MedAssets (MDAS) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2013

OR

¨     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      x  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        x   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  x	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    x

As of October 24, 2013, the registrant had 61,868,839 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, 2013 and December 31, 2012		3
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012		4
Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2013		5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		38
Item 4. Controls and Procedures		38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3. Defaults Upon Senior Securities		39
Item 4. Mine Safety Disclosures		39
Item 5. Other Information		39
Item 6. Exhibits		39
Signatures		40

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MedAssets, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30, 2013		December 31, 2012
	(In thousands, except per share amounts)
ASSETS
Current assets
Cash and cash equivalents	$	-	$	13,734
Accounts receivable, net of allowances of $2,518 and $3,046 as of September 30, 2013 and December 31, 2012, respectively		91,152		96,346
Deferred tax asset, current portion		10,579		11,126
Prepaid expenses and other current assets		24,906		21,791
Total current assets		126,637		142,997
Property and equipment, net		155,485		134,361
Other long term assets
Goodwill		1,027,847		1,027,847
Intangible assets, net		282,206		330,163
Other		42,431		42,869
Other long term assets		1,352,484		1,400,879
Total assets	$	1,634,606	$	1,678,237
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	17,028	$	25,487
Accrued revenue share obligation and rebates		78,379		74,274
Accrued payroll and benefits		32,734		40,085
Other accrued expenses		23,562		14,145
Deferred revenue, current portion		51,758		55,756
Current portion of notes payable		15,500		15,500
Current portion of finance obligation		249		233
Total current liabilities		219,210		225,480
Notes payable, less current portion		452,875		544,500
Bonds payable		325,000		325,000
Finance obligation, less current portion		8,849		9,046
Deferred revenue, less current portion		14,960		14,393
Deferred tax liability		124,778		125,394
Other long term liabilities		10,119		801
Total liabilities		1,155,791		1,244,614
Commitments and contingencies
Stockholders’ equity
Common stock, $0.01 par value, 150,000,000 shares authorized; 61,826,000 and 59,324,000 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively		618		593
Additional paid-in capital		713,908		688,431
Accumulated deficit		(235,711)		(255,401)
Total stockholders’ equity		478,815		433,623
Total liabilities and stockholders’ equity	$	1,634,606	$	1,678,237

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

3

MedAssets, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(In thousands, except per share amounts)
Revenue:
Administrative fees, net	$	69,426	$	68,641	$	216,447	$	200,752
Other service fees		96,945		94,800		293,503		275,589
Total net revenue		166,371		163,441		509,950		476,341
Operating expenses:
Cost of revenue (inclusive of certain amortization expense)		38,246		34,570		110,010		100,583
Product development expenses		7,173		7,217		23,649		20,777
Selling and marketing expenses		12,898		12,983		46,925		46,709
General and administrative expenses		59,095		55,167		174,914		165,577
Acquisition and integration-related expenses		111		1,535		9,576		4,812
Depreciation		10,926		7,721		29,979		21,416
Amortization of intangibles		15,341		17,840		47,957		55,251
Total operating expenses		143,790		137,033		443,010		415,125
Operating income		22,581		26,408		66,940		61,216
Other income (expense):
Interest (expense)		(11,814)		(16,672)		(35,544)		(50,722)
Other income		118		114		435		449
Income before income taxes		10,885		9,850		31,831		10,943
Income tax expense		3,983		4,386		12,141		3,467
Net income	$	6,902	$	5,464	$	19,690	$	7,476
Basic and diluted income per share:
Basic net income per share	$	0.12	$	0.09	$	0.33	$	0.13
Diluted net income per share	$	0.11	$	0.09	$	0.32	$	0.13
Weighted average shares—basic		59,936		57,693		59,446		57,239
Weighted average shares—diluted		61,476		59,513		60,912		58,896
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012
Net income	$	6,902	$	5,464	$	19,690	$	7,476
Unrealized loss from hedging activities for the period		-		(284)		-		(1,442)
Income tax expense related to hedging activities for the period		-		106		-		521
Comprehensive income	$	6,902	$	5,286	$	19,690	$	6,555

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

4

MedAssets, Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2013

	Common Stock				Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
	Shares		Par Value
	(In thousands)
Balances at December 31, 2012		59,324	$	593	$	688,431	$	(255,401)	$	433,623
Issuance of common stock from stock option and SSAR exercises and restricted stock issuances, net		2,502		25		9,886		-		9,911
Stock compensation expense		-		-		11,783		-		11,783
Excess tax benefit from equity award exercises, net		-		-		3,808		-		3,808
Net income								19,690		19,690
Balances at September 30, 2013		61,826	$	618	$	713,908	$	(235,711)	$	478,815

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

5

MedAssets, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2013		2012
	(In thousands)
Operating activities
Net income	$	19,690	$	7,476
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Bad debt expense		-		485
Depreciation		31,719		22,769
Amortization of intangibles		47,957		55,668
Impairment of assets		2,403		-
(Gain) loss on sale of assets		(123)		370
Noncash stock compensation expense		11,783		7,796
Excess tax benefit from exercise of equity awards		(5,091)		(1,191)
Amortization of debt issuance costs		2,858		5,705
Noncash interest expense, net		349		392
Deferred income tax benefit		(69)		(441)
Changes in assets and liabilities:
Accounts receivable		5,494		8,670
Prepaid expenses and other assets		(3,115)		(2,600)
Other long-term assets		(1,061)		1,846
Accounts payable		(4,651)		(4,477)
Accrued revenue share obligations and rebates		4,105		572
Accrued payroll and benefits		(7,351)		(4,294)
Other accrued expenses and long-term liabilities		8,357		6,325
Deferred revenue		(3,431)		2,610
Cash provided by operating activities		109,823		107,681
Investing activities
Purchases of property, equipment and software, net		(16,259)		(11,779)
Capitalized software development costs		(30,168)		(31,045)
Cash used in investing activities		(46,427)		(42,824)
Financing activities
Borrowings from revolving credit facility		-		90,000
Repayment of notes payable		(91,625)		(94,763)
Repayment of finance obligations		(507)		(507)
Payment of deferred purchase consideration		-		(120,136)
Excess tax benefit from exercise of equity awards		5,091		1,191
Issuance of common stock, net of offering costs		9,911		5,245
Purchase of treasury shares		-		(600)
Cash used in financing activities		(77,130)		(119,570)
Net decrease in cash and cash equivalents		(13,734)		(54,713)
Cash and cash equivalents, beginning of period		13,734		62,947
Cash and cash equivalents, end of period	$	-	$	8,234

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

6

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 client-specific solutions are designed to efficiently analyze detailed information across the spectrum of revenue cycle and spend management processes. Our solutions integrate with existing operations and enterprise software systems of our clients and provide financial improvement with minimal upfront costs or capital expenditures. Our operations and clients 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, 2012, 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, 2013 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2013.

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, 2012 included in our Form 10-K as filed with the SEC on February 27, 2013 in addition to our Form 10-Q filed for periods after December 31, 2012. 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. Actual results may differ materially from those estimates. We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts and returns, product development costs, share-based payments, business combinations, impairment of goodwill, intangible assets and long-lived assets, and accounting for income taxes have the greatest potential impact on our condensed consolidated financial statements.

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. In addition, we may periodically make voluntary repayments on our term loans. Cash and cash equivalents were zero and $13,734 as of September 30, 2013 and December 31, 2012, respectively, and our swing-line balance was zero during those reporting periods. We had $10,000 outstanding on our revolving credit facility as of September 30, 2013 and December 31, 2012. In the event our cash balance is zero at the end of a period, any outstanding checks are recorded as accrued expenses. As of September 30, 2013, we reclassified approximately $4,686 of outstanding checks related to a book overdraft into other accrued expenses on the condensed consolidated balance sheet. This book overdraft amount has been included in operating activities within the condensed consolidated statement of cash flows. See Note 5 for immediately available cash under our revolving credit facility.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Income Taxes

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update relating to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This update amends existing GAAP that required in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit

7

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

carryforward when such items exist in the same taxing jurisdiction. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, and retrospective application is permitted. We do not expect any impact from this update on our financial statements.

Comprehensive Income

In February 2013, the FASB issued an accounting standard update relating to improving the reporting of reclassifications out of accumulated other comprehensive income. The update would require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The update is effective for reporting periods beginning after December 15, 2012. We adopted this update on January 1, 2013.

3. ACQUISITION AND INTEGRATION-RELATED EXPENSES

Broadlane Acquisition

In January 2012, we paid the deferred purchase consideration amount of $120,136 to Broadlane Holdings, LLC in connection with the acquisition of Broadlane Intermediate Holdings, Inc. (“Broadlane”).

Restructuring Activities

In connection with certain business activities, our management approved and initiated several plans to restructure our operations resulting in certain management, system and organizational changes within our Spend and Clinical Resource Management (“SCM”), Revenue Cycle Management (“RCM”) and corporate segments. During the three months ended September 30, 2013 and 2012, we expensed restructuring and exit and integration related costs of approximately $111 and $1,535, respectively. During the nine months ended September 30, 2013 and 2012, we expensed restructuring and exit and integration related costs of approximately $9,576 and $4,812, respectively. These costs were attributable to management changes and restructuring activities related to the Broadlane acquisition consisting of employee costs, system migration and standardization, facilities consolidation 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 and comprehensive income.

As of September 30, 2013, the components of our restructuring plans are as follows:

— Employee-related costs — during the three months ended September 30, 2013, we expensed approximately $570 of cash-based compensation and $920 of share-based compensation related to the resignation of our RCM segment president on September 30, 2013. During the three months ended September 30, 2012, we expensed approximately $738 of employee-related costs. During the nine months ended September 30, 2013 and 2012, we expensed approximately $807 and $2,587 of employee-related costs, respectively. The costs primarily related to severance, salaries relating to redundant positions, certain bonuses and other employee benefits. As of September 30, 2013, we had approximately $697 included in current liabilities for these costs.

— System migration and standardization — during the three months ended September 30, 2013 and 2012, we expensed approximately $98 and $787 of system migration costs, respectively. During the nine months ended September 30, 2013 and 2012, we expensed approximately $2,372 and $2,175 of system migration costs, respectively. The costs primarily related to consulting and other third-party services. As of September 30, 2013, we had approximately $8 included in current liabilities for these costs. In addition, we had non-cash adjustments of ($389) for the write-off of impaired development projects related to the Broadlane acquisition.

