances materially affects period-to-period financial performance comparability and revenue and earnings growth in future periods subsequent to the acquisition and is not indicative of changes in underlying results of operations.

(4)

Amount represents restructuring costs consisting of severance that resulted from certain management changes within our RCM segment.

(5)

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

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

12.

DERIVATIVE FINANCIAL INSTRUMENTS

We have interest rate risk relative to the outstanding borrowings under our credit agreement. Loans under the credit agreement bear interest, at the Company’s election, either at the prime rate or the London Interchange Bank Offering Rate (“LIBOR”) plus a percentage point spread based on certain specified financial ratios. The Company’s policy has been to manage interest cost using a mix of fixed and variable rate debt. To manage this risk in a cost efficient manner, we entered into the derivative financial instruments described below.

On May 5, 2011, we entered into three separate derivative financial instruments to convert 50% of our variable rate debt to a fixed or maximum rate debt, as required by our Credit Agreement. The derivative instruments consisted of: (i) a 3% LIBOR interest rate cap (exclusive of the applicable bank margin charged by our lender) on a $317,500 notional amount beginning May 13, 2011 and ending on February 16, 2013; (ii) a forward starting interest rate swap which fixes three-month LIBOR at 2.80% (exclusive of the applicable bank margin charged by our lender) on a $158,750 notional amount beginning February 19, 2013 and ending February 16, 2015; and (iii) a forward starting interest rate swap which fixes three-month LIBOR at 2.78% (exclusive of the applicable bank margin charged by our lender) on a $158,750 notional amount beginning February 19, 2013 and ending February 16, 2015. Our interest rate swaps are designated as a cash flow hedging relationship and considered highly effective. The effective portion of the change in fair value of the derivatives are reported as a component of accumulated other comprehensive (loss) income (“AOCI”). If we assess any portion to be ineffective, we will reclassify the ineffective portion to current period earnings or loss accordingly.

We have not treated the interest rate cap as a hedging instrument as defined by GAAP for derivatives and hedging. As a result, we will record the fair value adjustment on the interest rate cap through earnings each reporting period. For the three and nine months ended September 30, 2011, we recorded a charge to interest expense of approximately $49 and $185, respectively, relating to the fair value of the interest rate cap.

We have treated our interest rate swaps as hedging instruments in accordance with GAAP for derivatives and hedging. As of September 30, 2011, we recorded the fair value of the interest rate swaps on our balance sheet as a liability of approximately $6,160 in other long-term liabilities, and the offsetting loss ($4,497 net of tax) was recorded in AOCI in our stockholders’ equity.

We determined the fair values of the swaps using Level 2 inputs as defined under GAAP for fair value measurements and disclosures because our valuation techniques included inputs that are considered significantly observable in the market, either directly or indirectly. Our valuation technique assessed the swap by comparing each fixed interest payment, or cash flow, to a hypothetical cash flow utilizing an observable market three-month floating LIBOR rate as of September 30, 2011. Future hypothetical cash flows utilize projected market-based LIBOR rates. Each fixed cash flow and hypothetical cash flow is then discounted to present value utilizing a market observable discount factor for each cash flow. The discount factor fluctuates based on the timing of each future cash flow. The fair value of the swap represents a cumulative total of the differences between the discounted cash flows that are fixed from those that are hypothetical using floating rates.

We considered the credit worthiness of the counterparty of the hedged instrument. We believe the performance of the counterparties of the swaps is probable given the size, international presence and past performance of the counterparties under the obligations of the contracts and that the counterparties are not at risk of default which would change the highly effective status of the hedged instruments. We also assessed the Company’s credit worthiness and ability to deliver under the terms of the contracts. Given the availability under our revolving credit facility, our historical ability to generate positive cash flow and our expectation for the continuing ability to generate positive cash from operations, we expect to be able to perform all of our obligations under the interest rate swap arrangements.

As of September 30, 2011, our forward starting interest rate swaps were highly effective and, as a result, we did not record any gain or loss from ineffectiveness in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011.

The following table presents the fair value of our outstanding derivative instruments as of September 30, 2011 and December 31, 2010:

Balance Sheet Location

Fair Value of Financial Instruments

As of September 30,
2011

As of December 31,
2010

Derivative Liabilities

(Unaudited)

Derivatives designated as hedging instruments - interest rate contracts

Other long term liabilities

6,160

MedAssets, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited) – (continued)

(In thousands, except share and per share amounts)

The effects of derivative instruments designated as cash flow hedges on income and AOCI are summarized below:

Amount of (Loss) or Gain Recognized
in OCI on Derivative (Effective
Portion)

Amount of (Loss) or Gain Recognized
in OCI on Derivative (Effective
Portion)

Three Months Ended September 30,

Nine Months Ended September 30,

Derivatives designated
as cash flow hedges

2011

2010

2011

2010

(Unaudited)

Total (loss) or gain recognized in other comprehensive income - interest rate contracts

$ (3,415)

$ 32

$ (4,497)

$ 577

13.

FAIR VALUE MEASUREMENTS

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

Refer to Note 12 for information and fair values of our derivative instruments measured on a recurring basis under GAAP for fair value measurements and disclosures.

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

—

Cash and cash equivalents: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value due to the high credit standing of the financial institutions holding these items and their liquid nature;

—

Accounts receivable, net: The carrying value reported in the Condensed Consolidated Balance Sheets is net of allowances for doubtful accounts which includes a degree of counterparty non-performance risk;

—

Accounts payable and current liabilities: The carrying value reported in the Condensed Consolidated Balance Sheets for these items approximates fair value, which is the likely amount for which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company;

—

Finance obligation: The carrying value of our finance obligation reported in the Condensed Consolidated Balance Sheets approximates fair value based on current interest rates; and

—

Notes payable: The carrying value of our long-term notes payable reported in the Condensed Consolidated Balance Sheets approximates fair value since they bear interest at variable rates. Refer to Note 6.

14.

RELATED PARTY TRANSACTION

We have an agreement with John Bardis, our chief executive officer, for the use of an airplane owned by JJB Aviation, LLC, a limited liability company, owned by Mr. Bardis. We pay Mr. Bardis at market-based rates for the use of the airplane for business purposes. The audit committee of the board of directors reviews such usage of the airplane annually. During the nine months ended September 30, 2011 and 2010, we incurred charges of $1,560 and $1,514, respectively, related to transactions with Mr. Bardis.

15.

SUBSEQUENT EVENTS

We have evaluated subsequent events for recognition or disclosure in the Condensed Consolidated Financial Statements filed on Form 10-Q with the SEC and no events have occurred that require disclosure.

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

NOTE ON FORWARD-LOOKING STATEMENTS

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

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

Overview

Management’s primary metrics to measure the consolidated financial performance of the business include net revenue, non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted adjusted EPS (which we formerly referred to as non-GAAP diluted cash EPS).

The table below highlights our primary results of operations for the three and nine months ended September 30, 2011 and 2010 (unaudited):


	Three Months Ended September 30,								Nine Months Ended September 30,
	2011		2010		Change				2011		2010		Change
	Amount		Amount		Amount		%		Amount		Amount		Amount		%
	(In millions)								(In millions)
Gross fees(1)		$ 177.3		$ 111.6		$ 65.7		58.9%		$ 522.9		$ 329.5		$ 193.4		58.7%
Revenue share obligation(1)		(33.7)		(15.7)		(18.0)		114.6		(101.4)		(45.1)		(56.3)		124.8

Total net revenue		143.6		95.9		47.7		49.7		421.5		284.4		137.1		48.2

Operating income		11.7		17.3		(5.6)		(32.4)		18.9		39.5		(20.6)		(52.2)
Net (loss) income		$ (1.0)		$ 8.5		$ (9.5)		-111.8%		$ (19.6)		$ 17.3		$ (36.9)		-213.3%

Adjusted EBITDA(1)		$ 45.2		$ 33.6		$ 11.6		34.5%		$ 130.4		$ 86.8		$ 43.6		50.2%
Adjusted EBITDA margin(1)		31.5%		35.0%						30.9%		30.5%
Diluted Adjusted EPS(1)		$ 0.26		$ 0.25		$ 0.01		4.0%		$ 0.66		$ 0.61		$ 0.05		8.2%

(1)

These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

The increases in non-GAAP gross fees and total net revenue during the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010 were primarily attributable to:

—

our acquisition of Broadlane on November 16, 2010 (the “Broadlane Acquisition”);

—

growth in our RCM segment from our revenue cycle technology tools offset by a decline in our revenue cycle services; and

—

growth in our SCM segment from our vendor administrative fees.

The decrease in operating income during the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010, was primarily attributable to the growth in net revenue discussed above partially offset by the following operating expenses:

—

acquisition and integration-related expenses associated with the Broadlane Acquisition;

—

increased cost of revenue attributable to a higher percentage of net revenue being derived from service-based engagements within our SCM segment;

—

higher operating expenses related to new and existing salary-related compensation expense, inclusive of cash-based performance related compensation expense, primarily associated with our expanding services-based businesses;

—

an increase in amortization expense of acquired intangibles; and

—

an increase in depreciation expense from additions of property and equipment including purchased software in conjunction with fixed assets acquired in the Broadlane Acquisition.

For the three months ended September 30, 2011, increases in consolidated non-GAAP adjusted EBITDA compared to the three months ended September 30, 2010 were primarily attributable to the net revenue increase discussed above, as well as lower expense growth due to certain management cost control initiatives. The decrease in non-GAAP adjusted EBITDA margin for the three months ended September 30, 2011 was partially attributable to a decrease in certain performance fees in revenue cycle services that did not recur in 2011. In addition, we experienced an increase in cash-based performance compensation expense compared to the prior period.

For the nine months ended September 30, 2011, increases in consolidated non-GAAP adjusted EBITDA compared to the nine months ended September 30, 2010 were primarily attributable to the net revenue increase discussed above, as well as lower expense growth due to certain management cost control initiatives, partially offset by higher direct costs primarily from our service-based engagements. The non-GAAP adjusted EBITDA margin remained relatively consistent with the prior period.

Recent Developments

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

Broadlane Acquisition

We consummated the Broadlane Acquisition on November 16, 2010. The Company is required to make a payment of approximately $120.3 million in cash on or before January 4, 2012. During September 2011, we finalized the purchase price with Broadlane LLC. As a result, we recorded an adjustment of approximately $1.7 million which decreased the deferred purchase consideration and goodwill.

Purchase Accounting

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

Credit Facility and Notes Offering

On November 16, 2010, in connection with the Broadlane Acquisition, we entered into the Credit Agreement with Barclays Bank PLC and JP Morgan Securities LLC and closed a private placement offering of senior notes due 2018. The Company used the entire borrowings from the Credit Agreement and the net proceeds from the offering of senior notes to finance the purchase price of the Broadlane Acquisition and repay outstanding indebtedness of the Company and Broadlane.

