PINC-2013.9.30-10QA


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________________
 FORM 10-Q/A
Amendment No. 1
________________________________________________________________ 
(Mark One)
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
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission File Number 001-36092
______________________________________________________________________
 Premier, Inc.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________
Delaware
 
35-2477140
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
13034 Ballantyne Corporate Place
Charlotte, North Carolina
 
28277
(Address of principal executive offices)
 
(Zip Code)
(704) 357-0022
(Registrant's telephone number, including area code)_____________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   o     No   x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  o
No   o
Indicate by check mark 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.
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
x
 
Smaller reporting company
o
 
 
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
As of November 11, 2013, there were 32,374,751 shares of the registrant's Class A common stock, par value $0.01 per share, and 112,607,832 shares of the registrant's Class B common stock, par value $0.000001 per share, outstanding.




BASIS FOR AMENDMENT
This Amendment No. 1 on Form 10-Q/A ("Amendment No.1") amends the Company's Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2013 originally filed on November 12, 2013, and is being filed for the purpose of revising the pro forma consolidated balance sheet and pro forma loss per share included in Note 5 “Subsequent Events” of the Premier, Inc. unaudited financial statements as of and for the three months ended September 30, 2013. Additionally, Part I, Item 4. Controls and Procedures and Part II, Item 6. Exhibits have been amended to update the Company's evaluation of its controls and procedures, and to provide currently dated certifications from the Company's Chief Executive Officer and Chief Financial Officer, as required by sections 302 and 906 of the Sarbanes-Oxley Act of 2002, respectively.
 Subsequent to the filing of the original Form 10-Q, the Company identified errors in the presentation of certain pro forma balance sheet and pro forma loss per share information related to its redeemable limited partner’s capital. Prior to and subsequent to the Company’s Reorganization and IPO (as defined in this Amendment No. 1), the Company reflects limited partners’ capital on the consolidated balance sheets as redeemable limited partners’ capital in temporary equity, rather than permanent equity, at the greater of book value or the redemption amount per the limited partnership agreement. However, following the IPO, limited partners are now able to exchange Class B common units (as defined in this Amendment No. 1) for cash or our Class A common stock which is currently greater than the book value redemption amount per the limited partnership agreement. As a result, the Company has revised its pro forma balance sheet as of September 30, 2013 to reflect a $2.6 billion non-cash increase in redeemable limited partner’s capital, based on the redemption amount at the IPO price of Class A common stock at $27.00. There is a corresponding offset to additional paid-in capital and retained earnings, which will create an accumulated deficit on the balance sheet. These balance sheet items represent non-cash activity and do not impact the Company’s operating performance. The Company has also assessed this balance sheet treatment of temporary equity on the calculation of earnings per share for GAAP purposes. As a result of the member owners being party to multiple agreements in conjunction with the Company’s Reorganization and IPO, GAAP per-share earnings have been adjusted to reflect the adjustment to redeemable limited partners’ capital to the redemption amount.
Except for the changes listed above, this Amendment No. 1 makes no other changes to the originally filed Form 10-Q. This Amendment No. 1 does not reflect events occurring after the filing of the original Form 10-Q or modify or update those disclosures affected by subsequent events. For the convenience of the reader, this Amendment No. 1 sets forth the originally filed Form 10-Q as amended hereby, in its entirety.

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TABLE OF CONTENTS

 
 
Page
Item 1.
 
Premier, Inc.
 
 
 
Statement of Income for the three months ended September 30, 2013 (Unaudited)
 
Statement of Cash Flows for the three months ended September 30, 2013 (Unaudited)
 
 
Premier Healthcare Solutions, Inc.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.
 




EXPLANATORY NOTE
This report represents the quarterly report for the quarter ended September 30, 2013 for Premier, Inc. (this "Quarterly Report"). On October 1, 2013, Premier, Inc. completed the initial public offering ("IPO") of its Class A common stock, par value $0.01 per share (the "Class A common stock"). Premier, Inc. is a holding company that was incorporated as a Delaware corporation on May 14, 2013 which, prior to the IPO, had no substantial assets and conducted no substantial activity, except in connection with the IPO. Premier, Inc.'s sole asset is a controlling equity interest in Premier Services, LLC, a Delaware limited liability company ("Premier GP"). Premier GP is the general partner of Premier Purchasing Partners, L.P., a California limited partnership, which historically conducted the group purchasing portion of our supply chain services business, which changed its name to “Premier Healthcare Alliance, L.P.” ("Premier LP") in connection with the Reorganization (as defined herein). Unless the context suggests otherwise, references in this Quarterly Report to "Premier," the "Company," "we," "us" and "our" refer (1) prior to the IPO and related transactions, to PHSI (as defined herein) and its consolidated subsidiaries and (2) after our IPO and related transactions, to Premier, Inc. and its consolidated subsidiaries.
Immediately following the consummation of the IPO, a series of transactions, which we refer to as the "Reorganization," occurred by which Premier GP became the general partner of Premier LP and Premier Healthcare Solutions, Inc., a Delaware corporation, through which we historically conducted the majority of the performance services portion of our business under the name "Premier, Inc.," now Premier Healthcare Solutions, Inc., ("PHSI"), became our indirect subsidiary through Premier LP. PHSI, Premier LP and Premier Supply Chain Improvement, Inc., a Delaware corporation and our indirect subsidiary (through Premier LP) through which we historically conducted certain portions of our supply chain services ("PSCI"), historically conducted all of our business. Upon the consummation of the Reorganization and the IPO, our assets and business operations are substantially similar to those of PHSI, Premier LP and PSCI prior to the Reorganization and the IPO, and we will conduct all of our business through Premier LP and its subsidiaries.
Because the Reorganization and the IPO had not yet been consummated and Premier, Inc. had no substantial assets and conducted no substantial activities as of September 30, 2013, the financial statements and other information of PHSI and its consolidated subsidiaries are included in this Quarterly Report as of September 30, 2013 and for the quarters ended September 30, 2013 and 2012. For more information about the Reorganization and the IPO, refer to Note 5 - Subsequent Events to the Premier, Inc. Notes to Financial Statements of this Quarterly Report.
Throughout this Quarterly Report, references to "member owners" refer collectively to our past, present and future customers, or members, who have owned, or who currently own, limited partnership interests in Premier LP and/or common stock of PHSI, and, as the context relates to the completion of the Reorganization and the IPO, as described in the final prospectus, dated September 25, 2013, filed with the United States Securities and Exchange Commission (the "SEC") pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on September 27, 2013 relating to the Registration Statement on Form S-1 (File No. 333-190828), and any amendment or supplement thereto (the "Prospectus"), beneficially own shares of Premier, Inc. Class B common stock, par value $0.000001 per share, (the "Class B common stock"), and Class B common units after giving effect to the Reorganization, provided, that, in the context of discussions of the group purchasing organization ("GPO") participation agreements throughout this Quarterly Report, the term "member owner" also includes any related entity or affiliate of a member owner that is approved by Premier LP to be the signatory of such GPO participation agreement in lieu of the member owner.

4



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements made in this Quarterly Report that are not statements of historical or current facts, such as those under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Premier to be materially different from historical results or from any future results or projections expressed or implied by such forward-looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers are urged to consider statements in conditional or future tenses or that include terms such as "believes," "belief," "expects," "estimates," "intends," "anticipates" or "plans" to be uncertain and forward-looking. Forward-looking statements may include comments as to Premier's beliefs and expectations regarding future events and trends affecting its business and are necessarily subject to uncertainties, many of which are outside Premier's control. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to: competition which could limit Premier’s ability to maintain or expand market share within its industry, consolidation in the healthcare industry, potential delays in generating or an inability to generate revenues if the sales cycle takes longer than expected, the terminability of member participation in Premier's GPO programs with limited or no notice, the impact of Premier's business strategy that involves reducing the prices for products and services in its supply chain services segment, the rate at which the markets for Premier's non-GPO services and products develop, the dependency of Premier's members on payments from third-party payors, Premier's reliance on administrative fees which it receives from GPO suppliers, Premier's ability to maintain third-party provider and strategic alliances or enter into new alliances, Premier's ability to offer new and innovative products and services, the portion of revenues Premier receives from its largest members, risks related to future acquisition opportunities, potential litigation, data loss or corruption due to failures or errors in Premier's systems and service disruptions at its data centers, breaches or failures of Premier's security measures, Premier's ability to use, disclose, de-identify or license data and to integrate third-party technologies, Premier's reliance on partners and other third parties, Premier's use of "open source" software, changes in industry pricing benchmarks, any increase in the safety risk profiles of prescription drugs or the withdrawal of prescription drugs from the market, Premier's ability to maintain and expand its existing base of drugs in our specialty pharmacy, Premier's dependency on contract manufacturing facilities located in various parts of the world, Premier's ability to attract, hire, integrate and retain key personnel, adequate protection of Premier's intellectual property, any alleged infringement, misappropriation or violation of third-party proprietary rights, potential sales and use tax liability in certain jurisdictions, Premier's reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and its own systems for providing services to its users, Premier's future indebtedness and its ability to obtain additional financing, fluctuation of Premier's cash flows, quarterly revenues and results of operations, changes in the political, economic or regulatory healthcare environment, Premier’s compliance with federal and state laws governing financial relationships among healthcare providers and the submission of false or fraudulent healthcare claims, interpretation and enforcement of current or future antitrust laws and regulations, potential healthcare reform and new regulatory requirements placed on our software, services and content, compliance with federal and state privacy, security and breach notification laws, product safety concerns and regulation, Premier's holding company structure, different interests among Premier’s member owners or between Premier's member owners and itself, Premier’s ability to effectively deploy the net proceeds from future issuances of Premier, Inc.'s Class A common stock or debt securities, the ability of Premier member owners to exercise significant control over it, including through the election of all of Premier's directors, Premier's status as a "controlled company" within the meaning of the Nasdaq Global Select Market ("NASDAQ") rules, the terms of agreements between Premier and its member owners, payments made under the tax receivable agreement to Premier LP's limited partners, Premier's ability to realize all or a portion of the tax benefits that are expected to result from the acquisition of Class B common units from the limited partners, changes to Premier LP's allocation methods that may increase a tax-exempt limited partner's risk that some allocated income is unrelated business taxable income, Premier's entitlement to a 70% rather than 80% dividends received deduction with respect to dividends received from Premier LP's corporate subsidiaries, the dilutive effect of Premier LP's issuance of additional units or future issuances by Premier of common stock and/or preferred stock, provisions in Premier's certificate of incorporation and bylaws and the LP Agreement and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of Premier, any determination that Premier, Inc. is an investment company, the requirements of being a public company, Premier's inexperience and lack of operating history as a publicly-traded company, failure to establish and maintain an effective system of internal controls, any downgrade in securities or industry analysts' recommendations about Premier's business or Class A common stock, the volatility of Premier's Class A common stock price, the number of shares of Class A common stock that will be eligible for sale or exchange in the near future and the dilutive effect of such issuances, Premier's intention not to pay cash dividends on its Class A common stock and the risk factors discussed under the heading "Risk Factors" in the Prospectus.
More information on potential factors that could affect Premier's financial results is included from time to time in the "Forward Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of Premier's periodic and current filings with the SEC, as well as those discussed under the "Risk Factors" and "Forward Looking Statements" section of the Prospectus, which are available on Premier's website at http://investors.premierinc.com/. You should not place undue reliance on any of Premier's forward looking statements which speak only

5



as of the date they are made, and Premier undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Furthermore, Premier cannot guarantee future results, events, levels of activity, performance or achievements.