— Facilities consolidation — in March 2013, we exited our existing SCM and RCM leased facilities in Plano, Texas and began occupying a new leased facility comprised of approximately 231,000 square feet of office space together with certain surface parking areas in Plano, Texas. The lease term of the new facility commenced on March 1, 2013 and has an initial term of fifteen years plus an option to extend the lease term for up to ten years. In connection with the lease, the landlord provided a tenant allowance that was used for certain improvements to the facility amounting to $10,378, with $9,974 included in property and equipment on our condensed consolidated balance sheet as of September 30, 2013. We had approximately $692 included in other accrued expenses and $9,282 included in other long term liabilities associated with this allowance as of September 30, 2013. The liability will be recognized ratably as a reduction to rent expense over the term of the lease. We did not receive or pay any cash related to the tenant allowance and therefore the amount is not reflected in our condensed consolidated statement of cash flows for the nine months ended September 30, 2013.

8

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

In March 2013, we expensed approximately $6,924, relating to exit costs to vacate our previous SCM and RCM leased facilities in Plano, Texas. In August 2013, we amended the lease agreement for the previous RCM facility to accelerate the expiration date to August 2013 from its original expiration of January 2022 to effectively terminate the lease. As a result, we paid a lease termination fee of $6,000 and adjusted our total exit cost estimate associated with this lease liability by ($557) from what was originally estimated. As a result of the termination, we have no further obligation related to this lease agreement.

During the nine months ended September 30, 2013, we expensed approximately $6,397, relating to exit costs to vacate our previous SCM and RCM leased facilities in Plano, Texas as previously discussed. In addition, we had non-cash adjustments of $613 comprised of: (i) accrued rent of $1,669 related to the previously leased facilities; and (ii) the write-off of certain related facility assets of ($1,056).

The following table summarizes the details of the Company’s restructuring activities during the nine months ended September 30, 2013:

	Employee-related costs		System migration and integration		Facility consolidation		Total
Restructuring Reserve
Accrued, December 31, 2012	$	995	$	305	$	132	$	1,432
Charges incurred		807		2,372		6,397		9,576
Adjustments		-		(389)		613		224
Cash payments		(1,105)		(2,280)		(7,142)		(10,527)
Accrued, September 30, 2013	$	697	$	8	$	-	$	705	(1)

(1) The remaining restructuring accrual consists primarily of employee-related costs and will be paid over the next twelve months.

4. DEFERRED REVENUE

Deferred revenue consists of unrecognized revenue related to advanced client billing or client 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 prior to the event.

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

	September 30, 2013		December 31, 2012
Software and implementation fees	$	26,313	$	24,468
Service fees		28,890		26,135
Administrative fees		9,353		14,672
Other fees		2,162		4,874
Deferred revenue, total		66,718		70,149
Less: Deferred revenue, current portion		(51,758)		(55,756)
Deferred revenue, non-current portion	$	14,960	$	14,393

As of September 30, 2013 and December 31, 2012, deferred revenue included in our condensed consolidated balance sheets that was contingent upon meeting performance targets was $8,318 and $8,284, 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 as determined by the customer arrangement.

9

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

5. NOTES AND BONDS PAYABLE

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

	September 30, 2013		December 31, 2012
Term A facility	$	240,625	$	250,000
Term B facility		217,750		300,000
Revolving credit facility		10,000		10,000
Total notes payable		468,375		560,000
Bonds payable		325,000		325,000
Total notes and bonds payable		793,375		885,000
Less: current portions		(15,500)		(15,500)
Total long-term notes and bonds payable	$	777,875	$	869,500

Notes Payable

As of September 30, 2013, our long-term notes payable consists of a Term A Facility, a Term B Facility and a revolving credit facility, each with an outstanding balance of $240,625, $217,750 and $10,000, respectively. We have classified the $10,000 outstanding balance on our revolving credit facility as a long term liability given the maturity date of December 13, 2017. No amounts were drawn on our swing line loan, which resulted in approximately $189,000 of availability under our revolving 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, 2013. During the nine months ended September 30, 2013, we made scheduled principal payments of $11,625 on our Term A and Term B Facility in addition to $80,000 in voluntary prepayments from available free cash flow on our Term B Facility. The applicable weighted average interest rates (inclusive of the applicable bank margin) on our Term A Facility, Term B Facility and Revolving Credit Facility at September 30, 2013 were 2.53%, 4.00% and 2.52%, respectively.

We are a party to a credit agreement with JP Morgan Chase Bank, N.A and other financial institutions named therein, dated December 13, 2012. 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 maintenance covenants of maximum ratios of consolidated total indebtedness (subject to certain adjustments) to consolidated EBITDA (subject to certain adjustments) and minimum cash interest coverage ratios. The credit agreement contains certain customary representations and warranties, affirmative covenants and events of default, including but not limited to payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of insolvency or bankruptcy, material judgments, certain events under ERISA, actual or asserted failures of any guaranty or security document supporting the credit agreement to be in full force and effect and changes of control. The Company was in compliance with these covenants as of September 30, 2013.

Loans under the credit agreement must be prepaid under certain circumstances, including with proceeds from certain future debt issuances, asset sales and a portion of excess cash flow for the applicable fiscal year. Our first excess cash flow calculation will be completed during the first quarter of 2014 for the fiscal year ended December 31, 2013. Loans under the credit agreement may be voluntarily prepaid at any time, subject to customary LIBOR breakage costs.

Bonds Payable

In November 2010, we 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”). In October 2011, our Notes were registered under the Securities Act of 1933, as amended. The Notes are guaranteed on a senior unsecured basis by each of our existing domestic subsidiaries and each of our future domestic restricted subsidiaries in each case that guarantees our obligations under the credit agreement. Each of the subsidiary guarantors is 100% owned by us; the guarantees by the subsidiary guarantors are full and unconditional; the guarantees by the subsidiary guarantors are joint and several; we have no independent assets or operations; and any subsidiaries of ours 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, 2013.

10

  MedAssets, Inc.

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

(In thousands, except share and per share amounts)

The Company has the option to redeem the Notes as follows: (i) at any time prior to November 15, 2014, the Company may redeem all or part of the Notes at a redemption price equal to 100% of the principal amount plus the applicable premium (as defined in the Indenture); (ii) at any time prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the Notes issued with the cash proceeds of one or more equity offerings at a redemption price of 108% of the principal amount, provided that: (A) at least 65% of the aggregate original principal amount of the Notes remains outstanding immediately after each such redemption; and (B) the redemption occurs within 60 days after the closing of such equity offering; and (iii) on and after November 15, 2014, the Company may redeem all or a part of the Notes, at the following redemption prices:

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

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

As of September 30, 2013, the Company’s 8% senior notes due 2018 were trading at 107.5% of par value (Level 1).

Debt Issuance Costs

As of September 30, 2013, we had approximately $18,214 of debt issuance costs related to our credit agreement and Notes which will be amortized into interest expense generally using the effective interest method until the applicable maturity date. For the three months ended September 30, 2013 and 2012, we recognized $951 and $1,914, respectively, in interest expense related to the amortization of debt issuance costs. For the nine months ended September 30, 2013 and 2012, we recognized $2,858 and $5,705, respectively, in interest expense related to the amortization of debt issuance costs.

Debt Maturity Table

The following table summarizes our stated debt maturities and scheduled principal repayments as of September 30, 2013:

Year	Term A Facility		Term B Facility		Revolving Credit Facility		Senior Unsecured Notes		Total
2013	$	3,125	$	750	$	-	$	-	$	3,875	(1)
2014		12,500		3,000		-		-		15,500
2015		18,750		3,000		-		-		21,750
2016		25,000		3,000		-		-		28,000
2017		181,250		3,000		10,000		-		194,250
Thereafter		-		205,000		-		325,000		530,000
	$	240,625	$	217,750	$	10,000	$	325,000	$	793,375

(1) Represents the remaining quarterly principal payments due during the fiscal year ending December 31, 2013.

Total interest paid (net of amounts capitalized) on our notes and bonds payable during the nine months ended September 30, 2013 and 2012 was approximately $28,038 and $37,563, respectively.

6. COMMITMENTS AND CONTINGENCIES

Performance Targets

In the ordinary course of contracting with our clients, we may agree to make some or all of our fees contingent upon the client’s achievement of financial improvement targets from the use of our services and software. These contingent fees are not recognized as revenue until the client confirms achievement of the performance targets. We generally receive client acceptance as and when the performance targets are achieved. If we invoice contingent fees prior to client 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.

11

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

Legal Proceedings

From time to time, we become involved in legal proceedings arising in the ordinary course of business. As of September 30, 2013, we are not presently involved in any legal proceedings, the outcome of which, if determined adversely to us, would have a material adverse effect on our business, operating results or financial condition.

7. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Common Stock

During the nine months ended September 30, 2013, we issued approximately 1,427,000 shares of common stock in connection with employee stock option and stock-settled stock appreciation right (or “SSAR”) exercises for net exercise proceeds of $9,911.

Share-Based Compensation

As of September 30, 2013, we had restricted common stock, SSARs and common stock option equity awards outstanding under three share-based compensation plans. As of September 30, 2013, we had approximately 4,955,000 shares reserved (inclusive of equity award forfeitures) and available for grant under the 2008 MedAssets, Inc. Long-Term Performance Incentive Plan (“LTPIP”). The increase in shares available for grant was primarily attributable to an amendment to our LTPIP that authorized for issuance an additional 2,600,000 shares. The amendment was approved during our annual stockholders meeting on June 13, 2013.

The total share-based compensation expense related to equity awards was $4,361 and $2,781 for the three months ended September 30, 2013 and 2012, respectively. The total income tax benefit recognized in the condensed consolidated statement of operations for share-based compensation arrangements related to equity awards was $1,627 and $1,033 for the three months ended September 30, 2013 and 2012, respectively.

The total share-based compensation expense related to equity awards was $11,783 and $7,796 for the nine months ended September 30, 2013 and 2012, respectively. The total income tax benefit recognized in the condensed consolidated statement of operations for share-based compensation arrangements related to equity awards was $4,396 and $2,895 for the nine months ended September 30, 2013 and 2012, respectively. There were no capitalized share-based compensation expenses during the three and nine months ended September 30, 2013.