Credit Facility

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

Notes Offering

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

Share Repurchase Program

On August 23, 2011, our Board of Directors authorized a share repurchase program of up to $25.0 million of our common stock. The share repurchase program expires the earlier of twelve months from the authorization by our Board of Directors or the repurchase of $25.0 million of our common stock. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements herein for additional information on the amount and cost of shares we repurchased for the three and nine months ended September 30, 2011 under the share repurchase program.

RCM Management Restructuring Plan

Our management approved and initiated a plan to restructure our operations resulting in certain management changes within our RCM segment. During the three and nine months ended September 30, 2011, we expensed costs of approximately $1.2 million associated with restructuring activities consisting of severance costs. These costs are included within the product development and general and administrative expense line items on the Condensed Consolidated Statements of Operations.

Share-based Compensation

In connection with our quarterly probability assessment of performance achievement conducted during the three months ended June 30, 2011, for the performance-based SSARs and performance-based restricted common stock that were granted under the MedAssets, Inc. Long-Term Performance Incentive Plan, we no longer believe it is probable that we will achieve a compounded annual growth rate of diluted adjusted EPS (which we formerly referred to as non-GAAP diluted cash EPS) of greater than 15% for the three-year period ending December 31, 2011. As a result, during the three months ended June 30, 2011, we reversed 100% of the share-based compensation expense recorded to-date for the performance-based SSARs amounting to approximately $3.7 million and 50% of the share-based compensation expense recorded to-date for the performance-based restricted stock amounting to approximately $2.9 million. This determination was based on certain investment initiatives and areas of focus such as product development and other investments that were committed to during the year. These initiatives will increase our operating expenses in the short term which will have an unfavorable impact on our adjusted EBITDA and diluted adjusted EPS. During the three months ended September 30, 2011, we did not make any additional adjustments to share-based compensation for these grants.

Segment Reporting

Effective, January 1, 2011, we realigned our decision support services (“DSS”) and performance analytics business operations under our SCM segment from our RCM segment. All prior period amounts have been recast to reflect this realignment.

Use of Estimates

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

Customer Relationship Period

We finalized a study of our customer relationship period using data based on our historical experience. As a result of the study, effective January 1, 2011, we changed our customer relationship period for which we recognize revenue related to implementation and setup fees charged for our SaaS-based services from an average of four years to six years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in customer relationship period will reduce our 2011 other service fee revenue by approximately $0.8 million.

Internally Developed Software Useful Life

We finalized a study of our internally developed software useful life based on our historical experience. As a result of the study, effective January 1, 2011, we changed our useful life for which we will recognize depreciation expense related to internally developed software from three years to up to but generally five years. We will apply this change in estimate on a prospective basis. We estimate the impact of the change in internally developed software useful life will reduce our 2011 depreciation expense by approximately $5.6 million.

Segment Structure and Revenue Streams

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

Revenue Cycle Management

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

—

Subscription and implementation fees. We earn fixed subscription fees on a monthly or annual basis on multi-year contracts for customer access to our SaaS-based solutions. We may also charge our customers non-refundable upfront fees for implementation of our SaaS-based services. These non-refundable upfront fees are earned over the subscription period or estimated customer relationship period, whichever is longer.

We defer costs related to implementation services and expense these costs in proportion to the revenue earned over the subscription period or customer relationship period, as applicable. We completed a study on our customer relationship period based on historical attrition rates. This resulted in an increase to the customer relationship period from four to six years.

In addition, we defer upfront sales commissions related to subscription and implementation fees and expense these costs ratably over the related contract term.

—

Transaction fees. For certain of our revenue cycle management solutions, we earn fees that vary based on the volume of customer transactions or enrolled members.

—

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

Spend and Clinical Resource Management

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

—

Administrative fees and revenue share obligation. We earn administrative fees from manufacturers, distributors and other vendors (collectively referred to as “vendors”) of products and services with whom we have contracts under which our group purchasing organization customers may purchase products and services. Administrative fees represent a percentage, which we refer to as our administrative fee ratio, typically ranging from 0.25% to 3.00% of the purchases made by our group purchasing organization customers through contracts with our vendors.

Our group purchasing organization customers make purchases, and receive shipments, directly from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.

Some customer contracts require that a portion of our administrative fees be contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until we receive customer acceptance on the achievement of those contractual performance targets. Prior to receiving customer acceptance of performance targets, we record contingent administrative fees as deferred revenue on our consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees.

Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customer’s purchases from our vendors. Our total net revenue on our Consolidated Statements of Operations is shown net of the revenue share obligation.

—

Other service fees. The following items are included as “Other service fees” in our Condensed Consolidated Statement of Operations:

—

Consulting fees. We consult with our customers regarding the costs and utilization of medical devices and physician preference items (“PPI”) and the efficiency and quality of their key clinical service lines. Our consulting projects are typically fixed fee projects with an average duration of six to nine months, and the related revenues are earned as services are rendered. We generate revenue from consulting contracts that also include performance targets. The performance targets generally relate to committed financial improvement to our customers from the use and implementation of initiatives that result from our consulting services. Performance targets are measured as our strategic initiatives are identified and implemented, and the financial improvement can be quantified by the customer. In the event the performance targets are not achieved, we are obligated to refund or reduce a portion of our fees.

—

Subscription fees. We also offer technology-enabled services that provide spend management analytics and data services to improve operational efficiency, reduce supply costs, and increase transparency across spend management processes. We earn fixed subscription fees on a monthly basis for these Company-hosted SaaS-based solutions.

—

Licensed-software fees. We earn license, implementation, maintenance and other software-related service fees for our business intelligence, decision support and other software products. These software revenues are typically recognized ratably over the contract period as these are effectively annual licenses. We have certain SCM contracts that are sold in multiple-element arrangements and include software products. We have considered Rule 5-03 of Regulation S-X for these types of multiple-element arrangements that include software products and determined the amount is below the threshold that would require separate disclosure on our consolidated statement of operations.

Operating Expenses

We classify our operating expenses as follows:

—

Cost of revenue. Cost of revenue primarily consists of the direct labor costs incurred to generate our revenue. Direct labor costs consist primarily of salaries, benefits, and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our customers (indirect labor costs for these personnel are included in general and administrative expenses). As the majority of our services are generated internally, our costs to provide these services are primarily labor-driven. A less significant portion of our cost of revenue consists of costs of third-party products and services and customer reimbursed out-of-pocket costs. Cost of revenue does not include certain expenses relating to hosting our services and providing support and related data center capacity (which is included in general and administrative expenses), and allocated amounts for rent, depreciation, amortization or other indirect operating costs because we do not consider the inclusion of these items in cost of revenue relevant to our business. However, cost of revenue does include the amortization for the cost of software to be sold, leased, or otherwise marketed. As a result of the Broadlane Acquisition and related integration, there may be some re-allocation of expenses primarily between cost of revenue and general and administrative expense resulting from the implementation of our accounting expense allocation policies that could affect period over period and acquisition-affected comparability. In addition, any changes in revenue mix between our RCM and SCM segments, including changes in revenue mix towards SaaS-based revenue and consulting services, may cause significant fluctuations in our cost of revenue and have a favorable or unfavorable impact on operating income.

—

Product development expenses. Product development expenses primarily consist of the salaries, benefits, incentive compensation and share-based compensation expense of the technology professionals who develop, support and maintain our software-related products and services. Product development expenses are net of capitalized software development costs for both internal and external use.

—

Selling and marketing expenses. Selling and marketing expenses consist primarily of costs related to marketing programs (including trade shows and brand messaging), personnel-related expenses for sales and marketing employees (including salaries, benefits, incentive compensation and share-based compensation expense), certain meeting costs and travel-related expenses.

—

General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for administrative employees and indirect time related to operational service-based employees (including salaries, benefits, incentive compensation and share-based compensation expense) and travel-related expenses, occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses.

—

Acquisition and integration-related expenses. Acquisition and integration-related expenses may consist of: (i) costs incurred to complete acquisitions including due diligence, consulting and other related fees; (ii) integration and restructuring-type costs relating to our completed acquisitions; and (iii) acquisition-related fees associated with unsuccessful acquisition attempts.

—

Depreciation. Depreciation expense consists primarily of depreciation of fixed assets and the amortization of software, including capitalized costs of software developed for internal use.

—

Amortization of intangibles. Amortization of intangibles includes the amortization of all identified intangible assets (with the exception of software), primarily resulting from acquisitions.

Results of Operations

Consolidated Tables

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(Unaudited, in thousands)				(Unaudited, in thousands)
			(recast)				(recast)
Net revenue:
Revenue Cycle Management		$ 53,120		$ 55,920		$ 160,607		$ 160,324
Spend and Clinical Resource Management
Gross administrative fees(1)		96,354		43,625		280,478		129,527
Revenue share obligation(1)		(33,719)		(15,742)		(101,446)		(45,090)
Other service fees		27,803		12,049		81,852		39,624

Total Spend and Clinical Resource Management		90,438		39,932		260,884		124,061

Total net revenue		143,558		95,852		421,491		284,385
Operating expenses:
Revenue Cycle Management		51,395		45,429		146,786		134,767
Spend and Clinical Resource Management		71,089		22,317		230,573		79,512

Total segment operating expenses		122,484		67,746		377,359		214,279
Operating income
Revenue Cycle Management		1,725		10,491		13,821		25,557
Spend and Clinical Resource Management		19,349		17,615		30,311		44,549

Total segment operating income		21,074		28,106		44,132		70,106
Corporate expenses(2)		9,341		10,797		25,246		30,654

Operating income		11,733		17,309		18,886		39,452
Other income (expense):
Interest expense		(17,818)		(3,247)		(53,942)		(10,986)
Other income		2,490		84		2,770		286

(Loss) income before income taxes		(3,595)		14,146		(32,286)		28,752
Income tax (benefit) expense		(2,612)		5,685		(12,645)		11,477

Net (loss) income		(983)		8,461		(19,641)		17,275
Reportable segment adjusted EBITDA(3):
Revenue Cycle Management		9,928		18,988		35,649		51,375
Spend and Clinical Resource Management		$ 42,543		$ 20,813		$ 116,048		$ 54,907
Reportable segment adjusted EBITDA margin(4):
Revenue Cycle Management		18.7%		34.0%		22.2%		32.0%
Spend and Clinical Resource Management		47.0%		52.1%		44.5%		44.3%

(1)

These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

(2)

Represents the expenses of corporate office operations.