6



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PREMIER, INC.
Balance Sheets

 
September 30, 2013
June 30, 2013
 
(Unaudited)
 
Assets
 
 
Cash
$
1

$
1

Other assets
126,776


Total assets
$
126,777

$
1

 
 
 
Stockholder's Equity
 
 
Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, no shares issued and outstanding at September 30, 2013 and June 30, 2013, respectively
$

$

Class A common stock, par value $0.01 per share, 500,000,000 shares authorized, 100 shares issued and outstanding at September 30, 2013 and June 30, 2013, respectively
1

1

Class B common stock, par value $0.000001 per share, 600,000,000 shares authorized, no shares issued and outstanding at September 30, 2013 and June 30, 2013, respectively


Additional paid-in capital
325,066


Accumulated deficit
(198,290
)

Total stockholder's equity
$
126,777

$
1

See accompanying notes to financial statements.

7



PREMIER, INC.
Statement of Income
Three Months Ended September 30, 2013
(Unaudited)

Operating expenses:
 
Selling, general and administrative expense
$
325,066

Loss before income taxes
325,066

Income tax benefit
(126,776
)
Net loss
$
(198,290
)
 
 
Weighted average shares outstanding - basic and diluted
100

 
 
Loss per share - basic and diluted
$
(1,982.90
)
See accompanying notes to financial statements.


8



PREMIER, INC.
Statement of Cash Flows
Three Months Ended September 30, 2013
(Unaudited)

Operating activities
 
Net loss
$
(198,290
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
Stock-based compensation expense
325,066

Change in other current assets
(126,776
)
Net cash provided by operating activities

Cash and cash equivalents at beginning of period
1

Cash and cash equivalents at end of Period
$
1


See accompanying notes to financial statements.



9



PREMIER, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Premier, Inc. is a holding company and was incorporated in the state of Delaware on May 14, 2013 for the sole purpose of becoming the managing member of Premier Services, LLC. Premier Services, LLC will act as the general partner of Premier Healthcare Alliance, L.P. ("Premier LP") upon completion of the initial public offering ("IPO") and Reorganization.
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted. The financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring adjustments. Premier, Inc. believes that all disclosures are adequate to make the information presented not misleading and should be read in conjunction with the financial statements and related footnotes contained in the prospectus, dated September 25, 2013, filed with the SEC (the "Prospectus").
The preparation of Premier, Inc.'s financial statements requires management to make estimates and judgments that affect the reported amounts of assets and expenses and related disclosure of contingent assets and liabilities. Estimates are evaluated on an ongoing basis. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
(2) STOCKHOLDERS' EQUITY
Premier, Inc. has been capitalized with the issuance of 100 shares of Class A common stock with a par value of $0.01 per share for a total of $1.00.
Holders of Class A common stock are entitled to (i) one vote for each share held of record on all matters submitted to a vote of stockholders, (ii) to receive dividends, when and if declared by the board of directors out of funds legally available therefore, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock or any class of series of stock having a preference over or the right to participate with the Class A common stock with respect to the payment of dividends or other distributions and (iii) receive pro rata, based on the number of shares of Class A common stock held, the remaining assets available for distribution upon the dissolution or liquidation of Premier, Inc., after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any.
Holders of Class B common stock are (i) entitled to one vote for each share held of record on all matters submitted to a vote of stockholders and (ii) not entitled to receive dividends or to receive a distribution upon the dissolution or a liquidation of Premier, Inc., other than dividends payable in shares of Premier, Inc.'s common stock. Class B common stock will not be listed on any exchange and, except in connection with any permitted sale or transfer of Class B common units, cannot be sold or transferred.
(3) EARNINGS PER SHARE
Basic earnings per share of Premier, Inc. is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Except when the effect would be anti-dilutive, the diluted earnings per share calculation, which is calculated using the treasury stock method, includes the impact of restricted stock units, shares of non-vested performance share awards and shares that could be issued under the outstanding stock options.

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The following table provides a reconciliation of common shares used for basic earnings per share and diluted earnings per share for the three months ended September 30, 2013:
Weighted average number of common shares used for basic earnings per share (a)
100

Effect of potentially dilutive shares (b)

Weighted average number of common shares and potential dilutive shares used for diluted earnings per share
100

Anti-dilutive shares outstanding at period-end that are excluded from the above reconciliation (c)

(a) Weighted average number of common shares used for basic earnings per share excludes 46,206 weighted average shares of non-vested restricted stock units and 54,125 weighted average shares of non-vested performance share awards for the three months ended September 30, 2013.
(b) The effect of 26,408 restricted stock units for the three months ended September 30, 2013 was excluded from the diluted weighted average shares outstanding due to the net loss sustained for the period.
(c) Represents stock options excluded from the calculation of diluted earnings per share as such options had exercise prices in excess of the weighted average market price of Premier, Inc.'s common stock during the period.
(4) STOCK-BASED COMPENSATION
Stock-based compensation cost is recognized over the requisite service period, which generally equals the stated vesting period. Pre-tax stock-based compensation expense was $0.3 million for the three months ended September 30, 2013, with a resulting deferred tax asset of $0.1 million included in other assets on the balance sheet, calculated at a rate of 39%. At September 30, 2013, there is $64.8 million of unrecognized stock-based compensation related to non-vested awards that will be amortized over 2.75 years.
Premier, Inc. 2013 Equity Incentive Plan
The Premier, Inc. 2013 Equity Incentive Plan (the "2013 Equity Incentive Plan") provides for grants of up to 11,260,783 shares of Class A common stock, all of which are eligible to be issued as non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units or performance awards. As of September 30, 2013, there are 7,667,770 shares available for grant under the 2013 Equity Incentive Plan.
On September 25, 2013, certain of Premier Inc.'s employees and members of the board of directors were granted restricted stock units, performance award units and/or stock options. In addition, on September 25, 2013, all employees of Premier, Inc. were granted a one-time celebration award of restricted stock units, which vest in full on July 1, 2016.
Restricted Stock Units. On September 25, 2013, Premier, Inc. granted 414,987 restricted stock units to certain employees, 11,112 restricted stock units to non-employee directors and 282,800 celebration restricted stock units to all employees, with a grant date fair value of $27.00 per share. The employee restricted stock units vest in full on July 1, 2016 and the non-employee board of director restricted stock units vest in full on September 25, 2014.
Performance Share Awards. On September 25, 2013, Premier, Inc. granted 829,922 performance share awards, with a grant date fair value of $27.00 per share to certain employees. The performance share awards vest on July 1, 2016, either in part or in full, contingent upon the achievement of certain performance criteria.
Stock Options. Stock options have a term of 10 years from the date of grant; however, vested stock options will expire either after 12 months of an employee's termination with Premier, Inc. or immediately upon an employee's termination with Premier, Inc., depending on the termination circumstances. On September 25, 2013, Premier, Inc. granted 2,054,192 stock options, with an exercise price equal to the fair market value of a share of Premier, Inc.'s common stock on the grant date of $27.00 per share, to certain employees. The stock options vest in three equal annual installments, commencing on the first anniversary of July 1, 2013.
For purposes of determining compensation expense, the grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model which requires the use of various assumptions including the expected life of the option, expected dividend rate, expected volatility and risk-free interest rate. Key assumptions used for determining the fair value of stock options granted were as follows:

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Expected life (1)
6 years

Expected dividend (2)