Total share-based compensation expense (inclusive of restricted common stock, SSARs and common stock options) for the three and nine months ended September 30, 2013 and 2012 as reflected in our condensed consolidated statements of operations is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013		2012
Cost of revenue	$	864		$	672	$	3,040	$	1,535
Product development		130			34		473		123
Selling and marketing		975			282		1,944		1,069
General and administrative		2,392			1,793		6,326		5,069
Total share-based compensation expense	$	4,361	(1)	$	2,781	$	11,783	$	7,796

(1) For the three months ended September 30, 2013, share-based compensation includes charges related to the resignation of our RCM president and the conformity of one officer’s terms and conditions to their 2013 performance award grant.

Equity Award Expense Attribution

In general, for equity awards with graded-vesting, compensation cost is recognized using an accelerated method over the vesting or service period and is net of estimated forfeitures. In general, for equity awards with cliff-vesting, compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures. For performance-based equity awards, compensation cost 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.

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, 2013 and 2012, we purchased approximately 24,700 shares and 25,400 shares of our common stock under the Plan which amounted to approximately $482 and $372, respectively.

12

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

Equity Award Grants

Information regarding equity awards for the nine months ended September 30, 2013 is as follows:

Restricted Common Stock Awards

In 2013, our Board of Directors and Compensation, Governance and Nominating Committee approved an equity grant for certain eligible employees consisting of service-based and performance-based restricted shares. The purpose of the equity grant is to assist the Company in attracting, retaining, motivating, and rewarding certain individuals of the Company. The equity grant is intended to promote the creation of long-term value for stockholders of the Company by closely aligning the interests of such individuals with those of the stockholders. The total approved equity grant amounted to approximately 1,160,000 restricted shares with a grant date fair value of $18.34 per share and was comprised of: (i) 50,000 service-based restricted shares that vest ratably each month through December 31, 2013; (ii) 435,000 service-based restricted shares that vest annually over three years of continuous service with the first annual vest date beginning on March 1, 2014; (iii) 337,500 performance-based restricted shares using a net revenue performance metric that vest annually over three years of continuous service with the first annual vest date beginning on March 1, 2014 provided the performance metric is achieved; and (iv) 337,500 performance-based restricted shares using an adjusted EBITDA performance metric that vest annually over three years of continuous service with the first annual vest date beginning on March 1, 2014 provided the performance metric is achieved.

The measurement period for the net revenue performance-based awards is from January 1, 2013 through December 31, 2013. The net revenue performance metric is based on the achievement of an established net revenue target. The Company must achieve a minimum threshold of net revenue before any performance-based restricted shares begin vesting. The equity award holders have an opportunity to earn between 50% and 100% of the performance-based equity awards once the minimum threshold has been met. If the minimum threshold is not met, the equity award holders will forfeit those awards.

The measurement period for the adjusted EBITDA performance-based awards is from January 1, 2013 through December 31, 2013. The adjusted EBITDA performance metric is based on the achievement of an established adjusted EBITDA target. The Company must achieve a minimum threshold of adjusted EBITDA before any performance-based restricted shares begin vesting. The equity award holders have an opportunity to earn between 50% and 100% of the performance-based equity awards once the minimum threshold has been met. If the minimum threshold is not met, the equity award holders will forfeit those awards.

During the nine months ended September 30, 2013, an additional 38,000 service-based restricted shares were granted. The shares vest annually over three years with the first annual vest date beginning on June 1, 2014. The weighted average grant date fair value of each restricted common stock share was $20.03.

During the nine months ended September 30, 2013, we received approximately 54,000 restricted shares that were surrendered from equity awards holders to settle their associated minimum statutory tax liability from shares that vested during the year.

During the nine months ended September 30, 2013, approximately 69,000 shares of restricted common stock were forfeited.

As of September 30, 2013, there was approximately $13,188 of total unrecognized compensation expense related to all unvested restricted common stock awards that will be recognized over a weighted-average period of 1.3 years.

SSAR Awards

During the nine months ended September 30, 2013, we granted approximately 3,000 SSARs which have a service vesting period of five years. The weighted-average grant date base price of each SSAR was $16.77 and the weighted-average grant date fair value of each SSAR granted during the nine months ended September 30, 2013 was $7.15.

During the nine months ended September 30, 2013, approximately 245,000 SSARs were forfeited.

As of September 30, 2013, there was approximately $3,179 of total unrecognized compensation expense related to all unvested SSARs that will be recognized over a weighted-average period of 1.6 years.

13

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

Common Stock Option Awards

During the nine months ended September 30, 2013, we did not grant any stock option awards.

During the nine months ended September 30, 2013, approximately 58,000 stock option awards were forfeited.

As of September 30, 2013, there was approximately $64 of total unrecognized compensation expense related to all outstanding stock option awards that will be recognized over a weighted-average period of 1 year.

8. INCOME TAXES

Income tax expense recorded during the three and nine months ended September 30, 2013 reflected an effective income tax rate of 36.6% and 38.1%, respectively. Income tax expense recorded during the three and nine months ended September 30, 2012 reflected an effective income tax rate of 44.5% and 31.7%, respectively. During 2012, we restructured several subsidiaries to reflect the integration of the Broadlane acquisition into our operations. This restructuring required us to recognize a reduction in our state income tax rate and as a result, we recognized a $1,400 discrete tax benefit during the nine months ended September 30, 2012.

9. INCOME 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 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, 2013 and 2012 is as follows:

	Three Months Ended September 30,
	2013		2012
Numerator for Basic and Diluted Income Per Share:
Net income		6,902		5,464
Denominator for basic income per share weighted average shares		59,936,000		57,693,000
Effect of dilutive securities:
Stock options		529,000		999,000
Stock-settled stock appreciation rights		406,000		96,000
Restricted stock and stock warrants		605,000		725,000
Denominator for diluted income per share—adjusted weighted average shares and assumed conversions		61,476,000		59,513,000
Basic income per share:
Basic net income from continuing operations	$	0.12	$	0.09
Diluted net income per share:
Diluted net income from continuing operations	$	0.11	$	0.09

14

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

	Nine Months Ended September 30,
	2013		2012
Numerator for Basic and Diluted Income Per Share:
Net income		19,690		7,476
Denominator for basic income per share weighted average shares		59,446,000		57,239,000
Effect of dilutive securities:
Stock options		601,000		916,000
Stock-settled stock appreciation rights		285,000		15,000
Restricted stock and stock warrants		580,000		726,000
Denominator for diluted income per share—adjusted weighted average shares and assumed conversions		60,912,000		58,896,000
Basic income per share:
Basic net income from continuing operations	$	0.33	$	0.13
Diluted net income per share:
Diluted net income from continuing operations	$	0.32	$	0.13

During the three and nine months ended September 30, 2013 and 2012, the effect of certain dilutive securities have been excluded because the impact is anti-dilutive as a result of certain securities being “out of the money” with strike prices greater than the average market price 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,
	2013		2012		2013		2012
Stock options		-		40,000		-		70,000
Stock-settled stock appreciation rights		8,000		386,000		37,000		830,000
Restricted stock and stock warrants		-		-		1,000		3,000
Total		8,000		426,000		38,000		903,000

10. SEGMENT INFORMATION

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

— Spend and Clinical Resource Management. Our SCM segment provides a comprehensive suite of technology-enabled services that help our clients 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.

— 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.

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,

15

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

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 clients.

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. “SCM” represents the Spend and Clinical Resource Management segment and “RCM” represents the Revenue Cycle Management segment. Other assets and liabilities are included to provide a reconciliation to total assets and total liabilities.

The following tables represent our results of operations, by segment, for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30, 2013
	SCM		RCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	115,478	$	-	$	-	$	115,478
Revenue share obligation(1)		(46,052)		-		-		(46,052)
Other service fees		33,801		63,144		-		96,945
Total net revenue		103,227		63,144		-		166,371
Total operating expenses		74,381		56,016		13,393		143,790
Operating income (loss)		28,846		7,128		(13,393)		22,581
Interest expense		-		-		(11,814)		(11,814)
Other (expense) income		1		7		110		118
Income (loss) before income taxes	$	28,847	$	7,135	$	(25,097)	$	10,885
Income tax expense (benefit)		10,599		2,584		(9,200)		3,983
Net income (loss)		18,248		4,551		(15,897)		6,902
Segment Adjusted EBITDA	$	47,387	$	15,349	$	(8,837)	$	53,899

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

	As of September 30, 2013
	SCM		RCM		Corporate		Total
Financial Position:
Accounts receivable, net	$	39,489	$	51,647	$	16	$	91,152
Other assets		965,833		503,063		74,558		1,543,454
Total assets		1,005,322		554,710		74,574		1,634,606
Accrued revenue share obligation		78,379		-		-		78,379
Deferred revenue		25,424		41,294		-		66,718
Notes payable		-		-		468,375		468,375
Bonds payable		-		-		325,000		325,000
Other liabilities		28,039		25,156		164,124		217,319
Total liabilities	$	131,842	$	66,450	$	957,499	$	1,155,791

16

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

	Three Months Ended September 30, 2012
	SCM		RCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	109,335	$	-	$	-	$	109,335
Revenue share obligation(1)		(40,694)		-		-		(40,694)
Other service fees		30,471		64,329		-		94,800
Total net revenue		99,112		64,329		-		163,441
Total operating expenses		72,715		53,082		11,236		137,033
Operating income (loss)		26,397		11,247		(11,236)		26,408
Interest expense		-		-		(16,672)		(16,672)
Other income		9		27		78		114
Income (loss) before income taxes	$	26,406	$	11,274	$	(27,830)	$	9,850
Income tax expense (benefit)		14,255		5,171		(15,040)		4,386
Net income (loss)		12,151		6,103		(12,790)		5,464
Segment Adjusted EBITDA	$	46,340	$	17,835	$	(7,210)	$	56,965