(3)

Management’s primary metric of segment profit or loss is segment adjusted EBITDA. See Note 11 of the Notes to Condensed Consolidated Financial Statements.

(4)

Reportable segment adjusted EBITDA margin represents each reportable segment’s adjusted EBITDA as a percentage of each segment’s respective net revenue.

Comparison of the Three Months Ended September 30, 2011 and September 30, 2010


	Three Months Ended September 30,
	2011				2010				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management		$ 53,120		37.0%		$ 55,920		58.3%		$ (2,800)		-5.0%
Spend and Clinical Resource Management
Gross administrative fees(1)		96,354		67.1		43,625		45.5		52,729		120.9
Revenue share obligation(1)		(33,719)		(23.5)		(15,742)		(16.4)		(17,977)		114.2
Other service fees		27,803		19.4		12,049		12.6		15,754		130.7

Total Spend and Clinical Resource Management		90,438		63.0		39,932		41.7		50,506		126.5

Total net revenue		$ 143,558		100.0%		$ 95,852		100.0%		$ 47,706		49.8%

(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

Total net revenue. Total net revenue for the three months ended September 30, 2011 was $143.6 million, an increase of approximately $47.7 million, or 49.8%, from total net revenue of $95.9 million for the three months ended September 30, 2010. The increase in total net revenue was comprised of a $50.5 million increase in SCM revenue partially offset by a $2.8 million decrease in RCM revenue.

Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the three months ended September 30, 2011 was $53.1 million, a decrease of $2.8 million, or 5.0%, from net revenue of $55.9 million for the three months ended September 30, 2010. The decrease was primarily attributable to a $4.5 million decrease in revenue from our comprehensive revenue cycle service engagements that did not recur partially offset by a $1.7 million increase in revenue from our revenue cycle technology tools. As we engage new customers, renew with existing customers and complete existing contracts, we will continue to experience fluctuations in our revenue cycle services financial performance as the business is characterized by fewer agreements, which each relate to large amounts of revenue.

Spend and Clinical Resource Management net revenue. Spend and Clinical Resource Management net revenue for the three months ended September 30, 2011 was $90.4 million, an increase of $50.5 million, or 126.5%, from net revenue of $39.9 million for the three months ended September 30, 2010. The increase was the result of an increase in gross administrative fees of $52.7 million, or 120.9%, partially offset by an approximate $18.0 million increase in non-GAAP revenue share obligation, and an increase in other service fees of $15.8 million.

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Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $52.7 million, or 120.9%, as compared to the prior period, due to the inclusion of Broadlane purchase activity and higher purchasing volumes by new and existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies.

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Revenue share obligation. Non-GAAP revenue share obligation increased $18.0 million, or 114.2%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees including administrative fees not subject to a variable revenue share obligation (or the “revenue share ratio”). Our revenue share ratio was 35.0% and 36.1% for the three months ended September 30, 2011 and 2010, respectively. This decrease was attributable to the fluctuation in the mix of larger customers who are entitled to a higher revenue share percentage as compared to other customers with a lower revenue share percentage. We may experience fluctuations in our revenue share ratio in the future because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.

—

Broadlane related revenue. The Broadlane Acquisition accounted for $39.4 million of the net revenue increase during the three months ended September 30, 2011 and was comprised of $27.1 million in net administrative fee revenue and $12.3 million in other service fee revenue. As discussed further below, approximately $0.2 million of estimated net administrative and other service fees associated with the Broadlane Acquisition was excluded from our financial results because of GAAP relating to business combinations.

Given the significant impact of the Broadlane Acquisition on our SCM segment, we believe acquisition-affected measures are useful for the comparison of our period over period net revenue growth. SCM non-GAAP acquisition-affected net revenue for the three months ended September 30, 2011 was $90.6 million, an increase of $6.3 million, or 7.5%, from SCM non-GAAP acquisition-affected net revenue of $84.3 million for the three months ended September 30, 2010. The following table sets forth the reconciliation of SCM non-GAAP acquisition-affected net revenue to GAAP net revenue:


	Three Months Ended September 30,
	2011		2010		Change
	Amount		Amount		Amount		%
	(Unaudited, in thousands)
SCM net revenue		$ 90,438		$ 39,932		$ 50,506		126.5%
Broadlane acquisition-related adjustment(1)		-		44,343		(44,343)		(100.0)
Broadlane purchase accounting revenue adjustment(1)(2)		182		-		182		100.0

Total SCM acquisition-affected net revenue(1)		$ 90,620		$ 84,275		$ 6,345		7.5%

(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

(2) Upon acquiring Broadlane, we made a purchase accounting adjustment that reflects the fair value of administrative fees related to customer purchases that occurred prior to November 16, 2010, but were reported to us subsequent to that. Under our revenue recognition accounting policy, which is in accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases occurring prior to the transaction date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability. The $0.2 million represents the net amount of: (i) $0.3 million in gross administrative and other service fees based on vendor reporting received from July 1, 2011 through September 30, 2011 relating to purchases made prior to the acquisition date; and (ii) a corresponding revenue share obligation of $0.1 million relating to the same period.

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Other service fees. The $15.8 million, or 130.7%, increase in other service fees was primarily related to $15.3 million in increased revenues from medical device consulting and strategic sourcing services (inclusive of Broadlane). The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers coupled with other service fee revenue relating to consulting and sourcing services from the Broadlane Acquisition.

Total Operating Expenses


	Three Months Ended September 30,
	2011				2010				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue		$ 29,528		20.6%		$ 22,697		23.7%		$ 6,831		30.1%
Product development expenses		6,771		4.7		4,666		4.9		2,105		45.1
Selling and marketing expenses		12,853		9.0		8,671		9.0		4,182		48.2
General and administrative expenses		53,196		37.1		29,196		30.5		24,000		82.2
Acquisition and integration-related expenses		3,742		2.6		2,482		2.6		1,260		50.8
Depreciation		5,507		3.8		5,235		5.5		272		5.2
Amortization of intangibles		20,228		14.1		5,596		5.8		14,632		261.5

Total operating expenses		131,825		91.8		78,543		81.9		53,282		67.8
Operating expenses by segment:
Revenue Cycle Management		51,395		35.8		45,429		47.4		5,966		13.1
Spend and Clinical Resource Management		71,089		49.5		22,317		23.3		48,772		218.5

Total segment operating expenses		122,484		85.3		67,746		70.7		54,738		80.8
Corporate expenses		9,341		6.5		10,797		11.3		(1,456)		(13.5)

Total operating expenses		$ 131,825		91.8%		$ 78,543		81.9%		$ 53,282		67.8%

Cost of revenue. Cost of revenue for the three months ended September 30, 2011 was $29.5 million, or 20.6% of total net revenue, an increase of $6.8 million, or 30.1%, from cost of revenue of $22.7 million, or 23.7% of total net revenue, for the three months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our cost of revenue as a percentage of related net revenue was 20.8% for the three months ended September 30, 2011.

The $6.8 million increase primarily consisted of $7.9 million associated with cost of revenue resulting from the Broadlane Acquisition partially offset by a $1.1 million decrease in cost of revenue primarily from the decrease in our revenue cycle services revenue. As described above, we will continue to experience fluctuations in our revenue cycle services financial performance as the business is characterized by fewer agreements, which each relate to large amounts of revenue.

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

Product development expenses. Product development expenses for the three months ended September 30, 2011 were $6.8 million, or 4.7% of total net revenue, an increase of $2.1 million, or 45.1%, from product development expenses of $4.7 million, or 4.9% of total net revenue, for the three months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our product development expenses as a percentage of related net revenue was 5.6% for the three months ended September 30, 2011.

The increase during the three months ended September 30, 2011 was primarily attributable to a $1.6 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees in addition to a $0.4 million increase in professional fees. Our product development capitalization rate for the three months ended September 30, 2011 and 2010, was 54.7% and 47.2%, respectively. The increase in our product development capitalization rate was attributable to an increase in both our product integration efforts in addition to our product development.

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

Selling and marketing expenses. Selling and marketing expenses for the three months ended September 30, 2011 were $12.9 million, or 9.0% of total net revenue, an increase of $4.2 million, or 48.2%, from selling and marketing expenses of $8.7 million, or 9.0% of total net revenue, for the three months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, selling and marketing expenses, as a percentage of related net revenue was 11.1% for the three months ended September 30, 2011. The increase was primarily attributable to a $3.2 million increase in compensation expense (inclusive of performance-based compensation expense) relating to new and existing employees and a $1.0 million increase in other operating infrastructure expense.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2011 were approximately $53.2 million, or 37.1% of total net revenue, an increase of $24.0 million, or 82.2%, from general and administrative expenses of $29.2 million, or 30.5% of total net revenue, for the three months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our general and administrative expenses as a percentage of related net revenue was 40.1% for the three months ended September 30, 2011.

Of the increase, $11.4 million was attributable to the Broadlane Acquisition. The remaining increase was attributable to a $7.2 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees, primarily operational service-based employees; a $1.2 million increase in telecommunications expense; a $1.2 million increase in restructuring charges associated with certain management changes within our RCM segment as described above in “Recent Developments”; a $0.9 million increase in rent expense; an $0.8 million decrease in other operating infrastructure expense; a $0.7 million increase in transportation expense; a $0.3 million increase in legal expense; and a $0.3 million increase in bad debt expense.

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

Acquisition-related expenses. Acquisition and integration-related expenses for the three months ended September 30, 2011 were $3.7 million, or 2.6% of total net revenue, an increase of $1.2 million, from acquisition-related expenses of $2.5 million, for the three months ended September 30, 2010. The increase was attributable to costs relating to our continued integration and restructuring associated with the Broadlane Acquisition, including severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs.

We expect to continue to incur significant costs in future periods to fully integrate Broadlane, including but not limited to costs associated with the alignment of service offerings and the standardization and migration of certain Broadlane operational systems and transactional data sets into our operational systems.

Depreciation. Depreciation expense for the three months ended September 30, 2011 was $5.5 million, or 3.8% of total net revenue, an increase of $0.3 million, or 5.2%, from depreciation of $5.2 million, or 5.5% of total net revenue, for the three months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our depreciation expense as a percentage of related net revenue was 4.4% for the three months ended September 30, 2011. The increase was primarily attributable to depreciation resulting from purchases of property and equipment and to a lesser extent increases to capitalized software development subsequent to September 30, 2010. The increase is partially offset by the change in estimated useful life of internally developed software as described above in “Recent Developments”.