Expected volatility (3)
42.00
%
Risk-free interest rate (4)
1.71
%
(1) The six-year expected life (estimated period of time outstanding) of stock options granted was estimated using the "Simplified Method" which utilizes the midpoint between the vesting date and the end of the contractual term. This method was utilized for the stock options due to the lack of historical exercise behavior of Premier Inc.'s employees.
(2) No dividends are expected to be paid over the contractual term of the stock options granted, resulting in the use of a zero expected dividend rate.
(3) The expected volatility rate is based on the observed historical volatilities of comparable companies.
(4) The risk-free interest rate was interpolated from the five-year and seven-year United States constant maturity market yield as of the date of the grant.
(5) SUBSEQUENT EVENTS
Initial Public Offering
On October 1, 2013, Premier, Inc. consummated its IPO of 32,374,751 shares of its Class A common stock, at a price of $27.00 per share. This included 4,222,793 shares sold pursuant to the overallotment option granted to the underwriters by Premier, Inc., which was exercised in full prior to the consummation of the IPO, raising net proceeds of approximately $821.7 million after underwriting discounts and commissions but before expenses.
Premier, Inc. used approximately (i) $543.9 million of the net proceeds from the IPO to acquire 21,428,571 Class B common units from the member owners, (ii) $30.1 million of the net proceeds to acquire 1,184,882 Class B common units from PHSI and (iii) $247.7 million of the net proceeds to acquire 9,761,298 newly issued Class A common units of Premier LP, or the Class A common units, from Premier LP, in each case for a price per unit equal to the price paid per share of Class A Common Stock by the underwriters to Premier, Inc. in connection with the IPO. All Class B common units purchased by Premier, Inc. with the net proceeds from this offering automatically converted to Class A common units, pursuant to the terms of the Amended and Restated Limited Partnership Agreement of Premier LP (the "LP Agreement"), and were contributed by Premier, Inc. to Premier GP.
Reorganization
On October 1, 2013 (the "Effective Date"), Premier, Inc. consummated the Reorganization. In connection with the Reorganization and IPO, immediately following the Effective Date, all of Premier LP's limited partners that approved the Reorganization received an amount of Class B common units and capital account balances in Premier LP equal to their percentage interests and capital account balances in Premier LP immediately preceding the Reorganization. Additionally, immediately following the effective date of the LP Agreement, all of the stockholders (consisting of member owners) of PHSI that approved the Reorganization contributed their PHSI common stock to Premier LP in exchange for additional Class B common units based on such stockholder's percentage interest in the fair market valuation of PHSI and Premier LP prior to the Reorganization. As a result of the foregoing contributions, PHSI became a wholly owned subsidiary of Premier LP.
In connection with the Reorganization, the member owners purchased from Premier, Inc. 112,607,832 shares of Class B common stock, for par value, $0.000001 per share, which number of shares of Class B common stock equaled the number of Class B common units held by the member owners immediately following the IPO, pursuant to a stock purchase agreement.
Below is a summary of the principal documents that effected the Reorganization and define and regulate the governance and control relationships among Premier, Inc., Premier LP and the member owners after the completion of the Reorganization and IPO.
LP Agreement
In connection with the Reorganization and IPO, the LP Agreement made Premier GP the general partner of Premier LP. As the general partner of Premier LP, Premier GP generally controls the day-to-day business affairs and decision-making of Premier LP without the approval of any other partner, subject to certain limited partner approval rights. As such, Premier, Inc., the sole member of Premier GP, is responsible for all operational and administrative decisions of Premier LP. In accordance with the LP Agreement, subject to applicable law or regulation and the terms of Premier LP's financing agreements, Premier GP will cause

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Premier LP to make quarterly distributions out of its estimated taxable net income to Premier GP and to the holders of Class B common units as a class in an aggregate amount equal to Premier LP's total taxable income for each such quarter multiplied by the effective combined federal, state and local income tax rate then payable by Premier, Inc. to facilitate payment by each Premier LP partner of taxes, if required, on its share of taxable income of Premier LP. In addition, in accordance with the LP Agreement, Premier GP may cause Premier LP to make additional distributions to Premier GP and to the holders of Class B common units as a class in proportion to their respective number of units, subject to any applicable restrictions under Premier LP's financing agreements or applicable law. Premier GP will distribute any amounts it receives from Premier LP to Premier, Inc., which Premier, Inc. will use to (i) pay applicable taxes, (ii) meet its obligations under the tax receivable agreement, and (iii) meet its obligations to the member owners under the exchange agreement if they elect to convert their Class B common units for shares of its Class A common stock and Premier, Inc. elects to pay some or all of the consideration to such member owners in cash. In the event that a limited partner of Premier LP holding Class B common units not yet eligible to be exchanged for shares of Premier, Inc's Class A common stock pursuant to the terms of the exchange agreement (i) ceases to participate in Premier, Inc.'s GPO programs, (ii) ceases to be a limited partner of Premier LP (except as a result of a permitted transfer of its Class B common units), (iii) ceases to be a party to a GPO participation agreement (subject to certain limited exceptions) or (iv) becomes a related entity of, or affiliated with, a competing business of Premier LP, in each case, Premier LP will have the option to redeem all of such limited partner's Class B common units not yet eligible to be exchanged at a purchase price set forth in the LP Agreement. In addition, the limited partner will be required to exchange all Class B common units eligible to be exchanged on the next exchange date following the date of the applicable termination event described above.
Voting Trust Agreement
Additionally, in connection with the Reorganization and IPO, Premier, Inc.'s member owners entered into a voting trust agreement, which became effective upon the completion of the Reorganization and IPO and pursuant to which the member owners contributed their Class B common stock into Premier Trust, under which Wells Fargo Delaware Trust Company, N.A., as trustee, acts on behalf of the member owners for purposes of voting their shares of Class B common stock. As a result of the voting trust agreement, the member owners will retain beneficial ownership of the Class B common stock, while the trustee is the legal owner of such equity. Pursuant to the voting trust agreement, the trustee will vote all of the member owners' Class B common stock as a block in the manner determined by the plurality of the votes received by the trustee from the member owners for the election of directors to serve on our board of directors, and by a majority of the votes received by the trustee from the member owners for all other matters.
Exchange Agreement
In connection with the Reorganization and IPO, Premier, Inc., Premier LP and the member owners entered into an exchange agreement which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of the exchange agreement, subject to certain restrictions, commencing on October 31, 2014, and during each year thereafter, each member owner will have the cumulative right to exchange up to one-seventh of its initial allocation of Class B common units, as well as any additional Class B common units purchased by such member owner pursuant to certain rights of first refusal (discussed below), for shares of Class A common stock (on a one-for-one basis subject to customary adjustments for subdivisions or combinations by split, reverse split, distribution, reclassification, recapitalization or otherwise), cash or a combination of both, the form of consideration to be at the discretion of Premier, Inc.'s audit committee (or another committee of independent directors) of Premier, Inc.'s board of directors. This exchange right can be exercised on a quarterly basis (subject to certain restrictions contained in the registration rights agreement described below) and is subject to rights of first refusal in favor of the other holders of Class B common units and Premier LP. For each Class B common unit that is exchanged pursuant to the exchange agreement, the member owner will also surrender one corresponding share of our Class B common stock, which will automatically be retired.
Registration Rights Agreement
In connection with the Reorganization and IPO, Premier, Inc. and the member owners entered into a registration rights agreement which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of the registration rights agreement, as soon as practicable from the date that is 12 full calendar months after the completion of this offering, Premier, Inc. must use all reasonable efforts to cause a resale shelf registration statement to become effective for resales from time to time of its Class A common stock that may be issued to the member owners in exchange for their Class B common units pursuant to the exchange agreement, subject to various restrictions. Subject to certain exceptions, Premier, Inc. will use reasonable efforts to keep the resale shelf registration statement effective for seven years. In addition, Premier, Inc. will undertake to conduct an annual company-directed underwritten public offering to allow the member owners to resell Class A common stock and, at Premier, Inc.'s election, to permit it to sell primary shares, following the first quarterly exchange date of each of the first three years during which the member owners have the right to exchange their Class B common units for shares of Class A common stock. Premier, Inc. will not be required to conduct a company-directed underwritten public offering unless the number of shares of Class A common stock requested by the member owners (and any third parties) to be registered in the applicable company-directed underwritten

13



public offering constitutes the equivalent of at least 3.5% of the aggregate number of Class A common units and Class B common units, or, collectively, the common units, outstanding. If the offering minimum has not been met, Premier, Inc. will either proceed with the company-directed underwritten public offering (such decision being in Premier, Inc.'s sole discretion) or notify the member owners that Premier, Inc. will abandon the offering. After the third year during which member owners have the right to exchange their Class B common units for shares of Premier, Inc.'s Class A common stock, Premier, Inc. may elect to conduct a company-directed underwritten public offering in any subsequent year. Premier, Inc., as well as the member owners, and third parties, will be subject to customary prohibitions on sale prior to and for 60 days following any company-directed underwritten public offering. The registration rights agreement also grants the member owners certain "piggyback" registration rights with respect to other registrations of Class A common stock.
Tax Receivable Agreement
In connection with the Reorganization and IPO, Premier, Inc. entered into a tax receivable agreement with the member owners which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of the tax receivable agreement, Premier, Inc. has agreed to pay to the member owners, generally over a 15-year period (under current law), 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income and franchise tax that Premier, Inc. actually realizes (or is deemed to realize, in the case of payments required to be made upon certain occurrences under such tax receivable agreement) as a result of the increases in tax basis resulting from the initial sale of Class B common units by the member owners in connection with the Reorganization, as well as subsequent exchanges by such member owners pursuant to the exchange agreement, and of certain other tax benefits related to Premier, Inc. entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
GPO Participation Agreement
In connection with the Reorganization and IPO, Premier, Inc.'s member owners entered into GPO participation agreements with Premier LP which became effective upon the completion of the Reorganization and IPO. Pursuant to the terms of its GPO participation agreement, each member owner will receive cash sharebacks, or revenue share, from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's acute and alternate site providers and other eligible non-healthcare organizations that are owned, leased or managed by, or affiliated with, each such member owner, or member facilities, through Premier, Inc's GPO supplier contracts. In addition, Premier, Inc's two largest regional GPO member owners, which represented approximately 17% of Premier LP's gross administrative fees revenue for fiscal year 2013, will each remit all gross administrative fees collected by such member owner based upon purchasing by such member owner's member facilities through the member owner's own GPO supplier contracts and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to Premier LP subject to certain termination rights, these GPO participation agreements will be for an initial five-year term, although Premier LP's two largest regional GPO member owners have entered into agreements with seven-year terms.
The terms of the GPO participation agreements vary as a result of provisions in Premier, Inc.'s existing arrangements with member owners that conflict with the terms of the GPO participation agreement and which by the express terms of the GPO participation agreement are incorporated by reference and deemed controlling and will continue to remain in effect. In certain other instances, Premier LP and member owners have entered into GPO participation agreements with certain terms that vary from the standard form, which were approved by the member agreement review committee of Premier, Inc.'s board of directors, based upon regulatory constraints, pending merger and acquisition activity or other circumstances affecting those member owners.
Effects of the Reorganization
Immediately following the consummation of the Reorganization and IPO:
Premier, Inc. became the sole member of Premier GP and Premier GP became the general partner of Premier LP. Through Premier GP, Premier, Inc. exercises indirect control over the business operated by Premier LP, subject to certain limited partner approval rights. Premier GP has no employees and acts solely through its board of managers and appointed officers in directing the affairs of Premier LP;
the member owners hold 112,607,832 shares of Class B common stock and 112,607,832 Class B common units;
Premier GP holds 32,374,751 Class A common units;
through their holdings of Class B common stock, the member owners have approximately 78% of the voting power in Premier, Inc.;
the investors in the IPO collectively own all of Premier, Inc.'s outstanding shares of Class A common stock and collectively have approximately 22% of the voting power in Premier, Inc.; and