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

	Nine Months Ended September 30, 2013
	SCM		RCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	351,602	$	-	$	-	$	351,602
Revenue share obligation(1)		(135,155)		-		-		(135,155)
Other service fees		101,596		191,907		-		293,503
Total net revenue		318,043		191,907		-		509,950
Total operating expenses		238,777		167,593		36,640		443,010
Operating income (loss)		79,266		24,314		(36,640)		66,940
Interest expense		-		-		(35,544)		(35,544)
Other (expense) income		(28)		(22)		485		435
Income (loss) before income taxes	$	79,238	$	24,292	$	(71,699)	$	31,831
Income tax expense (benefit)		30,222		9,266		(27,347)		12,141
Net income (loss)		49,016		15,026		(44,352)		19,690
Segment Adjusted EBITDA	$	144,041	$	47,061	$	(23,020)	$	168,082

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

	Nine Months Ended September 30, 2012
	SCM		RCM		Corporate		Total
Results of Operations:
Revenue:
Gross administrative fees(1)	$	321,351	$	-	$	-	$	321,351
Revenue share obligation(1)		(120,599)		-		-		(120,599)
Other service fees		93,740		181,849		-		275,589
Total net revenue		294,492		181,849		-		476,341
Total operating expenses		220,938		161,273		32,914		415,125
Operating income (loss)		73,554		20,576		(32,914)		61,216
Interest expense		-		-		(50,722)		(50,722)
Other (expense) income		(12)		30		431		449
Income (loss) before income taxes	$	73,542	$	20,606	$	(83,205)	$	10,943
Income tax expense (benefit)		31,830		8,919		(37,282)		3,467
Net income (loss)		41,712		11,687		(45,923)		7,476
Segment Adjusted EBITDA	$	132,846	$	41,532	$	(22,001)	$	152,377

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

17

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 income for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
SCM Adjusted EBITDA	$	47,387	$	46,340	$	144,041	$	132,846
RCM Adjusted EBITDA		15,349		17,835		47,061		41,532
Total reportable Segment Adjusted EBITDA		62,736		64,175		191,102		174,378
Depreciation		(8,244)		(5,224)		(21,890)		(14,459)
Depreciation (included in cost of revenue)		(571)		(536)		(1,740)		(1,353)
Amortization of intangibles		(15,341)		(17,840)		(47,957)		(55,251)
Amortization of intangibles (included in cost of revenue)		-		(139)		-		(417)
Interest expense, net of interest income(1)		-		-		-		5
Income tax expense		(13,184)		(19,426)		(39,489)		(40,749)
Share-based compensation expense(2)		(2,486)		(1,221)		(6,408)		(3,943)
Acquisition and integration-related expenses(3)		(111)		(1,535)		(9,576)		(4,812)
Total reportable segment net income		22,799		18,254		64,042		53,399
Corporate net loss		(15,897)		(12,790)		(44,352)		(45,923)
Consolidated net income	$	6,902	$	5,464	$	19,690	$	7,476

(1) Interest income is included in other income (expense) and is not netted against interest expense in our condensed consolidated statements 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) Represents the amount attributable to acquisition and integration-related costs which include costs such as severance, retention, salaries relating to redundant positions, certain performance-related salary-based compensation, operating infrastructure costs and facility consolidation costs. We may incur costs in future periods related to our plans including but not limited to aligning service offerings and standardizing and migrating certain Broadlane operational systems and transactional data sets into our operational systems.

11. 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.

On December 13, 2012, we terminated our two floating-to-fixed rate LIBOR-based forward starting interest rate swaps, originally entered into on May 5, 2011. The swaps were originally scheduled to fully terminate by February 2015. Such early termination was deemed to be a termination of all future obligations between us and each counterparty. In consideration of the early termination, we paid a total of $8,209 to the counterparties on December 17, 2012. We have no assets or liabilities remaining on our condensed consolidated balance sheet with respect to these interest rate swaps as of September 30, 2013 and December 31, 2012, respectively. For the three and nine months ended September 30, 2012, the effects of the derivative instruments designated as cash flow hedges on income and AOCI were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives designated as cash flow hedges	2013		2012		2013		2012
Total unrealized loss recognized in other comprehensive income - interest rate contracts	$	-	$	(178)	$	-	$	(921)
Total realized loss reclassified into earnings - interest rate contracts	$	-		-	$	-		-

12. 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.

18

MedAssets, Inc.

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

(In thousands, except share and per share amounts)

Refer to Note 11 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;

— 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 5 for further information; and

— Bonds payable: The carrying value of our long-term bonds payable reported in the condensed consolidated balance sheets approximates fair value. Refer to Note 5 for further information.

13. RELATED PARTY TRANSACTION

We have an agreement with John Bardis, our chief executive officer, for the use of an airplane owned by JJB Aviation, LLC, a 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, 2013 and 2012, we incurred charges of $1,737 and $1,221, respectively, related to transactions with Mr. Bardis.

14. 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.

19

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, 2012 as filed with the SEC on February 27, 2013.

Overview

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

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

The table below highlights our primary results of operations for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2013		2012		Change				2013		2012		Change
	Amount		Amount		Amount		%		Amount		Amount		Amount		%
	(Unaudited, in millions)								(Unaudited, in millions)
Gross fees(1)	$	212.4	$	204.1	$	8.3		4.1%	$	645.0	$	596.9	$	48.1		8.1%
Revenue share obligation(1)		(46.0)		(40.7)		(5.3)		13.0		(135.1)		(120.6)		(14.5)		12.0
Total net revenue		166.4		163.4		3.0		1.8		509.9		476.3		33.6		7.1
Operating income		22.6		26.4		(3.8)		(14.4)		66.9		61.2		5.7		9.3
Net income	$	6.9	$	5.5	$	1.4		25.5%	$	19.7	$	7.5	$	12.2		162.7%
Adjusted EBITDA(1)	$	53.9	$	57.0	$	(3.1)		-5.4%	$	168.1	$	152.4	$	15.7		10.3%
Adjusted EBITDA margin(1)		32.4%		34.9%						33.0%		32.0%
Adjusted EPS(1)	$	0.31	$	0.32	$	(0.01)		-3.1%	$	1.02	$	0.84	$	0.18��		21.4%

(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 months ended September 30, 2013 compared to the three months ended September 30, 2012 were primarily attributable to:

— growth in our SCM segment from our vendor administrative fees and medical device consulting and strategic sourcing services; and

— growth in our RCM segment from an increase in our subscription services related to our revenue cycle technology tools offset by a decrease in our revenue cycle services.

The increases in non-GAAP gross fees and total net revenue during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 were primarily attributable to:

— growth in our SCM segment from our vendor administrative fees and medical device consulting and strategic sourcing services; and

— growth in our RCM segment from an increase in our subscription services related to our revenue cycle technology tools in addition to an increase in our revenue cycle services.

20

The decrease in operating income during the three months ended September 30, 2013 compared to the three months ended September 30, 2012, was primarily attributable to lower performance-related fee revenue during the period in addition to increases in the following operating expenses:

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

— higher operating expenses related to increased compensation expense for new and existing personnel, inclusive of performance-based incentive and share-based compensation expense and professional fees; and

— an increase in depreciation expense from additions of property and equipment including purchased software and internally developed software.

The increase in operating income during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, was primarily attributable to the growth in net revenue discussed above partially offset by the following operating expenses:

— increased acquisition and integration-related expenses related to exit costs associated with our facilities consolidation;

— increased cost of revenue attributable to a higher percentage of net revenue being derived from service-based engagements;

— higher operating expenses related to increased compensation expense for new and existing personnel, inclusive of performance-based incentive and share-based compensation expense; and

— an increase in depreciation expense from additions of property and equipment including purchased software and internally developed software.

For the three months ended September 30, 2013, decreases in consolidated non-GAAP adjusted EBITDA and consolidated non-GAAP adjusted EBITDA margin compared to the three months ended September 30, 2012 were primarily attributable to lower performance-related fee revenue compared to the prior period in addition to higher cost of revenue within our SCM segment.

For the nine months ended September 30, 2013, increases in consolidated non-GAAP adjusted EBITDA and consolidated non-GAAP adjusted EBITDA margin compared to the nine months ended September 30, 2012 were primarily attributable to the net revenue increase discussed above in both SCM and RCM partially offset by an increase in cost of revenue.

Segment Structure and Revenue Streams

We deliver our solutions through two business segments, Spend and Clinical Resource Management (“SCM”) and Revenue Cycle Management (“RCM”). 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 clients and inter-segment revenues have been eliminated. See Note 10 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.

Spend and Clinical Resource Management

Our SCM segment provides a comprehensive suite of technology-enabled services that help our clients 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. 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 clients 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 clients through contracts with our vendors.

21

Our group purchasing organization clients 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 clients through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.

Some client 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 client acceptance on the achievement of those contractual performance targets. Prior to receiving client acceptance of performance targets, we record contingent administrative fees as deferred revenue on our condensed consolidated balance sheets. 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 clients. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular client’s purchases from our vendors. Our total net revenue on our condensed 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 clients 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 clients 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 client. Prior to receiving client acceptance of performance targets, we record contingent consulting fees as deferred revenue on our condensed consolidated balance sheets. 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.

— 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.

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. 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 client access to our SaaS-based solutions. We may also charge our clients non-refundable upfront fees for implementation of our SaaS-based services. These non-refundable upfront fees are earned over the subscription period or estimated client 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 client relationship period, as applicable.

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 client transactions or enrolled members.

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

22

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, incentive compensation and other direct costs and share-based compensation expenses related to personnel who provide services to implement our solutions for our clients (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 client 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. In addition, any changes in revenue mix between our SCM and RCM 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.