Amortization of intangibles. Amortization of intangibles for the three months ended September 30, 2011 was $20.2 million, or 14.1% of total net revenue, an increase of $14.6 million, or 261.5%, from amortization of intangibles of $5.6 million, or 5.8% of total net revenue, for the three months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our amortization expense as a percentage of related net revenue was 4.6% for the three months ended September 30, 2011.

Excluding the impact of additional amortization expense relating to the Broadlane Acquisition, which amounted to $15.4 million, amortization expense decreased compared to the prior year due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the three months ended September 30, 2011 were $51.4 million, or 35.8% of total net revenue, an increase of $6.0 million, or 13.1%, from $45.4 million, or 47.4% of total net revenue, for the three months ended September 30, 2010. As a percentage of RCM segment net revenue, RCM segment expenses increased from 81.2% to 96.8% for the three months ended September 30, 2011 and 2010, respectively, for the reasons described below.

RCM operating expenses increased as a result of a $4.4 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees, primarily operational service-based employees; a $1.2 million increase in restructuring charges associated with certain management changes within our RCM segment as described above in “Recent Developments”; a $0.6 million increase in rent expense; a $0.5 million increase in bad debt expense; a $0.4 million increase in professional fees; and a $0.2 million increase in other operating infrastructure expense. The increase was partially offset by a $0.7 million decrease in cost of revenue, exclusive of share-based compensation, in connection with lower direct labor costs associated with lower revenue in our large comprehensive revenue cycle services engagements period over period; and a $0.6 million decrease in amortization of intangibles due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Spend and Clinical Resource Management expenses. Spend and Clinical Resource Management operating expenses for the three months ended September 30, 2011 were $71.1 million, or 49.5% of total net revenue, an increase of $48.8 million, or 218.5%, from $22.3 million, or 23.3% of total net revenue for the three months ended September 30, 2010.

Of the increase, $37.8 million of expenses were attributable to the Broadlane Acquisition. SCM operating expenses also increased as a result of $3.7 million attributable to integration and restructuring-type costs associated with the Broadlane Acquisition, including severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs. The remaining increase was attributable to a $5.5 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees, primarily operational service-based employees; a $0.7 million increase in other operating infrastructure expense; a $0.5 million increase in telecommunications expense; a $0.3 million increase in share-based compensation; and a $0.3 million increase in rent expense.

Excluding the impact of the Broadlane Acquisition, our SCM segment expenses as a percentage of related net revenue were 57.8% for the three months ended September 30, 2011.

Corporate expenses. Corporate expenses for the three months ended September 30, 2011 were $9.3 million, a decrease of $1.5 million, or 13.5%, from $10.8 million for the three months ended September 30, 2010, or 6.5% and 11.3% of total net revenue, respectively. The decrease in corporate expenses was primarily attributable to a $2.5 million decrease in acquisition-related fees and a $0.2 million decrease in share-based compensation expense (for the reason described above in “Recent Developments”). The decrease was partially offset by an $0.8 million increase in other operating infrastructure expense; and a $0.4 million increase in telecommunications expense.

Non-operating Expenses

Interest expense. Interest expense for the three months ended September 30, 2011 was $17.8 million, an increase of $14.6 million from interest expense of $3.2 million for the three months ended September 30, 2010. As of September 30, 2011, we had total indebtedness of $905.2 million (excluding the $120.3 million deferred purchase consideration) compared to $173.5 million as of September 30, 2010. The increase in interest expense is attributable to the increase in our indebtedness period over period associated with the funding of the Broadlane Acquisition.

The increase in our indebtedness will continue to cause a significant increase in our interest expense in future periods as compared to prior periods.

Other income. Other income for the three months ended September 30, 2011 was $2.5 million, an increase of $2.4 million from other income of $0.1 million for the three months ended September 30, 2010. The increase in other income was primarily attributable to a $2.3 million insurance settlement received during the period. Refer to Note 7 in the Notes to Condensed Consolidated Financial Statements for additional details.

Income tax (benefit) expense. Income tax benefit for the three months ended September 30, 2011, was $2.6 million, a decrease of $8.3 million from an income tax expense of $5.7 million for the three months ended September 30, 2010. The income tax benefit recorded during the three months ended September 30, 2011, and income tax expense recorded during the three months ended September 30, 2010, reflected an effective tax rate of 72.7% and 40.2%, respectively. The increase in our effective tax rate was primarily attributable to the true-up of our 2010 income tax provision compared to our 2010 income tax returns. Specifically, final deductibility studies related to certain expense incurred in connection with the Broadlane Acquisition were not completed prior to the filing of our annual report on Form 10-K for the fiscal year ended December 31, 2010.

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

Comparison of the Nine Months Ended September 30, 2011 and September 30, 2010


	Nine Months Ended September 30,
	2011				2010				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Net revenue:
Revenue Cycle Management		$ 160,607		38.1%		$ 160,324		56.4%		$ 283		0.2%
Spend and Clinical Resource Management
Gross administrative fees(1)		280,478		66.5		129,527		45.5		150,951		116.5
Revenue share obligation(1)		(101,446)		(24.1)		(45,090)		(15.9)		(56,356)		125.0
Other service fees		81,852		19.4		39,624		13.9		42,228		106.6

Total Spend and Clinical Resource Management		260,884		61.9		124,061		43.6		136,823		110.3

Total net revenue		$ 421,491		100.0%		$ 284,385		100.0%		$ 137,106		48.2%

(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

Total net revenue. Total net revenue for the nine months ended September 30, 2011 was $421.5 million, an increase of $137.1 million, or 48.2%, from total net revenue of $284.4 million for the nine months ended September 30, 2010. The increase in total net revenue was comprised of a $136.8 million increase in SCM revenue and a $0.3 million increase in RCM revenue.

Revenue Cycle Management net revenue. Revenue Cycle Management net revenue for the nine months ended September 30, 2011 was $160.6 million, an increase of $0.3 million, or 0.2%, from net revenue of $160.3 million for the nine months ended September 30, 2010. The increase was attributable to a $5.1 million increase in our revenue cycle technology tools partially offset by a $4.8 million decrease in revenue from our revenue cycle services. As we engage new customers, renew with existing customers and complete existing contracts, we may experience certain fluctuations in our revenue cycle service financial performance as the business is characterized by fewer agreements, which each relate to large amounts of revenue.

Spend and Clinical Resource Management net revenue. Spend and Clinical Resource Management net revenue for the nine months ended September 30, 2011 was $260.9 million, an increase of $136.8 million, or 110.3%, from net revenue of $124.1 million for the nine months ended September 30, 2010. The increase was the result of an increase in gross administrative fees of $151.0 million, or 116.5%, partially offset by a $56.4 million increase in non-GAAP revenue share obligation, and an increase in other service fees of $42.2 million.

—

Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $151.0 million, or 116.5%, as compared to the prior period, due to the inclusion of Broadlane purchase activity and higher purchasing volumes by new and existing customers under our group purchasing organization contracts with our manufacturer and distributor vendors as well as an increase in the average administrative fee percentage realized from our manufacturer and distributor contracts. We may have fluctuations in our non-GAAP gross administrative fee revenue in future periods as the timing of vendor reporting and customer acknowledgement of achieved performance targets varies.

—

Revenue share obligation. Non-GAAP revenue share obligation increased $56.4 million, or 125.0%, as compared to the prior period. We analyze the impact of our non-GAAP revenue share obligation on our results of operations by calculating the ratio of non-GAAP revenue share obligation to non-GAAP gross administrative fees including administrative fees not subject to a variable revenue share obligation (or the “revenue share ratio”). Our revenue share ratio was 36.2% and 34.8% for the nine months ended September 30, 2011 and 2010, respectively. This increase was primarily attributable to an increase in the mix of larger customers who are entitled to a higher revenue share percentage due to increased purchasing volume. We may experience fluctuations in our revenue share ratio in the future because of the timing of vendor reporting and the timing of revenue recognition based on performance target achievement for certain customers.

—

Broadlane related revenue. The Broadlane Acquisition accounted for $117.9 million of the net revenue increase during the nine months ended September 30, 2011 and was comprised of $83.2 million in net administrative fee revenue and $34.7 million in other service fee revenue. As discussed further below, approximately $6.2 million of estimated net administrative and other service fees associated with the Broadlane Acquisition was excluded from our financial results because of GAAP relating to business combinations.

Given the significant impact of the Broadlane Acquisition on our SCM segment, we believe acquisition-affected measures are useful for the comparison of our period over period net revenue growth. SCM non-GAAP acquisition-affected net revenue for the nine months ended September 30, 2011 was $267.1 million, an increase of $12.4 million, or 4.9%, from SCM non-GAAP acquisition-affected net revenue of $254.7 million for the nine months ended September 30, 2010. The following table sets forth the reconciliation of SCM non-GAAP acquisition-affected net revenue to GAAP net revenue:


	Nine Months Ended September 30,
	2011		2010		Change
	Amount		Amount		Amount		%
	(Unaudited, in thousands)
SCM net revenue		$ 260,884		$ 124,061		$ 136,823		110.3%
Broadlane acquisition-related adjustment(1)		-		130,646		(130,646)		(100.0)
Broadlane purchase accounting revenue adjustment(1)(2)		6,245		-		6,245		100.0

Total SCM acquisition-affected net revenue(1)		$ 267,129		$ 254,707		$ 12,422		4.9%

(1) These are non-GAAP measures. See “Use of Non-GAAP Financial Measures” section for additional information.

(2) Upon acquiring Broadlane, we made a purchase accounting adjustment that reflects the fair value of administrative fees related to customer purchases that occurred prior to November 16, 2010, but were reported to us subsequent to that. Under our revenue recognition accounting policy, which is in accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases occurring prior to the transaction date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability. The $6.2 million represents the net amount of: (i) approximately $11.0 million in gross administrative and other service fees based on vendor reporting received from January 1, 2011 through September 30, 2011 relating to purchases made prior to the acquisition date; and (ii) a corresponding revenue share obligation of $4.8 million relating to the same period.

—

Other service fees. The $42.2 million, or 106.6%, increase in other service fees was primarily related to $44.6 million in higher revenues from medical device consulting and strategic sourcing services (inclusive of Broadlane). The growth in supply chain consulting was mainly due to an increased number of engagements from new and existing customers coupled with other service fee revenue relating to consulting and sourcing services from the Broadlane Acquisition. The increase was partially offset by a $2.4 million decrease in revenue relating to our DSS business primarily due to a scheduled and planned step down in license fees from a large decision support customer. In addition, we recorded $5.0 million in revenue associated with our annual customer and vendor meeting for the nine months ended September 30, 2011 compared to $3.5 million for the nine months ended September 30, 2010.