14



Premier LP is the operating partnership and parent company to all of Premier, Inc.'s other operating subsidiaries, including PSCI and PHSI.
Any newly admitted Premier LP limited partners must also become parties to the exchange agreement, the registration rights agreement, the voting trust agreement and the tax receivable agreement, in each case on the same terms and conditions as the member owners (except that any Class B common units acquired by such newly admitted Premier LP limited partners will not be subject to the seven-year vesting schedule set forth in the LP Agreement and the exchange agreement). Any newly admitted Premier LP limited partner will also enter into a GPO participation agreement with Premier LP.
Unaudited Pro Forma Consolidated Financial Statements
The unaudited pro forma consolidated balance sheet as of September 30, 2013 and the unaudited pro forma consolidated statement of income for the three months ended September 30, 2013 present the results of PHSI and giving pro forma effect to Premier, Inc. and the Reorganization, IPO and the use of the net proceeds from the IPO as if such transactions occurred on July 1, 2013 for the consolidated statement of income and as of September 30, 2013 for the consolidated balance sheet.
The pro forma adjustments give effect to:
the Reorganization, including (i) the issuance of 32,374,751 shares of Class A common stock in the IPO, or approximately 22% of the Class A common stock and Class B common stock, collectively, outstanding after the Reorganization and IPO, at an IPO price of $27.00 per share and the use of the net proceeds therefrom to purchase (A) Class A common units from Premier LP, (B) Class B common units from PHSI and (C) Class B common units from Premier, Inc.'s member owners, (ii) the entry by Premier LP, Premier GP and the member owners into the LP Agreement and (iii) the issuance of 112,607,832 shares of Class B common stock to the member owners;
payments to each member owner of revenue share from Premier LP equal to 30% of all gross administrative fees collected by Premier LP based upon purchasing by such member owner's member facilities through Premier LP's GPO supplier contracts (and, in addition, Premier LP's two largest regional GPO member owners, which represented approximately 17% of Premier LP's gross administrative fees revenue for fiscal year 2013, will each remit all gross administrative fees collected by such member owner based upon purchasing by such member owner's member facilities through the member owner's own GPO supplier contracts and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to Premier LP);
the change from the 99% noncontrolling interest held by the limited partners of Premier LP prior to the Reorganization to the approximately 78% noncontrolling interest held by the limited partners of Premier LP subsequent to the Reorganization and IPO;
the change in the allocation of Premier LP's income from 1% of operating income and 5% of investment income to PHSI prior to the Reorganization and IPO to approximately 22% of Premier LP's income to Premier, Inc. (indirectly through Premier GP) subsequent to the Reorganization and IPO as the result of the modified income allocation provisions of the LP Agreement and Premier, Inc.'s purchase of approximately 22% of the common units;
adjustments to reflect redeemable limited partners' capital at the greater of the book value or redemption amount per the LP Agreement;
adjustments that give effect to the tax receivable agreement, including the effects of the increase in the tax basis of Premier LP's assets resulting from Premier, Inc.'s purchase of Class B common units from the member owners; and
payments due to member owners pursuant to the tax receivable agreement equal to 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local income and franchise tax that Premier, Inc. actually realizes (or is deemed to realize in the case of certain payments required to be made upon certain occurrences under such tax receivable agreement) as a result of the increases in the tax basis of Premier LP's assets resulting from Premier, Inc.'s purchase of Class B common units from the member owners and of certain other tax benefits related to Premier, Inc. entering into the tax receivable agreement.
The unaudited pro forma consolidated financial information reflects the manner in which Premier, Inc. accounted for the Reorganization and IPO. Specifically, Premier, Inc. accounted for the Reorganization as a non-substantive transaction in a manner similar to a transaction between entities under common control pursuant to Accounting Standards Codification Topic 805, Business Combinations. Accordingly, after the Reorganization, the assets and liabilities of Premier, Inc. are reflected at their carryover basis. The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect Premier, Inc.'s results of operations or financial position that would have occurred had it operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being

15



indicative of Premier, Inc.'s financial condition or results of operations had the Reorganization and IPO and the contemplated use of the estimated net proceeds from the IPO occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project Premier, Inc.'s results of operations or financial position for any future period or date.
The unaudited pro forma consolidated financial statements should be read together with "Unaudited Pro Forma Consolidated Financial Information," "Structure," "Selected Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements and related notes appearing in the Prospectus, Premier, Inc.'s financial statements as of and for the three months ended September 30, 2013 and with PHSI's consolidated financial statements as of and for the three months ended September 30, 2013 and 2012 included under Item 1 of this Quarterly Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in Item 2 of this Quarterly Report.

16



PREMIER, INC.
Pro Forma Consolidated Balance Sheet
September 30, 2013
(Unaudited)
(In thousands, except share data)
 
PHSI
Pro Forma Adjustments (Revised)
 
Premier, Inc. Pro Forma (Revised)
Assets
 
 
 
 
Cash and cash equivalents
$
75,351

$
277,814

(1)
$
353,165

Marketable securities
57,500


 
57,500

Accounts receivable, net
61,968


 
61,968

Inventories - finished goods
13,029


 
13,029

Prepaid expenses and other current assets
34,576

(5,555
)
(2)
29,021

Due from related party
788


 
788

Deferred tax assets
7,691


 
7,691

Total current assets
250,903

272,259

 
523,162

Investments
10,773


 
10,773

Property and equipment, net
119,538


 
119,538

Restricted cash
5,000


 
5,000

Deferred tax assets
13,328

294,950

(3)
308,278

Goodwill
84,626


 
84,626

Intangible assets, net
9,262


 
9,262

Other assets
28,410


 
28,410

Total assets
$
521,840

$
567,209

 
$
1,089,049

 
 
 
 
 
Liabilities, redeemable limited partners' capital and stockholders' equity (deficit)
 
 
 
 
Accounts payable
$
16,899

$

 
$
16,899

Accrued expenses
25,486


 
25,486

Revenue share obligations
5,085


 
5,085

Accrued compensation and benefits
22,374


 
22,374

Deferred revenue
17,492


 
17,492

Current portion of notes payable
7,438


 
7,438

Current portion of lines of credit
60,000



60,000

Payable pursuant to tax receivable agreement

10,142

(3)
10,142

Income tax payable

8,425

(4)
8,425

Other current liabilities
2,402


 
2,402

Total current liabilities
157,176

18,567

 
175,743

Notes payable, less current portion
20,293


 
20,293

Lines of credit, less current portion
11,508


 
11,508

Payable pursuant to tax receivable agreement, less current portion

194,651

(3)
194,651

Deferred compensation plan obligations
27,653


 
27,653

Deferred rent
15,841


 
15,841

Other long-term liabilities
5,387


 
5,387

Total liabilities
237,858

213,218

 
451,076

Redeemable limited partners' capital
207,066

2,799,276

(5)
3,006,342

Stockholders' equity (deficit):
 
 
 
 
Series A Preferred stock, par value $0.01, 400,000 shares authorized; no shares issued and outstanding


 

Common stock, par value $0.01, 12,250,000 shares authorized; 5,626,784 shares issued and outstanding, no shares outstanding on a pro forma basis
56

(56
)
(6)

Class A common stock, par value $0.01, 500,000,000 shares authorized; 32,374,751 shares issued and outstanding on a pro forma basis

324

(6)
324

Class B common stock, par value $0.000001, 600,000,000 shares authorized; 112,607,832 shares issued and outstanding on a pro forma basis


(6)

Additional paid-in capital
28,503

(28,503
)
(7)

Retained earnings (accumulated deficit)
50,321

(2,417,053
)
(8)
(2,366,732
)
Noncontrolling interest
(1,964
)

 
(1,964
)
Accumulated other comprehensive income

3

(5)
3

Total stockholders' equity (deficit)
76,916

(2,445,285
)
 
(2,368,369
)
Total liabilities, redeemable limited partners' capital and stockholders' equity (deficit)
$
521,840

$
567,209

 
$
1,089,049


17



PREMIER, INC.
Pro Forma Consolidated Statement of Income
Three Months Ended September 30, 2013
(Unaudited)
(In thousands, except per share data)
 
PHSI
Pro Forma Adjustments
 
Premier, Inc. Pro Forma (Revised)
 
Net revenue:
 
 
 
 
 
Net administrative fees
$
143,576

$
(41,263
)
(9)
$
102,313

 
Other services and support
53,252


 
53,252

 
Services
196,828

(41,263
)
 
155,565

 
Products
43,748


 
43,748

 
 
240,576

(41,263
)
 
199,313

 
Cost of revenue:
 
 
 
 
 
Services
27,488


 
27,488

 
Products
40,038


 
40,038

 
 
67,526


 
67,526

 
Gross profit
173,050

(41,263
)
 
131,787

 
Operating expenses:
 
 
 
 
 
Selling, general and administrative
62,318

325

 
62,643

 
Research and development
852


 
852

 
Amortization of purchased intangible assets
601


 
601

 
 
63,771

325

 
64,096

 
Operating income
109,279

(41,588
)
 
67,691

 
Equity in net income of unconsolidated affiliates
4,114


 
4,114

 
Interest and investment income, net
220


 
220

 
Gain on disposal of assets
4


 
4

 
Other income, net
4,338


 
4,338

 
Income before income taxes
113,617

(41,588
)
 
72,029

 
Income tax expense
891

5,870

(10)
6,761

 
Net income
112,726

(47,458
)
 
65,268

 
Add: Net loss attributable to noncontrolling interest in SVS, LLC
210


 
210

 
Less: Net income attributable to noncontrolling interest in Premier LP
(113,214
)
62,184

(11)
(51,030
)
 
Net (loss) income attributable to noncontrolling interest
(113,004
)
62,184

 
(50,820
)
 
Net (loss) income attributable to PHSI/Premier, Inc. shareholders
$
(278
)
$
14,726

 
$
14,448

 
 
 
 
 
 
 
Weighted average shares outstanding of Class A common stock:
 
 
 
 
 
Basic
5,627

 
 