23

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,
	2013		2012		2013		2012
	(Unaudited, in thousands)
Net revenue:
Spend and Clinical Resource Management
Gross administrative fees(1)		$      115,478		$        109,335		$      351,602		$        321,351
Revenue share obligation(1)		(46,052)		(40,694)		(135,155)		(120,599)
Other service fees		33,801		30,471		101,596		93,740
Total Spend and Clinical Resource Management		103,227		99,112		318,043		294,492
Revenue Cycle Management		63,144		64,329		191,907		181,849
Total net revenue		166,371		163,441		509,950		476,341
Operating expenses:
Spend and Clinical Resource Management		74,381		72,715		238,777		220,938
Revenue Cycle Management		56,016		53,082		167,593		161,273
Total segment operating expenses		130,397		125,797		406,370		382,211
Operating income
Spend and Clinical Resource Management		28,846		26,397		79,266		73,554
Revenue Cycle Management		7,128		11,247		24,314		20,576
Total segment operating income		35,974		37,644		103,580		94,130
Corporate expenses(2)		13,393		11,236		36,640		32,914
Operating income		22,581		26,408		66,940		61,216
Other income (expense):
Interest expense		(11,814)		(16,672)		(35,544)		(50,722)
Other income		118		114		435		449
Income before income taxes		10,885		9,850		31,831		10,943
Income tax expense		3,983		4,386		12,141		3,467
Net income		6,902		5,464		19,690		7,476
Reportable segment adjusted EBITDA(3):
Spend and Clinical Resource Management		47,387		46,340		144,041		132,846
Revenue Cycle Management	$	15,349	$	17,835	$	47,061	$	41,532
Reportable segment adjusted EBITDA margin(4):
Spend and Clinical Resource Management		45.9%		46.8%		45.3%		45.1%
Revenue Cycle Management		24.3%		27.7%		24.5%		22.8%

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

(2) Represents the expenses of the corporate office operations.

(3) Management’s primary metric of segment profit or loss is segment adjusted EBITDA. See Note 10 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.

24

Comparison of the Three Months Ended September 30, 2013 and September 30, 2012

	Three Months Ended September 30,
	2013				2012				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Net revenue:
Spend and Clinical Resource Management
Gross administrative fees(1)	$	115,478		69.4%	$	109,335		66.9%	$	6,143		5.6%
Revenue share obligation(1)		(46,052)		(27.7)		(40,694)		(24.9)		(5,358)		13.2
Other service fees		33,801		20.3		30,471		18.6		3,330		10.9
Total Spend and Clinical Resource Management		103,227		62.0		99,112		60.6		4,115		4.2
Revenue Cycle Management		63,144		38.0		64,329		39.4		(1,185)		(1.8)
Total net revenue	$	166,371		100.0%	$	163,441		100.0%	$	2,930		1.8%

(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, 2013 was $166.3 million, an increase of approximately $2.9 million, or 1.8%, from total net revenue of $163.4 million for the three months ended September 30, 2012. The increase in total net revenue was comprised of a $4.1 million increase in SCM revenue and a $1.2 million decrease in RCM revenue. For the three months ended September 30, 2013 and 2012, performance-related fee revenue as a percentage of consolidated net revenue amounted to approximately 2.2% and 5.0%, respectively. Revenue may fluctuate significantly from period to period based upon achieving and thereof receiving client acknowledgement of the financial performance targets.

Spend and Clinical Resource Management net revenue. SCM net revenue for the three months ended September 30, 2013 was $103.2 million, an increase of $4.1 million, or 4.2%, from net revenue of $99.1 million for the three months ended September 30, 2012. The increase was the result of an increase in gross administrative fees of $6.1 million, or 5.6%, and an increase in other service fees of $3.3 million partially offset by an approximate $5.3 million increase in non-GAAP revenue share obligation.

— Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $6.1 million, or 5.6%, as compared to the prior period, primarily due to an increase in the average administrative fee percentage realized under 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 client acknowledgement of achieved performance targets varies.

— Revenue share obligation. Non-GAAP revenue share obligation increased $5.3 million, or 13.2%, 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 39.9% and 37.2% for the three months ended September 30, 2013 and 2012, respectively. The increase was attributable in part to lower performance-related fees received (with no associated revenue share obligation) compared to the prior quarter. We may experience fluctuations in our revenue share ratio based on the mix of clients who are entitled to a higher revenue share percentage due to increased purchasing volume in addition to an increase in the number of fixed-fee arrangements.

— Other service fees. The $3.3 million, or 10.9%, increase in other service fees primarily related to higher revenues from medical device consulting and strategic sourcing services partially offset by lower performance-related fee revenue during the period.

Revenue Cycle Management net revenue. RCM net revenue for the three months ended September 30, 2013 was $63.1 million, a decrease of $1.2 million, or 1.8%, from net revenue of $64.3 million for the three months ended September 30, 2012. The decrease was attributable to a $3.4 million decrease in revenue from our comprehensive revenue cycle service engagements partially offset by a $2.2 million increase in revenue from our revenue cycle technology tools. As we engage new clients, renew with existing clients and complete existing contracts, we will continue to experience fluctuations in our revenue cycle services financial performance as the business is characterized by a relatively small number of agreements, which each relate to large amounts of revenue.

25

Total Operating Expenses

	Three Months Ended September 30,
	2013				2012				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue	$	38,246		23.0%	$	34,570		21.2%	$	3,676		10.6%
Product development expenses		7,173		4.3		7,217		4.4		(44)		(0.6)
Selling and marketing expenses		12,898		7.8		12,983		7.9		(85)		(0.7)
General and administrative expenses		59,095		35.5		55,167		33.8		3,928		7.1
Acquisition and integration-related expenses		111		0.1		1,535		0.9		(1,424)		(92.8)
Depreciation		10,926		6.6		7,721		4.7		3,205		41.5
Amortization of intangibles		15,341		9.2		17,840		10.9		(2,499)		(14.0)
Total operating expenses		143,790		86.4		137,033		83.8		6,757		4.9
Operating expenses by segment:
Spend and Clinical Resource Management		74,381		44.7		72,715		44.5		1,666		2.3
Revenue Cycle Management		56,016		33.7		53,082		32.5		2,934		5.5
Total segment operating expenses		130,397		78.4		125,797		77.0		4,600		3.7
Corporate expenses		13,393		8.1		11,236		6.9		2,157		19.2
Total operating expenses	$	143,790		86.4%	$	137,033		83.8%	$	6,757		4.9%

Cost of revenue. Cost of revenue for the three months ended September 30, 2013 was $38.2 million, or 23.0% of total net revenue, an increase of $3.7 million, or 10.6%, from cost of revenue of $34.5 million, or 21.2% of total net revenue, for the three months ended September 30, 2012. The increase was primarily attributable to an increase in service-related engagements in our SCM segment, which resulted in a higher cost of revenue since these activities are more labor intensive. In addition, for our engagements that involve achieving financial performance targets, we recognize revenue based on when the financial performance targets are achieved and such achievement is acknowledged by our clients. There are instances during a reporting period where we incur a higher amount of direct costs with no associated revenue for these types of engagements. Also, we may record revenue in a reporting period where the direct costs have been recorded in a previous period. These events may affect period over period comparability.

Product development expenses. Product development expenses for the three months ended September 30, 2013 were $7.1 million, or 4.3% of total net revenue, a decrease of $0.1 million, or 0.6%, from product development expenses of $7.2 million, or 4.4% of total net revenue, for the three months ended September 30, 2012. The decrease was primarily attributable to a $0.3 million decrease in compensation expense relating to new and existing employees partially offset by a $0.2 million increase in professional fees. Our product development capitalization rate for the three months ended September 30, 2013 and 2012, was 61.2% and 60.0%, respectively.

We may experience fluctuations in our capitalization rate due to the timing of our product development investments associated with: (i) integration-related activities in connection with integrating the operations of Broadlane with our existing operations; and (ii) investments in product development due to new product features and functionality, new technologies, and upgrades to our service offerings.

Selling and marketing expenses. Selling and marketing expenses for the three months ended September 30, 2013 were $12.9 million, or 7.8% of total net revenue, a decrease of $0.1 million, or 0.7%, from selling and marketing expenses of $13.0 million, or 7.9% of total net revenue, for the three months ended September 30, 2012. The decrease was attributable to a $0.4 million decrease in meeting expenses; a $0.2 million decrease in professional fees; and a $0.1 million decrease in compensation expense partially offset by a $0.6 million increase in share-based compensation.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2013 were $59.1 million, or 35.5% of total net revenue, an increase of $3.9 million, or 7.1%, from general and administrative expenses of $55.2 million, or 33.8% of total net revenue, for the three months ended September 30, 2012. The increase was attributable to a $2.5 million increase in professional fees; a $1.5 million increase in compensation expense to new and existing employees; a $0.6 million increase in share-based compensation; and a $0.3 million increase in telecommunications expense. The increase was partially offset by a $0.4 million decrease in transportation expense; a $0.4 million decrease in other operating infrastructure expense; and a $0.2 million decrease in bad debt expense.

Acquisition-related expenses. Acquisition and integration-related expenses for the three months ended September 30, 2013 were $0.1 million, or 0.1% of total net revenue, a decrease of $1.4 million, or 92.8%, from acquisition-related expenses of $1.5 million, or 0.9% of total net revenue, for the three months ended September 30, 2012. The decrease was attributable to lower costs relating to severance, retention and salaries relating to redundant positions. Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further details.

Depreciation. Depreciation expense for the three months ended September 30, 2013 was $10.9 million, or 6.6% of total net revenue, an increase of $3.2 million, or 41.5%, from depreciation of $7.7 million, or 4.7% of total net revenue, for the three months ended September 30, 2012. The increase was primarily attributable to depreciation resulting from purchases of property and equipment inclusive of increases to capitalized software development. As a result of our capital investments, we expect our depreciation expense to increase in future periods.

26

Amortization of intangibles. Amortization of intangibles for the three months ended September 30, 2013 was $15.3 million, or 9.2% of total net revenue, a decrease of $2.5 million, or 14.0%, from amortization of intangibles of $17.8 million, or 10.9% of total net revenue, for the three months ended September 30, 2012. The decrease in amortization expense compared to the prior year was due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Spend and Clinical Resource Management expenses. SCM operating expenses for the three months ended September 30, 2013 were $74.4 million, or 44.7% of total net revenue, an increase of $1.7 million, or 2.3%, from approximately $72.7 million, or 44.5% of total net revenue for the three months ended September 30, 2012. As a percentage of SCM segment net revenue, segment expenses were 72.1% and 73.4% for the three months ended September 30, 2013 and 2012, respectively.

The increase was primarily attributable to a $3.5 million increase in cost of revenue in connection with higher direct labor costs; a $0.9 million increase in professional fees; a $0.8 million increase in depreciation expense; a $0.3 million increase in share-based compensation; and a $0.2 million increase in compensation expense to new and existing employees. The increase was partially offset by a $1.4 million decrease in integration and restructuring costs associated with the Broadlane Acquisition, including exit costs associated with our facilities consolidation, severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs; a $0.9 million decrease in the amortization of intangibles as certain intangible assets reached the end of their useful life; a $0.8 million decrease in other operating infrastructure expense; a $0.4 million decrease in telecommunications expense; a $0.3 million decrease in meetings expense; and a $0.2 million decrease in transportation expense.