Total Operating Expenses


	Nine Months Ended September 30,
	2011				2010				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue		$ 90,571		21.5%		$ 67,176		23.6%		$ 23,395		34.8%
Product development expenses		19,646		4.7		14,859		5.2		4,787		32.2
Selling and marketing expenses		43,454		10.3		35,348		12.4		8,106		22.9
General and administrative expenses		149,107		35.4		91,425		32.1		57,682		63.1
Acquisition and integration-related expenses		22,713		5.4		4,351		1.5		18,362		422.0
Depreciation		16,414		3.9		14,068		4.9		2,346		16.7
Amortization of intangibles		60,700		14.4		17,706		6.2		42,994		242.8

Total operating expenses		402,605		95.5		244,933		86.1		157,672		64.4

Operating expenses by segment:
Revenue Cycle Management		146,786		34.8		134,767		47.4		12,019		8.9
Spend and Clinical Resource Management		230,573		54.7		79,512		28.0		151,061		190.0


Total segment operating expenses		377,359		89.5		214,279		75.3		163,080		76.1
Corporate expenses		25,246		6.0		30,654		10.8		(5,408)		(17.6)


Total operating expenses		$ 402,605		95.5%		$ 244,933		86.1%		$ 157,672		64.4%

Cost of revenue. Cost of revenue for the nine months ended September 30, 2011 was $90.6 million, or 21.5% of total net revenue, an increase of approximately $23.4 million, or 34.8%, from cost of revenue of $67.2 million, or 23.6% of total net revenue, for the nine months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our cost of revenue as a percentage of related net revenue was 21.1% for the nine months ended September 30, 2011.

The $23.4 million increase primarily consisted of $26.5 million associated with cost of revenue resulting from the Broadlane Acquisition partially offset by a $2.3 million decrease in cost of revenue in our RCM segment from a reduction in direct labor costs; and a $0.8 million decrease in share-based compensation (for the reason described in “Recent Developments”).

Product development expenses. Product development expenses for the nine months ended September 30, 2011 were $19.6 million, or 4.7% of total net revenue, an increase of $4.8 million, or 32.2%, from product development expenses of $14.8 million, or 5.2% of total net revenue, for the nine months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our product development expenses as a percentage of related net revenue was 5.5% for the nine months ended September 30, 2011.

The increase during the nine months ended September 30, 2011 was attributable to a $4.3 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees; a $0.4 million increase in professional fees; and a $0.3 million increase in operating infrastructure expense. The increase was partially offset by a $0.3 million decrease in share-based compensation (for the reason described in “Recent Developments”). Our product development capitalization rate for the nine months ended September 30, 2011 and 2010, was 49.0% and 44.5%, respectively. The increase in our product development capitalization rate was attributable to an increase in both our product integration efforts in addition to our product development.

Selling and marketing expenses. Selling and marketing expenses for the nine months ended September 30, 2011 were $43.4 million, or 10.3% of total net revenue, an increase of $8.1 million, or 22.9%, from selling and marketing expenses of $35.3 million, or 12.4% of total net revenue, for the nine months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, selling and marketing expenses, as a percentage of related net revenue was 13.0% for the nine months ended September 30, 2011.

The increase was primarily attributable to a $5.6 million increase in compensation expense (inclusive of performance-based compensation expense) relating to new and existing employees; a $2.2 million increase in expenses associated with our annual customer and vendor meeting held during the quarter; a $0.6 million increase in transportation expense; a $0.5 million increase in meetings expense; a $0.4 million increase in advertising expense; and a $0.4 million increase in other infrastructure expense. The increase was partially offset by a $1.6 million decrease in share-based compensation expense (for the reason described under “Recent Developments”). Total expenses related to our annual customer and vendor meeting amounted to $7.0 million and $4.7 million for the nine months ended September 30, 2011 and 2010, respectively.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2011 were $149.1 million, or 35.4% of total net revenue, an increase of $57.7 million, or 63.1%, from general and administrative expenses of $91.4 million, or 32.1% of total net revenue, for the nine months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our general and administrative expenses as a percentage of related net revenue was 38.1% for the nine months ended September 30, 2011.

Of the increase, $33.5 million was attributable to the Broadlane Acquisition. The remaining increase was attributable to a $16.8 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees, primarily operational service-based employees; a $2.5 million increase in telecommunications expense; a $2.5 million increase in other operating infrastructure expense; a $2.1 million increase in rent expense; a $1.1 million increase in restructuring charges associated with certain management changes within our RCM segment as described above in “Recent Developments”; a $1.1 million increase in transportation expense; a $0.6 million increase in legal expenses; and a $0.4 million increase in professional fees. The increase was partially offset by a $3.0 million decrease in share-based compensation expense (for the reason described above in “Recent Developments”).

Acquisition-related expenses. Acquisition and integration-related expenses for the nine months ended September 30, 2011 were $22.7 million, or 5.4% of total net revenue, an increase of $18.4 million, from acquisition-related expenses of $4.3 million, for the nine months ended September 30, 2010. The increase was attributable to costs relating to our continued integration and restructuring associated with the Broadlane Acquisition, including severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs.

Depreciation. Depreciation expense for the nine months ended September 30, 2011 was $16.4 million, or 3.9% of total net revenue, an increase of $2.3 million, or 16.7%, from depreciation of $14.1 million, or 4.9% of total net revenue, for the nine months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our depreciation expense as a percentage of related net revenue was 4.3% for the nine months ended September 30, 2011.The increase was primarily attributable to depreciation resulting from purchases of property and equipment and to a lesser extent increases to capitalized software development subsequent to September 30, 2010. The increase is partially offset by the change in estimated useful life of internally developed software.

Amortization of intangibles. Amortization of intangibles for the nine months ended September 30, 2011 was $60.7 million, or 14.4% of total net revenue, an increase of $43.0 million, or 242.8%, from amortization of intangibles of $17.7 million, or 6.2% of total net revenue, for the nine months ended September 30, 2010. Excluding the impact of the Broadlane Acquisition, our amortization expense as a percentage of related net revenue was 4.7% for the nine months ended September 30, 2011.

Excluding the impact of additional amortization expense relating to the Broadlane Acquisition, which amounted to $46.3 million, amortization expense decreased compared to the prior year due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Revenue Cycle Management expenses. Revenue Cycle Management operating expenses for the nine months ended September 30, 2011 were $146.8 million, or 34.8% of total net revenue, an increase of $12.0 million, or 8.9%, from $134.8 million, or 47.4% of total net revenue, for the nine months ended September 30, 2010. As a percentage of RCM segment net revenue, RCM segment expenses increased from 84.1% to 91.4% for the nine months ended September 30, 2011 and 2010, respectively, for the reasons described below.

RCM operating expenses increased as a result of a $13.0 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees, primarily operational service-based employees; a $1.2 million increase in restructuring charges associated with certain management changes within our RCM segment as described above in “Recent Developments”; a $1.1 million increase in rent expense; a $1.0 million increase in telecommunications expense; a $0.9 million increase in bad debt expense; a $0.4 million increase in transportation expense; and a $0.3 million increase in professional fees. The increase was partially offset by a $2.7 million decrease in amortization of intangibles due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization; a $2.2 million decrease in cost of revenue, exclusive of share-based compensation, in connection with lower direct labor costs associated with lower revenue in our large comprehensive revenue cycle services engagements period over period; and a $1.0 million decrease in share-based compensation expense (for the reason described above in “Recent Developments”).

Spend and Clinical Resource Management expenses. Spend and Clinical Resource Management operating expenses for the nine months ended September 30, 2011 were $230.6 million, or 54.7% of total net revenue, an increase of $151.1 million, or 190.0%, from $79.5 million, or 28.0% of total net revenue for the nine months ended September 30, 2010.

Of the increase, $116.7 million of expenses were attributable to the Broadlane Acquisition. SCM operating expenses also increased as a result of $22.6 million attributable to integration and restructuring-type costs associated with the Broadlane Acquisition, including severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs. The remaining increase was attributable to a $7.3 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees, primarily operational service-based employees; a $1.9 million increase in expenses associated with our annual customer and vendor meeting held during the quarter; a $1.7 million increase in cost of revenue; a $1.6 million increase in telecommunications expense; a $0.9 million increase in rent expense; and a $0.9 million increase in other operating infrastructure expense. The increase was offset by a $1.1 million decrease in share-based compensation expense (for the reason described above in “Recent Developments”); a $0.7 million decrease in bad debt expense; and a $0.7 million decrease in the amortization of intangibles as certain of these assets reached the end of their useful life.

Excluding the impact of the Broadlane Acquisition, our SCM segment expenses as a percentage of related net revenue was 63.7% for the nine months ended September 30, 2011.

Corporate expenses. Corporate expenses for the nine months ended September 30, 2011 were $25.2 million, a decrease of $5.4 million, or 17.6%, from $30.6 million for the nine months ended September 30, 2010, or 6.0% and 10.8% of total net revenue, respectively. The decrease in corporate expenses was primarily attributable to a $4.2 million decrease in acquisition-related expenses; and a $3.7 million decrease in share-based compensation expense (for the reason described above in “Recent Developments”). The decrease was partially offset by a $0.7 million increase in legal expense; a $0.7 million increase in other operating infrastructure expense; a $0.6 million increase in compensation expense (inclusive of performance-based compensation expense) to new and existing employees; and a $0.5 million increase in professional fees.

Non-operating Expenses

Interest expense. Interest expense for the nine months ended September 30, 2011 was $53.9 million, an increase of $42.9 million from interest expense of $11.0 million for the nine months ended September 30, 2010. As of September 30, 2011, we had total indebtedness of $905.2 million (excluding the $120.3 million deferred purchase consideration) compared to $173.5 million as of September 30, 2010. The increase in interest expense is attributable to the increase in our indebtedness period over period associated with the funding of the Broadlane Acquisition.

The increase in our indebtedness will cause a significant increase in our interest expense in future periods as compared to prior periods.

Other income. Other income for the nine months ended September 30, 2011 was $2.8 million, an increase of $2.5 million from other income of $0.3 million for the nine months ended September 30, 2010. The increase in other income was primarily attributable to a $2.3 million insurance settlement received during the period. Refer to Note 7 in the Notes to Condensed Consolidated Financial Statements for additional details.

Income tax (benefit) expense. Income tax benefit for the nine months ended September 30, 2011, was $12.6 million, an increase of $24.1 million from an income tax expense of $11.5 million for the nine months ended September 30, 2010. The income tax benefit recorded during the nine months ended September 30, 2011, and income tax expense recorded during the nine months ended September 30, 2010, reflected an effective tax rate of 39.2% and 39.9%, respectively.