32,375

(13)
Diluted
5,627

 
 
32,375

(13)
 
 
 
 
 
 
Loss per share of Class A common stock:
 
 
 
 
 
Basic
$
(0.05
)
 
 
$
(79.00
)
(12)
Diluted
$
(0.05
)
 
 
$
(79.00
)
(12)

18



(1)
Reflects net effect on cash and cash equivalents of the receipt of gross proceeds from the IPO of $874.1 million (with an IPO price of $27.00 per share of Class A common stock) and the purchase of units from the member owners described above.
(In thousands)
 
 
Actual cash as reported
 
$
75,351

Pro forma adjustments
 
 
Gross proceeds from the IPO
874,118

 
Underwriting discounts, commissions and other expenses
(52,447
)
 
Purchases of Class B common units from the member owners
(543,857
)
 
 
 
277,814

Pro forma cash balance
 
$
353,165

(2)
Reflects the reduction of prepaid expenses related to the IPO, with an offset to the proceeds of the IPO in additional paid-in capital.
(3)
Premier LP intends to have in effect an election under Section 754 of the Internal Revenue Code of 1986, as amended, or the Code, and comparable elections under state and local tax law, such that the initial sale of Class B common units by PHSI and the member owners will result in adjustments to the tax basis of the assets of Premier LP. These increases in tax basis are expected to increase (for tax purposes) the depreciation and amortization deductions by Premier LP, and therefore, to reduce the amount of income tax that Premier, Inc. would otherwise be required to pay in the future. In connection with the Reorganization and IPO, Premier, Inc. has entered into a tax receivable agreement with the member owners which became effective upon the completion of the Reorganization and IPO, pursuant to which Premier, Inc. agrees to pay to the member owners, generally over a 15-year period (under current law), 85% of the amount of cash savings, if any, in U.S. federal, foreign, state and local and franchise income tax that Premier, Inc. actually realizes (or is deemed to realize, in the case of payments required to be made upon certain occurrences under such tax receivable agreement) as a result of the increases in tax basis resulting from the sale or exchange of Class B common units by the member owners. The unaudited pro forma consolidated financial statements reflect adjustments (shown in the pro forma adjustments column above) to give effect to the Section 754 election and the tax receivable agreement based on the following assumptions:
The unaudited pro forma consolidated financial statements include adjustments to reflect the expected increase in deferred tax assets representing the income tax effects of the increases in the tax basis as a result of Premier LP's election under Section 754 of the Code in connection with the initial sale of Class B common units described above. This adjustment is calculated based on an estimated effective income tax rate for Premier, Inc. of 39%, which includes a provision for U.S. federal income taxes and assumes (i) Premier, Inc.'s estimated statutory rates apportioned to each state and local tax jurisdiction, (ii) that there are no material changes in the relevant tax law, and (iii) that Premier, Inc. earns sufficient taxable income in each year to realize the full tax benefit of the amortization of its assets.
Premier, Inc. will determine the adjustments in connection with the Section 754 election by first calculating the excess of each selling member owner's and PHSI's assumed selling price over such person's share of Premier LP's tax basis in its assets attributable to the Class B common units being sold to Premier, Inc. Premier, Inc. will then allocate the aggregate excess among Premier LP's assets following applicable tax regulations governing adjustments that result from the Section 754 election. Premier, Inc. will determine each selling member owner's share of the tax basis in Premier LP's assets attributable to the Class B common units sold to Premier, Inc. by multiplying the member owner's tax capital account balance as of the date of sale as maintained in Premier LP's books and records by a fraction, the numerator of which is the number of Class B common units sold to us, and the denominator of which is the number of Class B common units held by the selling member owner immediately prior to the sale. For purposes of the calculation, the assumed selling price per Class B common unit will equal the price paid per share of the Class A common stock by the underwriters to Premier, Inc. in the IPO. The adjustments are expected to increase Premier LP's basis in its assets (for tax purposes), and Premier, Inc. will calculate the amount of any depreciation, amortization and other deductions to which it will be entitled as a result of these adjustments. Premier, Inc. will then calculate Premier, Inc.'s tax liability with and without the deductions attributable to these adjustments, assuming that Premier, Inc. earns sufficient taxable income in each year to realize the full benefit of the deductions. Premier, Inc. will compute the estimated tax benefit attributable to the election as the excess of Premier, Inc.'s tax liability as so computed without the deductions over Premier, Inc.'s tax liability as so computed with the deductions. Additionally, the tax receivable agreement payments may give rise to adjustments that result in Premier LP becoming entitled to additional deductions, and the calculation of Premier, Inc.'s liability under the tax receivable agreement would take these adjustments and additional resulting deductions into account.
Premier LP's election under Section 754 of the Code is at the discretion of Premier LP and is not subject to review or approval by the IRS or other tax authorities. The computation of the adjustments resulting from the Section 754 election and Premier, Inc.'s tax liability is subject to audit by the IRS and other tax authorities in the same manner as all other items reported on income tax returns.
The unaudited pro forma consolidated financial statements include cumulative adjustments of $204.8 million, of which $10.1 million is expected to be paid in the next 12 months, and is reflected as a current liability with the remaining balance classified as a long-term liability, to reflect a liability equal to 85% of the estimated realizable tax benefit resulting from

19



the estimated increase in tax basis due to Premier LP's Section 754 election in connection with the initial sale by the member owners, of the Class B common units described above as an increase to payable pursuant to the tax receivable agreement.
The unaudited pro forma consolidated financial statements include adjustments to reflect deferred tax assets for the change in the allocation of Premier LP's income from 1% of operating income and 5% of investment income to PHSI prior to the Reorganization to approximately 22% of Premier LP's income to Premier, Inc. (indirectly through Premier GP), measured by the difference in the tax basis of Premier, Inc.'s investment in Premier LP as compared to its GAAP carrying value. The adjustments related to Premier LP's Section 754 election described above are a component of Premier, Inc.'s tax basis in Premier LP.
Pursuant to the terms of the exchange agreement, the member owners and new limited partners admitted to Premier LP following the completion of the IPO may subsequently exchange Class B common units in Premier LP for shares of Premier, Inc.'s Class A common stock, cash or a combination of both. Any subsequent exchanges of Class B common units for shares of Premier, Inc.'s Class A common stock pursuant to the exchange agreement may result in increases in the tax basis of the tangible and intangible assets of Premier LP (85% of the realized tax benefits from which will be due to the limited partners and recorded as an additional payable pursuant to the tax receivable agreement) that otherwise would not have been available. These subsequent exchanges have not been reflected in the unaudited pro forma consolidated financial statements.
In addition, the pro forma adjustment reflects $0.1 million of Premier, Inc. deferred taxes related to stock-based compensation.
(4)
Reflects income taxes payable due as a result of the purchase of Class B common units from PHSI.
(5)
Reflects the increase in the noncontrolling interest held by the limited partners in Premier L.P. resulting from the net proceeds from the IPO used to purchase Class A common units from Premier LP of $247.7 million and Class B common units from PHSI of $21.7 million, net of taxes of $8.4 million, and the contribution of the common stock of PHSI in connection with the Reorganization of $76.9 million. This is offset by an adjustment of $133.7 million to reflect the approximately 78% controlling interest held by the limited partners of Premier LP subsequent to the Reorganization and IPO, which is reflected in redeemable limited partners' capital on the unaudited pro forma consolidated balance sheets. Immediately following the effective date of the LP Agreement, all of Premier LP's limited partners that approved the Reorganization received Class B common units and capital account balances in Premier LP equal to their percentage interests and capital account balances in Premier LP immediately preceding the Reorganization. Premier, Inc. used a portion of the net proceeds from the IPO to purchase (i) Class A common units, (ii) Class B common units from PHSI and (iii) Class B common units from the member owners, resulting in a reduction in the noncontrolling interest attributable to the limited partners from 99% to approximately 78%.
Reflects the increase in redeemable limited partners' capital of $2,586.7 million to record the balance at the redemption amount, which represents the greater of the book value or redemption amount per the LP Agreement, at the date of the Reorganization. This results in an offsetting decrease in retained earnings of $41.7 million, followed by an offsetting decrease in additional paid-in-capital of $178.3 million and with a final offsetting increase in accumulated deficit of $2,366.7 million.
(6)
Reflects (i) the exchange of the existing PHSI shares of common stock, common stock subscribed and related subscriptions receivable for Class B common units, (ii) the issuance of Class B common stock in connection with the Reorganization and (iii) the issuance of Class A common stock in connection with the IPO.
(7)
Reflects the impact of the adjustments in notes (1), (2), (3), (5) and (6) above to additional paid-in capital:
an increase of $90.0 million due to an increase in deferred tax assets described in note (3) of $294.8 million offset by an increase in payables pursuant to the tax receivable agreement of $204.8 million;
an increase of $821.7 million from the net proceeds from the IPO less the par value of the shares of Class A common stock sold in the IPO of $0.3 million and less prepaid offering expenses of $5.6 million;
a decrease of $756.4 million to reflect the difference between the consideration paid to acquire the Class A and B common units and the adjustment to the carrying value of the noncontrolling interest described in note (5) above; and
a decrease in the remaining balance of additional paid-in-capital related to the increase in redeemable limited partners' capital to its redemption value, as described in note (5) above.
In addition, Premier, Inc. recorded stock-based compensation expense for the three months ended September 30, 2013 of $0.3 million.
(8)
Reflects Premier, Inc.'s net loss attributable to stock-based compensation, net of tax, for the three months ended September 30, 2013, and income tax expense as a result of the purchase of Class B common units from PHSI, as well as the decrease in retained earnings and increase in accumulated deficit related to the increase in redeemable limited partners' capital to its redemption value, as described in note (5) above.
(9)
Following the completion of the Reorganization and the IPO, Premier LP became contractually required under the GPO participation agreements to pay each member owner revenue share from Premier LP equal to 30% of all gross administrative fees collected by