Revenue Cycle Management expenses. RCM operating expenses for the three months ended September 30, 2013 were $56.0 million, or 33.7% of total net revenue, an increase of $2.9 million, or 5.5%, from $53.1 million, or 32.5% of total net revenue, for the three months ended September 30, 2012. As a percentage of RCM segment net revenue, segment expenses were 88.7% and 82.5% for the three months ended September 30, 2013 and 2012, respectively.

The increase was primarily attributable to a $2.2 million increase in depreciation expense; a $1.2 million increase in telecommunications expense; a $1.0 million increase in share-based compensation; a $0.6 million increase in professional fees; and a $0.2 million increase in rent expense. The increase was partially offset by of a $1.5 million decrease in amortization of intangibles as certain intangible assets reached the end of their useful life; and a $0.8 million decrease in compensation expense to new and existing employees.

Corporate expenses. Corporate expenses for the three months ended September 30, 2013 were $13.4 million, an increase of $2.2 million, or 19.2%, from $11.2 million for the three months ended September 30, 2012, or 8.1% and 6.9% of total net revenue, respectively. The increase in corporate expenses was attributable to a $1.4 million increase in professional fees; a $0.9 million increase in compensation expense to new and existing employees; a $0.3 million increase in share-based compensation; and a $0.3 million increase in other operating infrastructure expense. The increase was partially offset by a $0.5 million decrease in telecommunications expense; and a $0.2 million decrease in transportation expense.

Non-operating Expenses

Interest expense. Interest expense for the three months ended September 30, 2013 was $11.8 million, a decrease of $4.9 million from interest expense of $16.7 million for the three months ended September 30, 2012. The decrease in interest expense was primarily due to a lower level of indebtedness compared to the prior period and a lower weighted average interest rate on our credit facility due to the debt refinancing in 2012. As of September 30, 2013, we had total indebtedness of $793.3 million compared to $885.0 million as of December 31, 2012. See Note 5 of the Notes to our Condensed Consolidated Financial Statements herein for more details.

Other income. Other income for the three months ended September 30, 2013 and 2012 was $0.1 million comprised mainly of rental income.

Income tax expense. Income tax expense for the three months ended September 30, 2013 was $4.0 million, a decrease of $0.4 million from an income tax expense of $4.4 million for the three months ended September 30, 2012, which was primarily attributable to a lower provision to return adjustment compared to the prior period. Income tax expense recorded during the three months ended September 30, 2013 reflected an effective income tax rate of 36.6%. Income tax expense recorded during the three months ended September 30, 2012 reflected an effective income tax rate of 44.5%.

In August 2013, we were notified by the Internal Revenue Service that our 2011 federal income tax return had been selected for examination. As a result of the carryback of our net operating loss from our 2012 federal income tax return to 2011, we were notified during the opening conference for the 2011 examination that our 2012 federal income tax return would also be included with the 2011 examination. Fieldwork on this examination commenced in September 2013. No conclusion or preliminary results have been communicated to us. We do not expect any material assessment to be realized from this examination. We anticipate the examination will be completed by September 2014.

27

Comparison of the Nine Months Ended September 30, 2013 and September 30, 2012

	Nine Months Ended September 30,
	2013				2012				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Net revenue:
Spend and Clinical Resource Management
Gross administrative fees(1)	$	351,602		68.9%	$	321,351		67.5%	$	30,251		9.4%
Revenue share obligation(1)		(135,155)		(26.5)		(120,599)		(25.3)		(14,556)		12.1
Other service fees		101,596		19.9		93,740		19.7		7,856		8.4
Total Spend and Clinical Resource Management		318,043		62.4		294,492		61.8		23,551		8.0
Revenue Cycle Management		191,907		37.6		181,849		38.2		10,058		5.5
Total net revenue	$	509,950		100.0%	$	476,341		100.0%	$	33,609		7.1%

(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, 2013 was $509.9 million, an increase of approximately $33.6 million, or 7.1%, from total net revenue of $476.3 million for the nine months ended September 30, 2012. The increase in total net revenue was comprised of a $23.5 million increase in SCM revenue and a $10.1 million increase in RCM revenue. For the nine months ended September 30, 2013 and 2012, performance-related fee revenue as a percentage of consolidated net revenue amounted to approximately 3.3% and 3.9%, respectively. Revenue may fluctuate significantly from period to period based upon achieving and thereof receiving client acknowledgement of the financial performance targets.

Spend and Clinical Resource Management net revenue. SCM net revenue for the nine months ended September 30, 2013 was $318.0 million, an increase of $23.5 million, or 8.0%, from net revenue of $294.5 million for the nine months ended September 30, 2012. The increase was the result of an increase in gross administrative fees of $30.2 million, or 9.4%, and an increase in other service fees of $7.8 million partially offset by an approximate $14.5 million increase in non-GAAP revenue share obligation.

— Gross administrative fees. Non-GAAP gross administrative fee revenue increased by $30.2 million, or 9.4%, as compared to the prior period, primarily due to an increase in the average administrative fee percentage realized under 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 client acknowledgement of achieved performance targets varies.

— Revenue share obligation. Non-GAAP revenue share obligation increased $14.5 million, or 12.1%, 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 38.4% and 37.5% for the nine months ended September 30, 2013 and 2012, respectively. We may experience fluctuations in our revenue share ratio based on the mix of clients who are entitled to a higher revenue share percentage due to increased purchasing volume in addition to an increase in the number of fixed-fee arrangements.

— Other service fees. The $7.8 million, or 8.4%, increase in other service fees primarily related to higher revenues from medical device consulting and strategic sourcing services due to an increased number of engagements from new and existing clients. In addition, we recorded $5.4 million in revenue associated with our annual client and vendor meeting for the nine months ended September 30, 2013 compared to $5.1 million for the nine months ended September 30, 2012.

Revenue Cycle Management net revenue. RCM net revenue for the nine months ended September 30, 2013 was $191.9 million, an increase of $10.1 million, or 5.5%, from net revenue of $181.8 million for the nine months ended September 30, 2012. The increase was attributable to an $8.3 million increase in revenue from our revenue cycle technology tools and a $1.8 million increase in revenue from our comprehensive revenue cycle service engagements. As we engage new clients, renew with existing clients and complete existing contracts, we will continue to experience fluctuations in our revenue cycle services financial performance as the business is characterized by a relatively small number of agreements, which each relate to large amounts of revenue.

28

Total Operating Expenses

	Nine Months Ended September 30,
	2013				2012				Change
	Amount		% of Revenue		Amount		% of Revenue		Amount		%
	(Unaudited, in thousands)
Operating expenses:
Cost of revenue	$	110,010		21.6%	$	100,583		21.1%	$	9,427		9.4%
Product development expenses		23,649		4.6		20,777		4.4		2,872		13.8
Selling and marketing expenses		46,925		9.2		46,709		9.8		216		0.5
General and administrative expenses		174,914		34.3		165,577		34.8		9,337		5.6
Acquisition and integration-related expenses		9,576		1.9		4,812		1.0		4,764		99.0
Depreciation		29,979		5.9		21,416		4.5		8,563		40.0
Amortization of intangibles		47,957		9.4		55,251		11.6		(7,294)		(13.2)
Total operating expenses		443,010		86.9		415,125		87.1		27,885		6.7
Operating expenses by segment:
Spend and Clinical Resource Management		238,777		46.8		220,938		46.4		17,839		8.1
Revenue Cycle Management		167,593		32.9		161,273		33.9		6,320		3.9
Total segment operating expenses		406,370		79.7		382,211		80.2		24,159		6.3
Corporate expenses		36,640		7.2		32,914		6.9		3,726		11.3
Total operating expenses	$	443,010		86.9%	$	415,125		87.1%	$	27,885		6.7%

Cost of revenue. Cost of revenue for the nine months ended September 30, 2013 was $110.0 million, or 21.6% of total net revenue, an increase of approximately $9.4 million, or 9.4%, from cost of revenue of $100.6 million, or 21.1% of total net revenue, for the nine months ended September 30, 2012. The increase was primarily attributable to an increase in service-related engagements in our SCM segment, which resulted in a higher cost of revenue given these activities are more labor intensive. In addition, for our engagements that include achieving financial performance targets, we recognize revenue based on when the financial performance targets are achieved and such achievement is acknowledged by our clients. There are instances during a reporting period where we incur a higher amount of direct costs with no associated revenue for these types of engagements. Also, we may record revenue in a reporting period where the direct costs have been recorded in a previous period. These events may affect period over period comparability.

Product development expenses. Product development expenses for the nine months ended September 30, 2013 were $23.6 million, or 4.6% of total net revenue, an increase of $2.9 million, or 13.8%, from product development expenses of $20.7 million, or 4.4% of total net revenue, for the nine months ended September 30, 2012. The increase was primarily attributable to a $2.2 million increase in compensation expense relating to new and existing employees; a $0.4 million increase in share-based compensation; and a $0.3 million increase in other operating infrastructure expense. Our product development capitalization rate for the nine months ended September 30, 2013 and 2012, was 56.1% and 59.9%, respectively.

We may experience fluctuations in our capitalization rate due to the timing of our product development investments associated with: (i) integration-related activities in connection with integrating the operations of Broadlane with our existing operations; and (ii) investments in product development due to new product features and functionality, new technologies, and upgrades to our service offerings.

Selling and marketing expenses. Selling and marketing expenses for the nine months ended September 30, 2013 were $46.9 million, or 9.2% of total net revenue, an increase of $0.2 million, or 0.5%, from selling and marketing expenses of $46.7 million, or 9.8% of total net revenue, for the nine months ended September 30, 2012. The increase was attributable to a $0.9 million increase in share-based compensation. The increase was partially offset by a $0.4 million decrease in professional fees and a $0.3 million decrease in other operating infrastructure expense. Total expenses related to our client and vendor meeting amounted to $6.5 million for the nine months ended September 30, 2013 and 2012.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2013 were $174.9 million, or 34.3% of total net revenue, an increase of $9.3 million, or 5.6%, from general and administrative expenses of $165.6 million, or 34.8% of total net revenue, for the nine months ended September 30, 2012. The increase was attributable to a $7.7 million increase in compensation expense to new and existing employees; a $1.3 million increase in share-based compensation expense; a $0.9 million impairment charge related to certain internally developed software products that were no longer being utilized; a $0.6 million increase in professional fees; and a $0.6 million increase in telecommunications expense. The increase was partially offset by a $0.6 million decrease in other operating infrastructure expense; a $0.5 million decrease in transportation expense; a $0.5 million decrease in bad debt expense; and a $0.2 million decrease in rent expense.