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

Critical Accounting Policies

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

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

Goodwill and Intangible Assets

We evaluate goodwill and other intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill or other intangible assets may not be recoverable. The Company considers the following to be important factors that could trigger an impairment review and may result in an impairment charge: significant and sustained underperformance relative to historical or projected future operating results; identification of other impaired assets within a reporting unit; significant and sustained adverse changes in business climate or regulations; significant negative changes in senior management; significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business; significant negative industry or economic trends; and a significant decline in the Company’s stock price for a sustained period.

We conduct our impairment evaluation by performing valuation analyses in accordance with GAAP relating to goodwill and other intangibles. This analysis contains uncertainties because it requires us to make market participant assumptions and to use judgment in estimating industry economic factors and the profitability and growth of future business strategies to determine estimated future cash flows and an appropriate discount rate. When market prices are not available, we estimate the fair value of the reporting unit or asset group using the income approach and/or the market approach. The income approach uses cash flow projections. Inherent in our development of cash flow projections are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth rates, capital expenditures and cost of capital, similar to those a market participant would use to assess fair value. We also make certain assumptions about future economic conditions and other data. Many of the factors used in assessing fair value are outside the control of management, and these assumptions and estimates may change in future periods.

Our estimates of future cash flows used in these valuations could differ from actual results. If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

During 2011, we have experienced a significant decline in our stock price and related market capitalization. If we continue to experience a further decline in our stock price and market capitalization or if we experience unfavorable business trends which could lead to a reduction of expected future cash flows for one or more of our reporting units, we may incur potential impairment charges in future reporting periods.

Liquidity and Capital Resources

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

We believe we currently have adequate cash flow from operations, capital resources, available credit facilities and liquidity to meet our cash flow requirements including the following near term obligations (next 12 months): (i) our working capital needs; (ii) our debt service obligations; (iii) our $120.3 million deferred purchase payment relating to the Broadlane Acquisition due on January 4, 2012; (iv) planned capital expenditures for the remainder of the year; (v) our revenue share obligation and rebate payments; and (vi) estimated federal and state income tax payments.

In connection with the Broadlane Acquisition, we entered into the Credit Agreement with Barclays Bank PLC and JP Morgan Securities LLC. The Credit Agreement consists of a six-year $635.0 million senior secured term loan facility and a five-year $150.0 million senior secured revolving credit facility that contains a letter of credit sub-facility of $25.0 million and a swing line sub-facility of $25.0 million. On March 31, 2011, we entered into the first amendment to the Credit Agreement to redefine the swing line lender as Bank of America, N.A. from Barclays Bank.

Also in connection with the Broadlane Acquisition, we closed the offering of an aggregate principal amount of $325.0 million of senior notes due 2018 (the “Notes”) in a private placement. The Notes are guaranteed on a senior unsecured basis by each of the Company’s existing domestic subsidiaries and each of the Company’s future domestic restricted subsidiaries in each case that guarantees the Company’s obligations under the Credit Agreement. Each of the subsidiary guarantors is 100% owned by the Company; the guarantees by the subsidiary guarantors are full and unconditional; the guarantees by the subsidiary guarantors are joint and several; the Company has no independent assets or operations; and any subsidiaries of the Company other than the subsidiary guarantors are minor. The Notes and the guarantees are senior unsecured obligations of the Company and the subsidiary guarantors, respectively. The Notes were issued pursuant to an indenture dated as of November 16, 2010 (the “Indenture”) among the Company, its subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Pursuant to the Indenture, the Notes will mature on November 15, 2018 and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011.

Our expectation relating to the $120.3 million deferred purchase payment will be to fund the payment by the due date from a combination of our free cash flow generated during the year and drawing upon our existing revolving credit facility to fund the balance. If we do not have enough liquidity to fund the deferred purchase payment with the combination of our free cash flow and revolving credit facility, we can obtain additional funding under our Credit Agreement via incremental loan facilities or an increase in the aggregate commitments under the revolving credit facility. Lastly, we have the option to issue equity to raise cash to fund the deferred purchase payment.

Historically, we have utilized federal net operating loss carryforwards for both regular and Alternative Minimum Tax payment purposes. Consequently, our federal cash tax payments in past reporting periods have been minimal. As a result of tax accounting method changes adopted during the three months ended September 30, 2011 related to the Broadlane Acquisition, we have realized additional net operating losses and certain tax attributes to utilize for 2011. As a result, we expect our cash tax payments to remain low, comparable to previous tax years. However, for tax years 2012 and later, we expect our cash paid for taxes to increase significantly.

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

As of September 30, 2011, we had zero dollars drawn on our revolving credit facility resulting in $149.0 million of availability under our revolving credit facility inclusive of the swing-line (netted for a $1.0 million letter of credit). We may observe fluctuations in cash flows provided by operations from period to period. Certain events may cause us to draw additional amounts under our swing-line or revolving facility and may include the following:

—

changes in working capital due to inconsistent timing of cash receipts and payments for major recurring items such as trade accounts payable, revenue share obligation, incentive compensation, changes in deferred revenue, and other various items;

—

transaction and integration related costs associated with the Broadlane Acquisition;

—

acquisitions; and

—

unforeseeable events or transactions.

We may continue to pursue other acquisitions or investments in the future. We may also increase our capital expenditures consistent with our anticipated growth in infrastructure, software solutions, and personnel, and as we expand our market presence. Cash provided by operating activities may not be sufficient to fund such expenditures. Accordingly, in addition to the use of our available revolving credit facility, we may need to engage in additional equity or debt financings to secure additional funds for such purposes. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters including higher interest costs, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain required financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be limited.

Discussion of Cash Flow

As of September 30, 2011 and December 31, 2010, we had cash and cash equivalents totaling $43.6 million and $46.8 million, respectively.

Operating Activities.

The following table summarizes the cash provided by operating activities for the nine months ended September 30, 2011 and 2010:


	Nine Months Ended September 30,
	2011		2010		Change
	Amount		Amount		Amount		%
	(Unaudited, in millions)

Net (loss) income		$ (19.6)		$ 17.3		$ (36.9)		-213.3%
Non-cash items		71.7		43.9		27.8		63.3
Net changes in working capital		23.6		(14.1)		37.7		267.4


Net cash provided by operations		$ 75.7		$ 47.1		$ 28.6		60.7%

Net (loss) income represents the loss or profitability attained during the periods presented and is inclusive of certain non-cash expenses. These non-cash expenses include depreciation for fixed assets, amortization of intangible assets, stock compensation expense, bad debt expense, deferred income tax expense, excess tax benefit from the exercise of stock options, loss on sale of assets, amortization of debt issuance costs, and non-cash interest expense. Refer to our Condensed Consolidated Statement of Cash Flows for details regarding these non-cash items. The total for these non-cash expenses was $71.7 million and $43.9 million for the nine months ended September 30, 2011 and 2010, respectively. The increase in non-cash expenses for the nine months ended September 30, 2011 compared to September 30, 2010 was primarily attributable to: (i) an increase in depreciation of property and equipment and amortization of intangibles primarily associated with the assets acquired in the Broadlane Acquisition; (ii) an increase in the amortization of debt issuance costs primarily associated with financing the Broadlane Acquisition; and (iii) an increase in noncash interest expense primarily associated with our deferred payment due for the Broadlane Acquisition. The increase was partially offset by: (i) a decrease in deferred income taxes associated with the tax impact of the Broadlane Acquisition; (ii) a decrease in share-based compensation for the reasons described under “Recent Developments”; and (iii) a decrease in our excess tax benefit from the exercise of equity awards. Refer to our Management Discussion and Analysis for more detail.

Working capital is a measure of our liquid assets. Changes in working capital are included in the determination of cash provided by operating activities. For the nine months ended September 30, 2011, the working capital changes resulting in an increase to cash flow from operations of $23.6 million primarily consisted of the following:

Increase to cash flow

—

a decrease in accounts receivable of $4.2 million primarily related to the timing of invoicing and cash collections;

—

a decrease in prepaid expenses and other assets of $2.7 million primarily related to an income tax refund received during the year;

—

a $10.4 million increase in deferred revenue for cash receipts not yet recognized as revenue;

—

an increase in accrued revenue share obligation and rebates of $8.8 million due to the timing of cash payments and customer purchasing volume at our GPO;

—

a $1.5 million increase in accrued payroll and benefits due to payroll cycle timing; and

—

a $0.4 million increase in other accrued expenses due to the timing of various payment obligations.

The working capital changes resulting in increases to cash flow from operations discussed above were partially offset by an increase in other long-term assets of $4.2 million related to the timing of cash payments for our deferred sales expenses and an increase in our deferred implementation costs resulting in a reduction to cash flow.

For the nine months ended September 30, 2010, the working capital changes resulting in a reduction to cash flow from operations of $14.1 million primarily consisted of the following:

Reduction of cash flow

—

an increase in accounts receivable of $8.7 million primarily related to the timing of invoicing and cash collections and our revenue growth;

—

an increase in prepaid expenses and other assets of $6.2 million primarily related to an income tax refund recorded during the year;

—

an increase in other long-term assets of $1.2 million related to the timing of cash payments for our deferred sales expenses and an increase in our deferred implementation costs;

—

an decrease in accrued revenue share obligation and rebates of $6.8 million due to the timing of cash payments and customer purchasing volume at our GPO; and

—

a $6.0 million decrease in accrued payroll and benefits due to payroll cycle timing.

The working capital changes resulting in reductions to the cash flow from operations discussed above were partially offset by the following changes in working capital resulting in increases to cash flow:

Increase to cash flow

—

a $7.7 million increase in deferred revenue for cash receipts not yet recognized as revenue;

—

a $3.7 million working capital increase in trade accounts payable due to the timing of various payment obligations; and

—

a $3.3 million increase in other accrued expenses due to the timing of various payment obligations.

Investing Activities.

Investing activities used $26.4 million of cash for the nine months ended September 30, 2011 which included: $18.8 million for investment in software development; and $7.6 million of capital expenditures.

Investing activities used $24.6 million of cash for the nine months ended September 30, 2010 which included: $11.9 million for investment in software development; $9.5 million of capital expenditures that were primarily related to the growth in our RCM segment; and $3.2 million in acquisitions.

We believe that cash used in investing activities will continue to be materially impacted by continued growth in investments in property and equipment, future acquisitions and capitalized software. Our property, equipment, and software investments consist primarily of SaaS-based technology infrastructure to provide capacity for expansion of our customer base, including computers and related equipment and software purchased or implemented by outside parties. Our software development investments consist primarily of company-managed design, development, testing and deployment of new application functionality.

Financing Activities.