20



Premier LP based upon purchasing by such member owner's member facilities through Premier LP's GPO supplier contracts. In addition, Premier LP's two largest regional GPO member owners, which represented approximately 17% of its gross administrative fees revenue for fiscal year 2013, will each remit all gross administrative fees collected by such member owner based upon purchasing by such member owner's member facilities through the member owner's own GPO supplier contracts and receive revenue share from Premier LP equal to 30% of such gross administrative fees remitted to Premier LP. Historically, Premier LP has not generally had a contractual requirement to pay revenue share to member owners participating in its GPO programs, but has paid semi-annual distributions of partnership income. In the case of the three month period ended September 30, 2013, the board of directors approved a distribution on Premier LP income in the amount of $78.0 million, of which $11.8 million has been paid as of September 30, 2013, calculated in a consistent manner with its historical semi-annual distributions pursuant to the historical limited partnership agreement of Premier LP, to its member owners who approved the Reorganization. This distribution is not reflected in these unaudited pro forma consolidated financial statements. In addition, certain members that have not owned, or do not currently own, limited partnership interests in Premier LP, common stock of PHSI or common units, as the context may require, or non-owner members, have historically operated under, and following the consummation of the Reorganization and IPO continue to operate under, contractual relationships that provide for a specific revenue share that differs from the 30% revenue share that Premier LP will provide to its member owners under the GPO participation agreements following consummation of the Reorganization and the IPO. As a result, Premier LP's revenue share expense is expected to be approximately 36% of gross administrative fees following the consummation of the Reorganization and the IPO, compared to approximately 9% of gross administrative fees for the three months ended September 30, 2013, which will result in a decrease in net revenue for the three months ended September 30, 2013 on a pro forma basis when compared to the actual net revenue for the same period. These unaudited pro forma consolidated financial statements assume that all of Premier LP's member owners prior to the Reorganization continued as member owners subsequent to the Reorganization and IPO and, therefore, do not reflect any possible loss in revenue if any member owners cease to continue as member owners. Pro forma revenue share is calculated at 30% from their respective dates of conversion from non-owner members to member owners.
(10)
Upon the completion of the Reorganization and the IPO, Premier, Inc. became subject to additional U.S. federal, state and local income taxes with respect to its additional allocable share of any taxable income of Premier LP. As a result, there is a pro forma adjustment to income tax expense to reflect an estimated effective income tax rate of 39%, which includes a provision for U.S. federal income taxes and assumes Premier, Inc.'s estimated statutory rates apportioned to each state and local tax jurisdiction. The low effective tax rate is attributable to the flow through of partnership income which is not subject to federal income taxes. For federal income tax purposes, income realized by Premier LP is taxable to its partners.
(11)
Reflects the reduction in noncontrolling interest in Premier LP from 99% to approximately 78%.
(12)
Pro forma basic earnings per share was computed by dividing the pro forma net income attributable to Premier, Inc., after the $2,586.7 million adjustment of redeemable limited partners' capital to redemption amount, by the 32,374,751 shares of Class A common stock that were issued and sold in the IPO and pro forma diluted earnings per share was computed by dividing the pro forma net income attributable to Premier, Inc., after the $2,586.7 million adjustment of redeemable limited partners' capital to redemption amount, by the 32,374,751 shares of Class A common stock that were issued and sold in the IPO.
(13)
Reflects the issuance of 32,374,751 shares of Class A common stock in the IPO. The impact of 26,408 shares were excluded from the diluted weighted average shares outstanding due to the net loss sustained for the respective periods. In addition, the conversion of 112,607,832 Class B common units into Class A common shares was excluded from the dilutive weighted average shares outstanding because to do so would have been anti-dilutive for the periods presented.

21



Item 1. Financial Statements (continued)
PREMIER HEALTHCARE SOLUTIONS, INC.
Consolidated Balance Sheets
(In thousands, except share data)
 
September 30, 2013
June 30, 2013
 
(Unaudited)
 
Assets
 
 
Cash and cash equivalents
$
75,351

$
198,296

Marketable securities
57,500

57,323

Accounts receivable (net of $732 and $671 allowance for doubtful accounts, respectively)
61,968

62,162

Inventories - finished goods
13,029

12,741

Prepaid expenses and other current assets
34,576

25,466

Due from related party
788

1,650

Deferred tax assets
7,691

8,403

Total current assets
250,903

366,041

Investments
10,773

6,676

Property and equipment (net of $161,440 and $153,446 accumulated depreciation, respectively)
119,538

115,587

Restricted cash
5,000

5,000

Deferred tax assets
13,328

15,077

Goodwill
84,626

61,410

Intangible assets (net of $17,839 and $17,238 accumulated amortization, respectively)
9,262

4,292

Other assets
28,410

24,833

Total assets
$
521,840

$
598,916

 
 
 
Liabilities, redeemable limited partners' capital and stockholders' equity
 
 
Accounts payable
$
16,899

$
21,788

Accrued expenses
25,486

28,883

Revenue share obligations
5,085

10,532

Accrued compensation and benefits
22,374

51,359

Deferred revenue
17,492

18,880

Current portion of notes payable
7,438

4,441

Current portion of lines of credit
60,000

7,708

Other current liabilities
2,402

1,557

Total current liabilities
157,176

145,148

Notes payable, less current portion
20,293

22,468

Lines of credit, less current portion
11,508


Deferred compensation plan obligations
27,653

24,081

Deferred rent
15,841

15,779

Other long-term liabilities
5,387

6,037

Total liabilities
237,858

213,513

Commitments and contingencies (Note 15)




Redeemable limited partners' capital
207,066

307,635

Stockholders' equity:
 
 
Series A Preferred stock, par value $0.01, 400,000 shares authorized; no shares issued and outstanding


Common stock, par value $0.01, 12,250,000 shares authorized; 5,626,784 and 5,653,390 shares issued and outstanding at September 30, 2013 and June 30, 2013, respectively
56

57

Additional paid-in-capital
28,503

28,866

Common stock subscribed, 0 and 23,266 shares at September 30, 2013 and June 30, 2013, respectively

300

Subscriptions receivable

(300
)
Retained earnings
50,321

50,599

Noncontrolling interest
(1,964
)
(1,754
)
Total stockholders' equity
76,916

77,768

Total liabilities, redeemable limited partners' capital and stockholders' equity
$
521,840

$
598,916

See accompanying notes to consolidated financial statements.

22



PREMIER HEALTHCARE SOLUTIONS, INC.
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)

 
Three Months Ended September 30,
 
2013
2012
Net revenue:
 
 
Net administrative fees
$
143,576

$
117,489

Other services and support
53,252

48,147

Services
196,828

165,636

Products
43,748

32,930

 
240,576

198,566

Cost of revenue:
 
 
Services
27,488

24,080

Products
40,038

30,152

 
67,526

54,232

Gross profit
173,050

144,334

Operating expenses:
 
 
Selling, general and administrative
62,318

55,732

Research and development
852

3,638

Amortization of purchased intangible assets
601

385

 
63,771

59,755

Operating income
109,279

84,579

Equity in net income of unconsolidated affiliates
4,114

2,781

Interest and investment income, net
220

224

Gain on disposal of assets
4


Other income, net
4,338

3,005

Income before income taxes
113,617

87,584

Income tax expense
891

2,517

Net income
112,726

85,067

Add: Net loss attributable to noncontrolling interest in SVS, LLC
210

305

Less: Net income attributable to noncontrolling interest in Premier LP
(113,214
)
(83,116
)
Net income attributable to noncontrolling interest
(113,004
)
(82,811
)
Net (loss) income attributable to PHSI shareholders
$
(278
)
$
2,256

 
 
 
Weighted average shares outstanding - basic and diluted
5,627
6,090
 
 
 
(Loss) earnings per share attributable to PHSI - basic and diluted
$
(0.05
)
$
0.37


See accompanying notes to consolidated financial statements.

23



PREMIER HEALTHCARE SOLUTIONS, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)

 
Three Months Ended September 30,
 
2013
2012
Net income
$
112,726

$
85,067

Net unrealized gain on marketable securities
26

102

Total comprehensive income
112,752

85,169

Less: Comprehensive income attributable to noncontrolling interest
(113,030
)
(82,913
)
Comprehensive (loss) income attributable to PHSI
$
(278
)
$
2,256


See accompanying notes to consolidated financial statements.


24



PREMIER HEALTHCARE SOLUTIONS, INC.
Consolidated Statements of Stockholders' Equity
Three Months Ended September 30, 2013
(Unaudited)
(In thousands)

 
Common Stock
Additional Paid-In Capital
Common Stock Subscribed
Subscriptions Receivable
Retained Earnings
Noncontrolling Interest
Total Stockholders' Equity
 
Shares
Amount
Shares
Amount
Balance at June 30, 2013
5,653

$
57

$
28,866

23

$
300

$
(300
)
$
50,599

$
(1,754
)
$
77,768

Repurchase of common stock
(49
)
(1
)
(663
)





(664
)
Payment on stock subscriptions
23


300

(23
)
(300
)
300



300

Net loss






(278
)

(278
)
Net loss attributable to noncontrolling interest in SVS, LLC







(210
)
(210
)
Balance at September 30, 2013
5,627

$
56

$
28,503


$

$

$
50,321

$
(1,964
)
$
76,916


See accompanying notes to consolidated financial statements.


25



PREMIER HEALTHCARE SOLUTIONS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

 
Three Months Ended September 30,
 
2013
2012
Operating activities
 
 
Net income
$
112,726

$
85,067

Adjustments to reconcile net income to net cash provided by operating activities:


Depreciation and amortization
8,957

6,775

Equity in net income of unconsolidated affiliates
(4,114
)
(2,781
)
Deferred taxes
2,461

1,059

Amortization of discounts on investments, net
26

5

Gain on disposal of assets
(4
)

Changes in operating assets and liabilities:


Accounts receivable, inventories, prepaid expenses and other current assets
(11,277
)
(1,481
)
Other assets
(10
)
(3,480
)
Accounts payable, accrued expenses and other current liabilities
(44,205
)
(33,208
)
Long-term liabilities
(590
)
5,380

Net cash provided by operating activities
63,970

57,336

Investing activities
 
 
Purchase of marketable securities
(19,151
)
(6,522
)
Proceeds from sale of marketable securities
18,974

46,977

Acquisition of SYMMEDRx, net of cash acquired
(28,740
)

Distributions received on equity investment

3,235

Purchases of property and equipment
(12,299
)
(12,255
)
Net cash (used in) provided by investing activities
(41,216
)
31,435

Financing activities
 
 
Payments made on notes payable
(1,475
)
(2,200
)
Proceeds from lines of credit
63,800

2,070

Proceeds from issuance of common stock
300


Distributions to limited partners of Premier LP
(208,324
)
(182,613
)
Net cash used in financing activities
(145,699
)
(182,743
)
Net decrease in cash and cash equivalents
(122,945
)
(93,972
)
Cash and cash equivalents at beginning of year
198,296

140,822

Cash and cash equivalents at end of year
$
75,351

$
46,850

 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
Issuance of limited partnership interest for notes receivable
$
7,860

$
2,120

Payable to member owners incurred upon repurchase of ownership interest
$
1,652

$
2,315

Reduction in redeemable limited partners' capital to reduce outstanding receivable
$
28,009

$
101

Distributions utilized to reduce subscriptions, notes, interest and accounts receivable from member owners
$
6,186

$
3,677


See accompanying notes to consolidated financial statements.