Acquisition-related expenses. Acquisition and integration-related expenses for the nine months ended September 30, 2013 were $9.6 million, or 1.9% of total net revenue, an increase of $4.8 million, or 99%, from acquisition-related expenses of $4.8 million, or 1.0% of total net revenue, for the nine months ended September 30, 2012. The increase was attributable to a $6.4 million charge for exit costs relating to consolidating certain facilities in Plano, Texas; a $0.2 million increase in system migration and standardization costs; partially offset by a $1.8 million decrease in other costs relating to severance, retention and salaries relating to redundant positions. Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further details.

29

Depreciation. Depreciation expense for the nine months ended September 30, 2013 was $30.0 million, or 5.9% of total net revenue, an increase of $8.6 million, or 40.0%, from depreciation of $21.4 million, or 4.5% of total net revenue, for the nine months ended September 30, 2012. The increase was primarily attributable to depreciation resulting from purchases of property and equipment inclusive of increases to capitalized software development. As a result of our capital investments, we expect our depreciation expense to increase in future periods.

Amortization of intangibles. Amortization of intangibles for the nine months ended September 30, 2013 was $48.0 million, or 9.4% of total net revenue, a decrease of $7.3 million, or 13.2%, from amortization of intangibles of $55.3 million, or 11.6% of total net revenue, for the nine months ended September 30, 2012. The decrease in amortization expense compared to the prior year was due to certain identified intangible assets that are nearing the end of their useful life under an accelerated method of amortization.

Segment Operating Expenses

Spend and Clinical Resource Management expenses. SCM operating expenses for the nine months ended September 30, 2013 were $238.7 million, or 46.8% of total net revenue, an increase of $17.8 million, or 8.1%, from approximately $220.9 million, or 46.4% of total net revenue for the nine months ended September 30, 2012. As a percentage of SCM segment net revenue, segment expenses were 75.1% and 75.0% for the nine months ended September 30, 2013 and 2012, respectively.

The increase was primarily attributable to a $10.4 million increase in cost of revenue in connection with higher direct labor costs; a $4.9 million increase in compensation expense with respect to new and existing employees; a $4.8 million increase in integration and restructuring costs associated with the Broadlane Acquisition, including exit costs associated with our facilities consolidation, severance, retention, certain performance-related salary-based compensation, and operating infrastructure costs; a $2.7 million increase in depreciation expense; a $1.6 million increase in share-based compensation expense; and a $0.5 million increase in meetings expense. The increase was partially offset by a $3.6 million decrease in the amortization of intangibles as certain intangible assets reached the end of their useful life; a $1.3 million decrease in telecommunications expense; a $0.9 million decrease in other operating infrastructure expense; a $0.5 million decrease in rent expense; a $0.4 million decrease in professional fees; and a $0.4 million decrease in transportation expense.

Revenue Cycle Management expenses. RCM operating expenses for the nine months ended September 30, 2013 were $167.6 million, or 32.9% of total net revenue, an increase of $6.3 million, or 3.9%, from $161.3 million, or 33.9% of total net revenue, for the nine months ended September 30, 2012. As a percentage of RCM segment net revenue, segment expenses were 87.3% and 88.7% for the nine months ended September 30, 2013 and 2012, respectively.

The increase was primarily attributable to a $4.7 million increase in depreciation expense; a $3.6 million increase in telecommunications expense; a $1.9 million increase in compensation expense with respect to new and existing employees; a $0.9 million impairment charge related to certain internally developed software products that were no longer being utilized; a $0.8 million increase in share-based compensation; a $0.5 million increase in other operating infrastructure expense; and a $0.4 million increase in rent expense. The increase was partially offset by a $3.7 million decrease in amortization of intangibles as certain intangible assets reached the end of their useful life; a $2.4 million decrease in cost of revenue; and a $0.4 million decrease in bad debt expense.

Corporate expenses. Corporate expenses for the nine months ended September 30, 2013 were $36.6 million, an increase of $3.7 million, or 11.3%, from $32.9 million for the nine months ended September 30, 2012, or 7.2% and 6.9% of total net revenue, respectively. The increase in corporate expenses was attributable to a $3.8 million increase in compensation expense with respect to new and existing employees; a $1.5 million increase in share-based compensation expense; a $1.1 million increase in depreciation expense. The increase was partially offset by a $1.6 million decrease in telecommunications expense; a $0.6 million decrease in other operating infrastructure expense; and a $0.5 million decrease in transportation expense.

Non-operating Expenses

Interest expense. Interest expense for the nine months ended September 30, 2013 was $35.5 million, a decrease of $15.2 million from interest expense of $50.7 million for the nine months ended September 30, 2012. The decrease in interest expense was primarily due to a lower level of indebtedness compared to the prior period and a lower weighted average interest rate on our credit facility due to the debt refinancing in 2012. As of September 30, 2013, we had total indebtedness of $793.4 million compared to $885.0 million as of December 31, 2012. See Note 5 of the Notes to our Condensed Consolidated Financial Statements herein for more details.

Other income. Other income for the nine months ended September 30, 2013 was $0.4 million, comprised mainly of rental income. Other income for the nine months ended September 30, 2012 was $0.4 million, primarily comprised of $0.3 million in rental income and $0.1 million from a gain on the sale of certain assets.

30

Income tax expense. Income tax expense for the nine months ended September 30, 2013 was $12.1 million, an increase of $8.6 million from an income tax expense of $3.5 million for the nine months ended September 30, 2012, which was primarily attributable to increased income before taxes. Income tax expense recorded during the nine months ended September 30, 2013 reflected an effective income tax rate of 38.1%. Income tax expense recorded during the nine months ended September 30, 2012 reflected an effective income tax rate of 31.7%. During the nine months ended September 30, 2012, we restructured several subsidiaries to reflect the integration of the Broadlane acquisition into our operations. This restructuring required us to recognize a reduction in our state income tax rate and as a result, we recognized a $1.4 million discrete tax benefit during the nine months ended September 30, 2012.

In August 2013, we were notified by the Internal Revenue Service that our 2011 federal income tax return had been selected for examination. As a result of the carryback of our net operating loss from our 2012 federal income tax return to 2011, we were notified during the opening conference for the 2011 examination that our 2012 federal income tax return would also be included with the 2011 examination. Fieldwork on this examination commenced in September 2013. No conclusion or preliminary results have been communicated to us. We do not expect any material assessment to be realized from this examination. We anticipate the examination will be completed by September 2014.

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, 2012. 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, 2012.

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) planned capital expenditures; (iv) our revenue share obligation and rebate payments; and (v) estimated federal and state income tax payments.

On December 13, 2012, we terminated our credit agreement with Barclays Bank PLC and JP Morgan Securities LLC and entered into a new credit agreement with JPMorgan Chase Bank, N.A. The Credit Agreement consists of: (i) a five-year $250.0 million senior secured term A loan facility; (ii) a seven-year $300.0 million senior secured term B loan facility; and (iii) a five-year $200.0 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.

On November 16, 2010, we closed the offering of an aggregate principal amount of $325.0 million of senior notes due 2018 (the “Notes”). 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.

Historically, we have utilized federal net operating loss carryforwards (“NOLs”) to reduce both regular and Alternative Minimum Tax (“AMT”) cash payments. Consequently, our federal cash tax payments in past reporting periods have been minimal. In 2012, we generated a NOL, the majority of which we will carryback to 2011. As a result, the credits previously utilized in 2011 will be reclaimed and utilized in 2013. Despite having NOLs and credits to offset certain tax amounts in 2013, we expect our cash tax liability to increase significantly in 2013 and in the future.

We have not historically utilized borrowings available under our credit agreement to fund operations. We have an auto-borrowing plan which causes all excess cash on hand to be used to repay our swing-line credit facility on a daily basis. 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 5 of the Notes to Condensed Consolidated Financial Statements for further details.

31

As of September 30, 2013, we had $10.0 million drawn on our revolving credit facility resulting in $189.0 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, 2013 and December 31, 2012, we had cash and cash equivalents of zero and $13.7 million, respectively.

Operating Activities.

The following table summarizes the cash provided by operating activities for the nine months ended September 30, 2013 and 2012:

	Nine Months Ended September 30,
	2013		2012		Change
	Amount		Amount		Amount		%
	(Unaudited, in millions)
Net income	$	19.7	$	7.5	$	12.2		162.7%
Non-cash items		91.8		91.6		0.2		0.2
Net changes in working capital		(1.7)		8.6		(10.3)		(119.8)
Net cash provided by operations	$	109.8	$	107.7	$	2.1		1.9%

Net income represents the income 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, impairment of assets, stock compensation expense, bad debt expense, deferred income tax expense, excess tax benefit from the exercise of stock options, (gain) 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 $91.8 million and $91.6 million for the nine months ended September 30, 2013 and 2012, respectively.

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, 2013, the working capital changes resulting in a decrease to cash flow from operations of $1.7 million primarily consisted of the following:

Decrease to cash flow

— an increase in prepaid expenses and other assets of $3.1 million primarily related to an increase in software maintenance costs of $3.0 million; deferred royalty costs of $0.4 million; and deferred sales expenses of $0.4 million partially offset by lower prepaid insurance of $1.0 million;

— an increase in other long-term assets of $1.1 million primarily related to the timing of cash payments for our deferred sales expenses;

— a $4.7 million working capital decrease in trade accounts payable due to the timing of various payment obligations;

32

— a $7.4 million decrease in accrued payroll and benefits due to payroll cycle timing and the payment of our 2012 performance-based compensation expense; and

— a decrease in deferred revenue of $3.4 million for cash receipts not yet recognized as revenue.