Financing activities used $52.4 million of cash for the nine months ended September 30, 2011. We made payments on our credit facility of $54.7 million in addition to payments of $0.5 million that were made on our finance obligation described below in “Off-Balance Sheet Arrangements and Commitments”. In addition, we repurchased approximately 75,000 shares of our common stock under our share repurchase program totaling $0.8 million. This was offset by $1.8 million we received from the issuance of common stock and $1.8 million from the excess tax benefit for the exercise of stock options. Our credit agreement requires an assessment of excess cash flow beginning December 31, 2011. We will be required to make any necessary cash flow payment within the first quarter of 2012.

Financing activities used $28.0 million of cash for the nine months ended September 30, 2010. We made payments on our credit facility of $41.6 million in addition to payments of $0.5 million that were made on our finance obligation. This was offset by $9.0 million we received from the issuance of common stock and $5.1 million from the excess tax benefit for the exercise of stock options.

Off-Balance Sheet Arrangements and Commitments

We have provided a $1.0 million letter of credit to guarantee our performance under the terms of a ten-year lease agreement. The letter of credit is associated with the capital lease of a building located in Cape Girardeau, Missouri under a finance obligation. We do not believe that this letter of credit will be drawn.

We lease office space and equipment under operating leases. Some of these operating leases include rent escalations, rent holidays, and rent concessions and incentives. However, we recognize lease expense on a straight-line basis over the minimum lease term utilizing total future minimum lease payments. Our consolidated future minimum rental payments under our operating leases with initial or remaining non-cancelable lease terms of at least one year are as follows as of September 30, 2011 for each respective year (Unaudited, in thousands):


	Amount
2011		$ 4,418	(1)
2012		12,698
2013		9,212
2014		8,196
2015		6,380
Thereafter		18,436

Total future minimum rental payments		$ 59,340

(1) Represents the remaining rental payments due during the fiscal year ending December 31, 2011.

As of September 30, 2011, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future significant effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Use of Non-GAAP Financial Measures

In order to provide investors with greater insight, promote transparency and allow for a more comprehensive understanding of the information used by management and the Board in its financial and operational decision-making, we supplement our Condensed Consolidated Financial Statements presented on a GAAP basis in this Quarterly Report on Form 10-Q with the following non-GAAP financial measures: gross fees, gross administrative fees, revenue share obligation, EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, SCM acquisition-affected net revenue, adjusted net income and adjusted diluted earnings per share.

These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We compensate for such limitations by relying primarily on our GAAP results and using non-GAAP financial measures only supplementally. We provide reconciliations of non-GAAP measures to their most directly comparable GAAP measures, where possible. Investors are encouraged to carefully review those reconciliations. In addition, because these non-GAAP measures are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures, as defined by us, may differ from and may not be comparable to similarly titled measures used by other companies.

Gross Fees, Gross Administrative Fees and Revenue Share Obligation. Gross fees include all gross administrative fees we receive pursuant to our vendor contracts and all other fees we receive from customers. Our revenue share obligation represents the portion of the gross administrative fees we are contractually obligated to share with certain of our GPO customers. Total net revenue (a GAAP measure) reflects our gross fees net of our revenue share obligation. These non-GAAP measures assist management and the Board and may be helpful to investors in analyzing our growth in the SCM segment given that administrative fees constitute a material portion of our revenue and are paid to us by over 1,150 vendors contracted by our GPO, and that our revenue share obligation constitutes a significant outlay to certain of our GPO customers. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measure can be found in the “Overview” and “Results of Operations” section of Item 2.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin. We define: (i) EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization; (ii) Adjusted EBITDA, as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization and other non-recurring, non-cash or non-operating items; and (iii) Adjusted EBITDA margin, as Adjusted EBITDA as a percentage of net revenue. We use EBITDA, Adjusted EBITDA and Adjusted EBITDA margin to facilitate a comparison of our operating performance on a consistent basis from period to period and provide for a more complete understanding of factors and trends affecting our business than GAAP measures alone. These measures assist management and the Board and may be useful to investors in comparing our operating performance consistently over time as it removes the impact of our capital structure (primarily interest charges and amortization of debt issuance costs), asset base (primarily depreciation and amortization) and items outside the control of the management team (taxes), as well as other non-cash (purchase accounting adjustments, and imputed rental income) and non-recurring items, from our operational results. Adjusted EBITDA also removes the impact of non-cash share-based compensation expense.

Our Board and management also use these measures as: (i) one of the primary methods for planning and forecasting overall expectations and for evaluating, on at least a quarterly and annual basis, actual results against such expectations; and, (ii) as a performance evaluation metric in determining achievement of certain executive incentive compensation programs, as well as for incentive compensation plans for employees generally.

Additionally, research analysts, investment bankers and lenders may use these measures to assess our operating performance. For example, our credit agreement requires delivery of compliance reports certifying compliance with financial covenants certain of which are, in part, based on an adjusted EBITDA measurement that is similar to the Adjusted EBITDA measurement reviewed by our management and our Board. The principal difference is that the measurement of adjusted EBITDA considered by our lenders under our credit agreement allows for certain adjustments (e.g., inclusion of interest income, franchise taxes and other non-cash expenses, offset by the deduction of our capitalized lease payments for one of our office leases) that result in a higher adjusted EBITDA than the Adjusted EBITDA measure reviewed by our Board and management and disclosed in this Quarterly Report on Form 10-Q. Additionally, our credit agreement contains provisions that utilize other measures, such as excess cash flow, to measure liquidity.

EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Despite the advantages regarding the use and analysis of these measures as mentioned above, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin, as disclosed in this Quarterly Report on Form 10-Q, have limitations as analytical tools, and you should not consider these measures in isolation, or as a substitute for analysis of our results as reported under GAAP; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use. Some of the limitations of EBITDA are:

—

EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

—

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

—

EBITDA does not reflect the interest expense, or the cash requirements to service interest or principal payments under our credit agreement;

—

EBITDA does not reflect income tax payments we are required to make; and

—

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements.

Adjusted EBITDA has all the inherent limitations of EBITDA. To properly and prudently evaluate our business, we encourage you to review the GAAP financial statements included elsewhere in this Quarterly Report on Form 10-Q, and not rely on any single financial measure to evaluate our business. We also strongly urge you to review the reconciliation of net income to Adjusted EBITDA in this section, along with our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to net income, a comparable GAAP-based measure. All of the items included in the reconciliation from net income to EBITDA to Adjusted EBITDA are either: (i) non-cash items (e.g., depreciation and amortization, impairment of intangibles and share-based compensation expense) or (ii) items that management does not consider in assessing our on-going operating performance (e.g., income taxes, interest expense and expenses related to the cancellation of an interest rate swap). In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other non-recurring items, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.

The following table reconciles net income to Adjusted EBITDA for the three and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30,				Nine Months Ended September 30,
Adjusted EBITDA Reconciliation	2011		2010		2011		2010
	(Unaudited, in thousands)
Net (loss) income		$ (983)		$ 8,461		$ (19,641)		$ 17,275
Depreciation		5,507		5,235		16,414		14,068
Depreciation (included in cost of revenue)		306		726		815		2,167
Amortization of intangibles		20,228		5,596		60,700		17,706
Amortization of intangibles (included in cost of revenue)		139		139		417		509
Interest expense, net of interest income(1)		17,818		3,201		53,928		10,886
Income tax (benefit) expense		(2,612)		5,685		(12,645)		11,477

EBITDA		40,403		29,043		99,988		74,088
Share-based compensation expense(2)		2,123		2,142		2,945		8,653
RCM management restructuring expenses(3)		1,204		-		1,204		-
Rental income from capitalizing building lease(4)		(109)		(110)		(327)		(329)
Purchase accounting adjustments(5)		182		-		6,245		-
Acquisition and integration related expenses(6)		3,742		2,482		22,713		4,351
Insurance settlement(7)		(2,340)		-		(2,340)		-

Adjusted EBITDA		$ 45,205		$ 33,557		$ 130,428		$ 86,763

(1)

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

(2)

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

(3)

Amount represents restructuring costs consisting of severance that resulted from certain management changes within our RCM segment.

(4)

The imputed rental income recognized with respect to a capitalized building lease is deducted from net income (loss) due to its non-cash nature. We believe this income is not a useful measure of continuing operating performance. See our Consolidated Financial Statements filed in our Annual Report on Form 10-K for the year ended December 31, 2010 for further discussion of this rental income.

(5)

Upon acquiring Broadlane on November 16, 2010, we made certain purchase accounting adjustments that reflect the fair value of administrative fees related to customer purchases that occurred prior to November 16, 2010 but were reported to us subsequent to that. Under our revenue recognition accounting policy, which is in accordance with GAAP, these administrative fees would be ordinarily recorded as revenue when reported to us; however, the acquisition method of accounting requires us to estimate the amount of purchases occurring prior to the transaction date and to record the fair value of the administrative fees to be received from those purchases as an account receivable (as opposed to recognizing revenue when these transactions are reported to us) and record any corresponding revenue share obligation as a liability.

For the three months ended September 30, 2011, the $0.2 million represents the net amount of: (i) $0.3 million in gross administrative fees and other service fees primarily based on vendor reporting received from July 1, 2011 through September 30, 2011 relating to purchases made prior to the acquisition date, and (ii) a corresponding revenue share obligation of $0.1 million relating to the same period.

For the nine months ended September 30, 2011, the $6.2 million represents the net amount of: (i) approximately $11.0 million in gross administrative fees and other service fees primarily based on vendor reporting received from January 1, 2011 through September 30, 2011 relating to purchases made prior to the acquisition date, and (ii) a corresponding revenue share obligation of $4.8 million relating to the same period.

(6)

Amount was attributable to integration and restructuring-type costs associated with the Broadlane Acquisition, such as severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs. We expect to continue to incur significant costs in future periods to fully integrate Broadlane, including but not limited to costs associated with the alignment of service offerings and the standardization and migration of certain Broadlane operational systems and transactional data sets into our operational systems.

(7)

Amount was attributable to a $2.3 million insurance settlement received during the period. Refer to Note 7 in the Notes to Condensed Consolidated Financial Statements for additional details.