26




PREMIER HEALTHCARE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Organization
Premier Healthcare Solutions, Inc. ("PHSI" or the "Company") is a for-profit Delaware corporation owned by hospitals, health systems and other healthcare organizations (owners of PHSI are referred to herein as "member owners") located in the United States. The Company, together with its subsidiaries and affiliates, is a national healthcare alliance that unites hospitals, health systems, physicians and other healthcare providers to improve and innovate in the clinical, financial and operational areas of their business to meet the demands of a rapidly evolving healthcare industry.
The Company's business model and solutions are designed to provide its members access to scale efficiencies, spread the cost of their development, derive intelligence from the Company's data warehouse, mitigate the risk of innovation and disseminate best practices that will help its member organizations succeed in their transformation to higher quality and more cost-effective healthcare.
The Company, together with its subsidiaries and affiliates, delivers its integrated platform of solutions through two business segments: supply chain services and performance services. The supply chain services segment includes one of the largest healthcare GPO's in the United States, a specialty pharmacy and direct sourcing activities. The performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers. The Company's software as a service ("SaaS") informatics products utilize its comprehensive data set to provide actionable intelligence to its members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and population health management. This segment also includes the Company's technology-enabled performance improvement collaboratives, advisory services and insurance services.
Basis of Presentation and Consolidation
The Company, through its wholly owned subsidiary Premier Plans, LLC ("Premier Plans"), holds a 1% controlling general partner interest in and, as a result, consolidates the financial statements of Premier Purchasing Partners, L.P. ("Premier LP"). The limited partners' 99% ownership of Premier LP is reflected as redeemable limited partners' capital in the Company's consolidated balance sheets and their proportionate share of income in Premier LP is reflected within net income attributable to noncontrolling interest in Premier LP in the Company's consolidated statements of income and within comprehensive income attributable to noncontrolling interest in the consolidated statements of comprehensive income.
The accompanying consolidated financial statements have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, certain information and disclosures normally included in annual financial statements have been condensed or omitted. The consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of results of operations and financial condition for the interim periods shown, including normal recurring adjustments. The Company believes that all disclosures are adequate to make the information presented not misleading and should be read in conjunction with the consolidated financial statements and related footnotes contained in the Prospectus.
The Company has reclassified certain prior period amounts to be consistent with the current period presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Company's consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates are evaluated on an ongoing basis, including allowances for doubtful accounts, useful lives of property and equipment, values of investments not publicly traded, the valuation allowance on deferred tax assets and the fair value of purchased intangible assets and goodwill. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

27



(2) SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies as described in the Prospectus.
Recently Issued Accounting Standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standard update ("ASU") relating to reporting of amounts reclassified out of accumulated other comprehensive income. The update requires presentation of information about significant amounts reclassified from each component of accumulated other comprehensive income, the sources of the items reclassified, and the income statement lines affected, either parenthetically on the face of the financial statements or in the notes to the financial statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, and did not have a material effect on the Company's consolidated financial statements.
(3) SEGMENTS
The Company delivers its solutions and manages its business through two reportable business segments, the supply chain services segment and the performance services segment. The supply chain services segment includes the Company's GPO, a specialty pharmacy and direct sourcing activities. The performance services segment includes the Company's informatics, collaborative, advisory services and insurance services businesses.
The Company uses segment adjusted EBITDA (as defined herein) as its primary measure of profit or loss to assess segment performance and to determine the allocation of resources. The Company also uses segment adjusted EBITDA to facilitate the comparison of the segment operating performance on a consistent basis from period to period. The Company defines segment adjusted EBITDA as the segment's net revenue less operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and non-recurring or non-cash items, and including equity in net income of unconsolidated affiliates. The Company considers non‑recurring items to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of segment adjusted EBITDA.
All reportable segment revenues are presented net of inter-segment eliminations and represent revenues from external clients.

28



The following table presents segment adjusted EBITDA and other information (in thousands) as utilized by the Company's chief operating decision maker.
 
Net Revenue
Segment Adjusted EBITDA
Depreciation & Amortization Expense
Capital Expenditures
Three Months Ended September 30, 2013
 
 
 
 
Supply Chain Services:
 
 
 
 
Net administrative fees
$
143,576




Other services and support
134




Services
143,710




Products
43,748




Total Supply Chain Services
187,458

$
125,480

$
327

$
300

Performance Services
53,118

16,329

7,435

11,979

Corporate

(17,475
)
1,195

20

Total
$
240,576

$
124,334

$
8,957

$
12,299

 
 
 
 
 
Three Months Ended September 30, 2012
 
 
 
 
Supply Chain Services:
 
 
 
 
Net administrative fees
$
117,489




Other services and support
39




Services
117,528




Products
32,930




Total Supply Chain Services
150,458

$
98,267

$
308

$
265

Performance Services
48,108

12,000

5,497

11,824

Corporate

(15,578
)
970

166

Total
$
198,566

$
94,689

$
6,775

$
12,255

The following table presents total assets (in thousands) as utilized by the Company's chief operating decision maker.
 
Total Assets
September 30, 2013
 
Supply Chain Services
$
211,423

Performance Services
227,773

Corporate
82,644

Total
$
521,840

 
 
June 30, 2013
 
Supply Chain Services
$
332,261

Performance Services
194,414

Corporate
72,241

Total
$
598,916


29



A reconciliation of segment adjusted EBITDA to operating income is as follows (in thousands):
 
Three Months Ended September 30,
 
2013
2012
Segment Adjusted EBITDA
$
124,334

$
94,689

Depreciation and amortization
(8,356
)
(6,390
)
Amortization of purchased intangible assets
(601
)
(385
)
Merger and acquisition related expenses (a)
(142
)

Strategic and financial restructuring expenses (b)
(1,842
)
(554
)
Equity in net income of unconsolidated affiliates (c)
(4,114
)
(2,781
)
Operating income
$
109,279

$
84,579

(a)
Represents legal, accounting and other expenses directly related to the acquisition of SYMMEDRx, LLC ('SYMMEDRx").
(b)
Represents legal, accounting and other expenses directly related to strategic and financial restructuring expenses.
(c)
Represents equity in net income from unconsolidated affiliates generated by the Company's 50% ownership interest in Innovatix, LLC ("Innovatix"), a privately held limited liability company that provides group purchasing services to alternate site providers in specific classes of trade, all of which is included in the supply chain services segment.
(4) BUSINESS ACQUISITIONS
On July 19, 2013, the Company purchased all the issued and outstanding units of SYMMEDRx for $28.8 million. The Company funded the acquisition by drawing on its senior secured revolving credit facility (see Note 6 - Lines of Credit for more information). The primary reason for the acquisition of SYMMEDRx, a business with a track record of analyzing and reducing costs for health systems through the innovative use of data, is to continue to strengthen the Company's ability to drive improvement in member cost savings.
The purchase price exceeded the fair value of the net tangible liabilities and identifiable intangible assets acquired from SYMMEDRx. As a result, the Company recorded goodwill in connection with this acquisition, which was assigned to the performance services segment.
The Company is in the process of finalizing the valuation of the assets acquired and liabilities assumed. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their fair values, which is subject to adjustment once the valuation is complete, is as follows (in thousands):
Net tangible liabilities acquired
$
(7
)
Intangible assets acquired
5,571

Goodwill
23,216

Total
$
28,780

The purchase price allocation is expected to be finalized in the quarter ended December 31, 2013.
(5) GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill consists of the following (in thousands):
 
Supply Chain Services
Performance Services
Total
Balance at June 30, 2013
$
31,765

$
29,645

$
61,410

SYMMEDRx acquisition

23,216

23,216

Balance at September 30, 2013
$
31,765

$
52,861

$
84,626


30



Intangible assets, net consist of the following (in thousands):
 
Weighted Average Useful Life
September 30, 2013
June 30, 2013
Identifiable intangible assets acquired:
 
 
 
Technology
5.0 years
$
16,670

$
11,570

Member relationships
8.7 years
6,520

6,260

Trade names
5.0 years
3,911

3,700

 
6.5 years
27,101

21,530

Accumulated amortization
 
(17,839
)
(17,238
)
Total identifiable intangible assets acquired, net
 
$
9,262

$
4,292

Amortization expense of intangible assets totaled $0.6 million and $0.4 million for the three months ended September 30, 2013 and 2012, respectively.
The estimated future amortization expense of intangible assets is as follows:
Twelve Months Ending September 30,
 
2014
$
2,764

2015
2,659

2016
1,644

2017
1,310

2018
885

Total amortization expense
$
9,262

The net carrying value of intangible assets by segment is as follows (in thousands):
 
September 30, 2013
June 30, 2013
Supply Chain Services
$
2,175

$
2,436

Performance Services
7,087

1,856

Total
$
9,262

$
4,292

(6) LINES OF CREDIT
On December 16, 2011, the Company entered into a $100.0 million senior secured revolving credit facility with Wells Fargo Bank, National Association (the "Revolving Facility"), which includes an accordion feature granting the Company the ability to increase the size of the Revolving Facility by an additional $100.0 million on terms and conditions mutually acceptable to the parties. Borrowings under the Revolving Facility generally bear interest at the lower of the London Interbank Offered Rate, (“LIBOR”), the Prime Rate or the Federal Funds Effective Rate, plus a margin ranging from 0.25% to 1.25% per annum, depending on the nature of the loan. In November 2012, the Company borrowed $10.0 million on its Revolving Facility, and repaid it in full in March 2013. In July 2013, the Company borrowed $30.0 million on its Revolving Facility and in September 2013, the Company borrowed an additional $30.0 million on its Revolving Facility. At September 30, 2013 and June 30, 2013, there was $60.0 million and $0, respectively, outstanding on the Revolving Facility. The Revolving Facility, which expires on December 16, 2014, includes restrictive covenants requiring the maintenance of certain financial and nonfinancial indicators, including a ratio of total liabilities to tangible net worth of less than or equal to 1.00 to 1.00, a minimum EBITDA (as defined in the Revolving Facility agreement) coverage ratio of 3.00 to 1.00 and a maximum total leverage ratio of 1.50 to 1.00. The Revolving Facility also includes customary negative covenants, including restrictions on other indebtedness, liens, conduct of business, consolidations, mergers or dissolutions, asset dispositions, investments, restricted payments, prepayment of indebtedness, transactions with insiders, restricted actions, ownership of subsidiaries, sale-leaseback transactions and negative pledges. The Company was in compliance with such negative covenants at September 30, 2013. Commitment fees on the Revolving Facility's unused commitments are 0.22% per annum. The Revolving Facility is guaranteed by substantially all of the Company's subsidiaries and secured by substantially all of the assets of such subsidiaries.