The working capital changes resulting in decreases to 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 decrease in accounts receivable of $5.5 million primarily related to the timing of invoicing and cash collections;

— a $4.1 million increase in accrued revenue share obligation and rebates due to the timing of cash payments and client purchasing volume for our GPO; and

— a $8.4 million increase in other accrued expenses primarily due to $4.7 million associated with the book overdraft discussed earlier in addition to the timing of other payment obligations.

For the nine months ended September 30, 2012, the working capital changes resulting in an increase to cash flow from operations of $8.6 million primarily consisted of the following:

Increase to cash flow

— a decrease in accounts receivable of $8.7 million primarily related to the timing of invoicing and cash collections;

— a decrease in other long-term assets of $1.8 million related to the timing of cash payments for our deferred sales expenses partially offset by an increase in deferred implementation costs;

— a $6.3 million increase in other accrued expenses due to the timing of various payment obligations; and

— an increase in deferred revenue of $2.6 million for cash receipts not yet recognized as revenue.

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

Decrease to cash flow

— an increase in prepaid expenses and other assets of $2.6 million primarily related to an increase in software maintenance costs and higher prepaid taxes partially offset by lower prepaid insurance;

— a $4.5 million working capital decrease in trade accounts payable due to the timing of various payment obligations; and

— a $4.3 million decrease in accrued payroll and benefits due to payroll cycle timing and the payment of our 2011 performance-based compensation expense.

Investing Activities.

Investing activities used $46.4 million of cash for the nine months ended September 30, 2013 which included $30.2 million for investment in software development and $16.2 million of capital expenditures.

Investing activities used $42.8 million of cash for the nine months ended September 30, 2012 which included $31.0 million for investment in software development and $11.8 million of capital expenditures.

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 client 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.

33

Financing Activities.

Financing activities used $77.1 million of cash for the nine months ended September 30, 2013. We made payments on our Term Loan Facility of $91.6 million consisting of $11.6 million in scheduled principal payments and $80.0 million voluntary prepayments from free cash flow. In addition, we made payments of $0.5 million that were made on our finance obligation (as discussed below). This was partially offset by $9.9 million received from the issuance of common stock and $5.1 million from the excess tax benefit from the exercise of stock options. As of September 30, 2013, our credit agreement requires an assessment of excess cash flow beginning for our fiscal year ended December 31, 2013. We would be required to make any excess cash flow payment during the first quarter of 2014.

Financing activities used $119.6 million of cash for the nine months ended September 30, 2012. We borrowed $90.0 million from our revolving credit facility consisting of: (i) a $55.0 million draw used to partially fund the deferred payment obligation made in January 2012; and (ii) a $35.0 million draw used to make a voluntary prepayment on our senior term loan facility. We also received $5.2 million from the issuance of common stock; and $1.2 million from the excess tax benefit from the exercise of stock options. This was offset by $120.1 million for the payment of the deferred purchase consideration made in connection with the Broadlane Acquisition. We made payments on our senior term loan facility of $94.8 million consisting of: (i) $4.8 million in scheduled principal payments; (ii) $55.0 million in voluntary prepayments from free cash flow; and (iii) a $35.0 million voluntary prepayment from our revolver draw discussed above. In addition, we made payments of $0.5 million that were made on our finance obligation as well as repurchased approximately 62,000 shares of our common stock under our share repurchase program (now expired) totaling $0.6 million.

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, 2013 for each respective year (Unaudited, in thousands):

	Amount
2013	$	2,783(1)
2014		11,894
2015		9,938
2016		7,794
2017		7,326
Thereafter		50,954
Total future minimum rental payments	$	90,689

  (1) Represents the remaining rental payments due during the fiscal year ending December 31, 2013.

As of September 30, 2013, 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 herein with the following non-GAAP financial measures: gross fees, gross administrative fees, revenue share obligation, EBITDA, adjusted EBITDA, adjusted EBITDA margin, 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 clients. Our revenue share obligation represents the portion of the gross administrative fees we are contractually obligated to share with certain of our GPO clients. 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 clients. 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.

34

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

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

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

EBITDA, adjusted EBITDA and adjusted EBITDA margin are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flow from continuing operating activities. Despite the advantages regarding the use and analysis of these measures as mentioned above, EBITDA, adjusted EBITDA and adjusted EBITDA margin, as disclosed herein, 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 herein, 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 herein.

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 and acquisition and integration-related expenses). 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.

35

The following table reconciles net income to Adjusted EBITDA for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
Adjusted EBITDA Reconciliation	2013		2012		2013		2012
	(Unaudited, in thousands)				(Unaudited, in thousands)
Net income	$	6,902	$	5,464	$	19,690	$	7,476
Depreciation		10,926		7,721		29,979		21,416
Depreciation (included in cost of revenue)		571		536		1,740		1,353
Amortization of intangibles		15,341		17,840		47,957		55,251
Amortization of intangibles (included in cost of revenue)		-		139		-		417
Interest expense, net of interest income(1)		11,813		16,672		35,544		50,717
Income tax expense		3,983		4,386		12,141		3,467
EBITDA		49,536		52,758		147,051		140,097
Share-based compensation expense(2)		4,361		2,781		11,783		7,796
Rental income from capitalizing building lease(3)		(109)		(109)		(328)		(328)
Acquisition and integration-related expenses(4)		111		1,535		9,576		4,812
Adjusted EBITDA	$	53,899	$	56,965	$	168,082	$	152,377

(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) 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, 2012 for further discussion of this rental income.

(4) Represents the amount attributable to acquisition and integration-related costs which include costs such as severance, retention, salaries relating to redundant positions, certain performance-related salary-based compensation, operating infrastructure costs and facility consolidation costs. We may incur costs in future periods related to our plans including but not limited to aligning service offerings and standardizing and migrating certain Broadlane operational systems and transactional data sets into our operational systems.

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 and depreciation, and non-recurring expense items on a tax-adjusted basis, non-cash share-based compensation and certain acquisition and integration-related expenses on a tax adjusted basis; and ii) diluted adjusted EPS as earnings per share excluding non-cash acquisition-related intangible amortization and depreciation, and non-recurring expense items, non-cash share-based compensation and certain acquisition and integration-related expenses on a tax-adjusted basis. 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 has been used historically by the Company as the financial performance metric that determines whether certain equity awards granted pursuant to the Company’s LTPIP 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 assess organic growth and accretive business transactions. As a significant portion of senior management’s incentive based compensation historically has been based on the achievement of certain diluted adjusted EPS growth over time, which is intended to reward them for organic growth and accretive business transactions, 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.

36

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Unaudited, in thousands)
Net income	$	6,902	$	5,464	$	19,690	$	7,476
Pre-tax non-cash, acquisition-related intangible amortization and depreciation		15,814		18,453		49,378		57,088
Pre-tax non-cash, share-based compensation(1)		4,361		2,781		11,783		7,796
Pre-tax acquisition and integration related expenses(2)		111		1,535		9,576		4,812
Tax effect on pre-tax adjustments(3)		(8,115)		(9,108)		(28,295)		(27,878)
Non-GAAP adjusted net income	$	19,073	$	19,125	$	62,132	$	49,294
	Three Months Ended September 30,				Nine Months Ended September 30,
Per share data	2013		2012		2013		2012
	(Unaudited)
EPS - diluted	$	0.11	$	0.09	$	0.32	$	0.13
Pre-tax non-cash, acquisition-related intangible amortization and depreciation		0.26		0.30		0.81		0.97
Pre-tax non-cash, share-based compensation(1)		0.07		0.05		0.19		0.13
Pre-tax acquisition and integration related expenses(2)		-		0.03		0.16		0.08
Tax effect on pre-tax adjustments(3)		(0.13)		(0.15)		(0.46)		(0.47)
Non-GAAP adjusted EPS - diluted	$	0.31	$	0.32	$	1.02	$	0.84
Weighted average shares - diluted (in 000s)		61,476		59,513		60,912		58,896

(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 acquisition and integration-related costs which include costs such as severance, retention, salaries relating to redundant positions, certain performance-related salary-based compensation, and operating infrastructure costs. We consider these charges to be non-operating expenses and unrelated to our underlying results of operations.

(3) Reflects the tax impact on the adjustments used to derive Non-GAAP diluted adjusted EPS. We used a tax rate of 40.0% for the three and nine months ended September 30, 2013 and 2012 since we believe the 40% will be our normalized long-term tax rate. The effective tax rate for the three months ended September 30, 2013 and 2012 was 36.6% and 44.5%, respectively. The effective tax rate for the nine months ended September 30, 2013 and 2012 was 38.1% and 31.7%, respectively.

New Pronouncements

Income Taxes

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update relating to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This update amends existing GAAP that required in certain cases, an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date, and retrospective application is permitted. We do not expect any impact from this update on our financial statements.

37

Comprehensive Income

In February 2013, the FASB issued an accounting standard update relating to improving the reporting of reclassifications out of accumulated other comprehensive income. The update would require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The update is effective for reporting periods beginning after December 15, 2012. We adopted this update on January 1, 2013.

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. 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 clients. 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 Facility and Revolving Credit Facility of $468.4 million as of September 30, 2013. The Term A Facility and the Revolving Credit Facility bear interest at LIBOR plus an applicable margin. The Term B Facility bears interest at LIBOR, subject to a floor of 1.25% plus an applicable margin. We also had outstanding an aggregate principal amount of our Notes of $325.0 million as of September 30, 2013, which bears interest at 8% per annum.

To the extent we do not hedge our variable rate debt, interest rates and interest expense could increase significantly.

A hypothetical 100 basis point increase in LIBOR, which would represent potential interest rate change exposure on our outstanding term loans, would have resulted in an approximate $3.5 million increase to our interest expense for the nine months ended September 30, 2013.

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

There have been no changes in our internal control over financial reporting for the three months ended September 30, 2013 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 effect on our business, operating results or financial condition.

38

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, 2012.

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

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

Exhibit No.	Description of Exhibit
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

39

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 6, 2013
Name: John A. Bardis	(Principal Executive Officer)
/s/ CHARLES O. GARNER	Chief Financial Officer	November 6, 2013
Name: Charles O. Garner	(Principal Financial Officer)

40

EXHIBIT INDEX

Exhibit No.	Description of Exhibit
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

41