Spend and Clinical Resource Management (“SCM”) Acquisition-Affected Net Revenue. SCM acquisition-affected net revenue includes the revenue of Broadlane prior to the Company’s actual ownership. The Broadlane Acquisition was consummated on November 16, 2010. This measure assumes the acquisition of Broadlane occurred on January 1, 2010. Broadlane acquisition-related adjustment includes the historical results of Broadlane’s operations from January 1, 2010 through September 30, 2010, inclusive of certain purchase accounting adjustments. Broadlane purchase accounting revenue adjustment reflects an estimated reduction of net administrative fee revenue. Under the Company’s revenue recognition policies, administrative fees are recorded as revenue when reported to the Company by vendors. GAAP relating to business combinations requires that the Company estimate the amount of customer supply purchases (the driver of administrative fee revenue) occurring prior to the acquisition closing date and to record the fair value of the administrative fees (the asset) to be received from those purchases as an account receivable and any corresponding revenue share obligation as a liability. As vendor reports are received and cash is collected, the Company will not recognize revenue for this acquisition-related purchase accounting revenue adjustment. SCM acquisition-affected net revenue is used by management and the Board to better understand the extent of growth of the Spend and Clinical Resource Management segment. Given the significant impact that this transaction had on the Company during the fiscal year ended December 31, 2010 and will have in future periods, we believe this measure may be useful and meaningful to investors in their analysis of such growth. SCM acquisition-affected net revenue is presented for illustrative and informational purposes only and is not intended to represent or be indicative of what our results of operations would have been if this transaction had occurred at the beginning of 2010. This measure also should not be considered representative of our future results of operations. Reconciliations of SCM acquisition-affected net revenue to its most directly comparable GAAP measure can be found in the “Results of Operations” section of Item 2.

Adjusted Net Income and Diluted Adjusted Earnings Per Share. The Company defines: i) adjusted net income as net income excluding non-cash acquisition related intangible amortization, nonrecurring expense items on a tax-adjusted basis and non-cash tax-adjusted shared-based compensation expense; and ii) diluted adjusted EPS (which we formerly referred to as non-GAAP diluted cash EPS) as diluted earnings per share excluding non-cash acquisition-related intangible amortization, nonrecurring expense items on a tax-adjusted basis and non-cash tax-adjusted shared-based compensation expense. Adjusted net income and diluted adjusted EPS are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Diluted adjusted EPS growth is used by the Company as the financial performance metric that determines whether certain equity awards granted pursuant to the Company’s Long-Term Performance Incentive Plan will vest. Use of these measures allows management and the Board to analyze the Company’s operating performance on a consistent basis by removing the impact of certain non-cash and non-recurring items from our operations and reward organic growth and accretive business transactions. As a significant portion of senior management’s incentive based compensation is based on the achievement of certain diluted adjusted EPS growth over time, investors may find such information useful; however, as non-GAAP financial measures, adjusted net income and diluted adjusted EPS are not the sole measures of the Company’s financial performance and may not be the best measures for investors to gauge such performance.


	Three Months Ended September 30,				Nine Months Ended September 30,
Per share data	2011		2010		2011		2010
	(Unaudited)
EPS - diluted		$ (0.02)		$ 0.14		$ (0.34)		$ 0.29

Pre-tax non-cash, aquisition-related intangible amortization		0.35		0.10		1.06		0.31

Pre-tax non-cash, share-based compensation(1)		0.04		0.04		0.06		0.15

Pre-tax acquisition and integration related expenses(2)		0.07		0.04		0.40		0.07

Pre-tax RCM management restructuring expenses(3)		0.02		-		0.02		-

Pre-tax purchase accounting adjustment(4)		-		-		0.11		-

Pre-tax deferred payment interest expense accretion(5)		0.01		-		0.03		-

Pre-tax, acquisition related depreciation(6)		0.01		-		0.03		-

Pre-tax, insurance settlement(7)		(0.04)		-		(0.04)		- ��


Tax effect on pre-tax adjustments(8)		(0.18)		(0.07)		(0.67)		(0.21)


Non-GAAP adjusted EPS - diluted		$ 0.26		$ 0.25		$ 0.66		$ 0.61


Weighted average shares - diluted (in 000s)(9)		57,410		59,786		57,334		59,340


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
	(Unaudited, in thousands)
Net (loss) income		$ (983)		$ 8,461		$ (19,641)		$ 17,275

Pre-tax non-cash, aquisition-related intangible amortization		20,367		5,735		61,117		18,215

Pre-tax non-cash, share-based compensation(1)		2,123		2,142		2,945		8,653

Pre-tax acquisition and integration related expenses(2)		3,742		2,482		22,713		4,351

Pre-tax RCM management restructuring expenses(3)		1,204		-		1,204		-

Pre-tax purchase accounting adjustment(4)		182		-		6,245		-

Pre-tax deferred payment interest expense accretion(5)		749		-		2,403		-

Pre-tax, acquisition related depreciation(6)		545		-		1,636		-

Pre-tax, insurance settlement(7)		(2,340)		-		(2,340)		-


Tax effect on pre-tax adjustments(8)		(10,629)		(4,163)		(38,369)		(12,463)


Non-GAAP adjusted net (loss) income		$ 14,960		$ 14,657		$ 37,913		$ 36,031

(1)

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

(2)

Represents the amount and the per share impact, on a pre-tax basis, of certain costs incurred specific to the integration of Broadlane, inclusive of personnel and operating infrastructure costs. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations.

(3)

Represents the amount and the per share impact, on a pre-tax basis, of restructuring costs consisting of severance that resulted from certain management changes within our RCM segment.

(4)

Represents the amount and the per share impact, on a pre-tax basis, of certain purchase accounting adjustments associated with the Broadlane Acquisition that reflects the fair value of gross administrative fee receivables and other service fees less revenue share obligation primarily related to customer purchases that were reported to us during the three and nine months ended September 30, 2011.

(5)

Represents the amount and the per share impact, on a pre-tax basis, of interest expense on the accretion of the $120.3 million deferred payment associated with the Broadlane Acquisition. We believe such expenses are infrequent in nature and are not indicative of continuing operating performance.

(6)

Represents the amount and the per share impact, on a pre-tax basis, of depreciation expense associated with software acquired in connection with the Broadlane Acquisition. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations.

(7)

Represents the amount and the per share impact, on a pre-tax basis, of a $2.3 million insurance settlement received during the period. Refer to Note 7 in the Notes to Condensed Consolidated Financial Statements for additional details.

(8)

This amount reflects the tax impact on the adjustments used to derive Non-GAAP diluted adjusted EPS. The Company generally utilizes its effective tax rate for each respective period to calculate the tax effect of each adjustment. Given the impact of the Broadlane Acquisition on the Company’s 2011 actual effective tax rate, the Company used a tax rate of 40.0% for the three and nine months ended September 30, 2011. The effective tax rate for the three months ended September 30, 2011 and 2010 was 72.7% and 40.2%, respectively. The effective tax rate for the nine months ended September 30, 2011 and 2010 was 39.2% and 39.9%, respectively.

(9)

Given the Company’s net loss for the three and nine months ended September 30, 2011, basic and diluted weighted average shares are the same.

New Pronouncements

Comprehensive Income

Fair Value

Business Combinations

Intangibles — Goodwill and Other

Revenue Recognition

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange risk. Certain of our contracts are denominated in Canadian dollars. As our Canadian sales have not historically been significant to our operations, we do not believe that changes in the Canadian dollar relative to the U.S. dollar will have a significant impact on our financial condition, results of operations or cash flows. On August 2, 2007, we entered into a series of forward contracts to fix the Canadian dollar-to-U.S. dollar exchange rates on a Canadian customer contract. The forward contracts expired on April 30, 2010. We have one other Canadian dollar contract that we have not elected to hedge. We currently do not transact any other business in any currency other than the U.S. dollar. As we continue to grow our operations, we may increase the amount of our sales to foreign customers. Although we do not expect foreign currency exchange risk to have a significant impact on our future operations, we will assess the risk on a case-specific basis to determine whether any forward currency hedge instrument would be warranted.

Interest rate risk. We had outstanding borrowings on our term loan of $905.2 million as of September 30, 2011. The term loan bears interest at LIBOR, subject to a floor of 1.5% plus an applicable margin. We also had outstanding an aggregate principal amount of our Notes of $325.0 million as of September 30, 2011, which bears interest at 8% per annum.

Due to the additional indebtedness we incurred under the Credit Agreement and the Notes we issued to help finance the Broadlane Acquisition, we expect to incur a significant increase in our interest expense in future periods. To the extent we do not hedge it, we expect our interest rate risk to rise accordingly. As required by our Credit Agreement, we entered into certain derivative instruments during May 2011 to convert a portion of our variable rate term loan facility to a fixed rate debt. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for additional information.

A hypothetical 100 basis point increase in LIBOR (without regard to the LIBOR floor), which would represent potential interest rate change exposure on our outstanding term loan, would have resulted in a $4.3 million increase to our interest expense for the nine months ended September 30, 2011.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, management recognizes that any control and procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship regarding the potential utilization of certain controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our chief executive officer and chief financial officer, evaluated the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

In November 2010, we completed our acquisition of Broadlane. In accordance with our integration efforts, we plan to incorporate Broadlane’s operations into our internal control over financial reporting program in the future within the time period provided by applicable SEC rules and regulations. There have been no changes in our internal control over financial reporting for the three months ended September 30, 2011 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in the risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2011.

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

Stock repurchases during the three months ended September 30, 2011 were as follows:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
	(In thousands, except per share data)
August 23-31, 2011(1)		54	$	10.69		54	$	24,423
September 1-30, 2011		41	$	9.85		41	$	24,022

Total		95	$	10.33		95

(1)	On August 23, 2011, we announced that our Board of Directors had authorized the repurchase of up to $25,000 of our common stock. The share repurchase program expires the earlier of twelve months from the authorization by our Board of Directors or the repurchase of $25,000 of our common stock.

For additional information regarding our stock repurchase program, see Note 8 of Notes to Condensed Consolidated Financial Statements.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. [Removed and Reserved]

Item 5. Other Information

Not applicable

Item 6. Exhibits


Exhibit No.		Description of Exhibit
10.1		Separation and Release Agreement, dated as of September 6, 2011, between MedAssets, Inc., MedAssets Services, LLC, and Mr. L. Neil Hunn. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2011)
31.1*		Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer
31.2*		Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer
32.1*		Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer and Chief Financial Officer
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

Signatures

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


Signature	Title	Date
/s/ JOHN A. BARDIS	Chairman of the Board of Directors and Chief Executive Officer	November 7, 2011
Name: John A. Bardis	(Principal Executive Officer)
/s/ CHARLES O. GARNER	Chief Financial Officer	November 7, 2011
Name: Charles O. Garner	(Principal Financial Officer)

EXHIBIT INDEX


Exhibit No.		Description of Exhibit
10.1		Separation and Release Agreement, dated as of September 6, 2011, between MedAssets, Inc., MedAssets Services, LLC, and Mr. L. Neil Hunn. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 7, 2011)
31.1*		Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer
31.2*		Sarbanes-Oxley Act of 2002, Section 302 Certification for Chief Financial Officer
32.1*		Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer and Chief Financial Officer
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Percentage

2016 and thereafter