31



On August 17, 2012, SVS, LLC d/b/a S2S Global ("S2S Global"), a direct sourcing business of which the Company acquired 60% of the outstanding shares of common stock on December 6, 2011, obtained a revolving line of credit with a one‑year term for up to $10.0 million at an interest rate which is generally the lower of LIBOR plus 1.25% or the Prime Rate plus 0.25%. On August 2, 2013, S2S Global renewed and amended its revolving line of credit to include a $15.0 million credit limit and a $5.0 million accordion feature. The amended revolving line of credit has a maturity date of December 16, 2014. At September 30, 2013 and June 30, 2013, S2S Global had $11.5 million and $7.7 million, respectively, outstanding on the revolving line of credit, which is included in lines of credit, less current portion in the accompanying consolidated balance sheets.
Principal payments of the lines of credit are as follows (in thousands):
Twelve Months Ending September 30,
 
2014
$
60,000

2015
11,508

Total principal payments
$
71,508

(7) NOTES PAYABLE
At September 30, 2013 and June 30, 2013, the Company had $24.3 million and $23.4 million, respectively, in non-interest bearing notes payable outstanding to departed member owners, of which $4.2 million and $4.2 million, respectively, are included in current portion of notes payable and $20.1 million and $19.2 million, respectively, are included in notes payable, less current portion, in the accompanying consolidated balance sheets.
During 2011, the Company entered into a financing agreement related to certain software licenses, payable in five installments with the final installment due on July 1, 2014. At September 30, 2013 and June 30, 2013, the Company had $3.2 million and $3.2 million, respectively, outstanding on these non-interest bearing notes payable which are included in current portion of notes payable and notes payable, less current portion, respectively, in the accompanying consolidated balance sheets.
Principal payments of notes payable are as follows (in thousands):
Twelve Months Ending September 30,
 
2014
$
7,438

2015
3,995

2016
4,072

2017
8,301

2018
3,671

Thereafter
254

Total principal payments
$
27,731


32



(8) FAIR VALUE MEASUREMENTS
Recurring Measurements
The Company measures the following assets at fair value on a recurring basis (in thousands):
Description
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
September 30, 2013
 
 
 
 
Cash equivalents
$
25,439

$
25,439

$

$

Corporate debt securities
57,500


57,500


Deferred compensation plan assets
29,071

29,071



Total assets
$
112,010

$
54,510

$
57,500

$

 
 
 
 
 
June 30, 2013
 
 
 
 
Cash equivalents
$
170,510

$
170,510

$

$

Corporate debt securities
57,323


57,323


Deferred compensation plan assets
24,489

24,489



Total assets
$
252,322

$
194,999

$
57,323

$

Cash equivalents are included in cash and cash equivalents; corporate debt securities are included in marketable securities; and deferred compensation plan assets are included in prepaid expenses and other current assets ($1.5 million and $0.4 million at September 30, 2013 and June 30, 2013, respectively) and other assets ($27.6 million and $24.1 million at September 30, 2013 and June 30, 2013, respectively) in the accompanying consolidated balance sheets. The fair value of the Company's corporate debt securities, classified as Level 2, are valued using quoted prices for similar securities in active markets or quoted prices for identical or similar securities in markets that are not active.
Non-recurring Measurements
The Company's financial instruments not measured at fair value on a recurring basis include cash, accounts receivable, accounts payable, accrued liabilities, lines of credit and notes payable, which are reflected at cost in the accompanying consolidated balance sheets. With the exception of notes payable, the Company believes cost approximates fair value because of the short‑term nature of these financial instruments. The fair value of non-interest bearing notes payable, classified as Level 2, is less than their carrying value (see Note 7 - Notes Payable for more information) by approximately $1.0 million and $1.1 million at September 30, 2013 and June 30, 2013, respectively, based on an assumed market interest rate of 1.6% and 1.7%, respectively, at September 30, 2013 and June 30, 2013.

33



(9) MARKETABLE SECURITIES
The Company invests its excess cash in commercial paper, corporate debt securities, government securities and other securities with maturities generally ranging from three to 12 months from the date of purchase. The Company uses the specific-identification method to determine the cost of securities sold. Marketable securities, classified as available-for-sale, consist of the following (in thousands):
 
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Market Value
September 30, 2013
 
 
 
 
Corporate debt securities
$
57,487

$
19

$
(6
)
$
57,500

 
 
 
 
 
June 30, 2013
 
 
 
 
Corporate debt securities
$
57,336

$
12

$
(25
)
$
57,323

(10) INVESTMENTS
Innovatix provides group purchasing services to alternate site providers in specific classes of trade. PSCI held 50% of the membership units in Innovatix at September 30, 2013 and June 30, 2013. The Company accounts for its investment in Innovatix using the equity method of accounting. The carrying value of the Company's investment in Innovatix was $9.8 million and $5.7 million at September 30, 2013 and June 30, 2013, respectively.
Premier Insurance Exchange, Risk Retention Group ("PRx"), a Vermont domiciled reciprocal risk retention group currently in run‑off, historically provided directors and officers and primary hospital professional liability insurance to members of the Company. The Company has an investment in PRx and its allocated share of PRx capital was 14% at September 30, 2013 and June 30, 2013. The Company accounts for this investment using the equity method of accounting and the carrying value of its investment in PRx was zero at September 30, 2013 and June 30, 2013.
Global Healthcare Exchange, LLC ("GHx"), a privately held limited liability company, is an internet‑based trading exchange developed to reduce costs and improve efficiencies for all participants in the healthcare supply chain. Premier LP held 13% of the membership units in GHx at September 30, 2013 and June 30, 2013. The Company accounts for its investment in GHx using the equity method of accounting and the carrying value of its investment in GHx was zero at September 30, 2013 and June 30, 2013.
(11) INCOME TAXES
The Company's income tax expense is attributable to the activities of the Company and PSCI, both subchapter C corporations. Under the provisions of federal and state statutes, Premier LP is not subject to federal and state income taxes. For federal income tax purposes, income realized by Premier LP is taxable to its partners. The Company and PSCI are subject to U.S. federal and state income taxes.
For the three months ended September 30, 2013 and 2012, the Company recorded a tax expense on income before taxes of $0.9 million and $2.5 million, respectively, which equates to an effective tax rate of 0.8% and 2.9%, respectively. For the three months ended September 30, 2013 and 2012, the effective tax rate differs from the 35% federal statutory rate primarily due to partnership income not subject to federal income taxes, state and local taxes and nondeductible expenses.
(12) REDEEMABLE LIMITED PARTNERS' CAPITAL
Redeemable limited partners' capital represents the member owners' 99% ownership of Premier LP. Pursuant to the terms of the historical limited partnership agreement, Premier LP is required to repurchase a limited partner's interest in Premier LP upon the sale of such limited partner's shares of PHSI common stock, such limited partners' withdrawal from Premier LP or such limited partner's failure to comply with the applicable purchase commitments under the existing limited partnership agreement of Premier LP. As a result, the redeemable limited partners' capital is classified as temporary equity in the mezzanine section of the consolidated balance sheets since (i) the withdrawal is at the option of each limited partner and (ii) the conditions of the repurchase

34



are not solely within the Company's control. At September 30, 2013, the redemption value of the redeemable limited partners' capital approximates its carrying value.
The table below shows the changes in the redeemable limited partners' capital from June 30, 2013 to September 30, 2013 (in thousands):
 
Receivables From Limited Partners
Redeemable Limited Partners' Capital
Accumulated Other Comprehensive (Loss) Income
Total Redeemable Limited Partners' Capital
June 30, 2013
$
(56,571
)
$
364,219

$
(13
)
$
307,635

Issuance of redeemable limited partnership interest for notes receivable
(7,860
)
7,860



Distributions and reductions applied to receivables from limited partners
30,362

(28,009
)

2,353

Repurchase of redeemable limited partnership interest

(1,652
)

(1,652
)
Net income attributable to Premier LP

113,214


113,214

Distributions to limited partners

(214,510
)

(214,510
)
Net unrealized gain on marketable securities


26

26

September 30, 2013
$
(34,069
)
$
241,122

$
13

$
207,066

Receivables from limited partners represent amounts due from limited partners for their required capital in Premier LP. These receivables are either interest bearing notes issued to new partners or non-interest bearing loans (contribution loans) provided to existing partners. Four interest bearing notes receivable were executed by partners of Premier LP during the three months ended September 30, 2013. These amounts are reflected as a reduction in redeemable limited partners' capital (which includes such receivables) because amounts due from limited partners for capital are not reflected as redeemable limited partnership capital until paid.
During the three months ended September 30, 2013, four partners withdrew from Premier LP. The limited partnership agreement provides for the payment of the partnership interest to former partners to occur five years from the date of withdrawal from the partnership without interest. Partnership interest obligations to former limited partners are reflected in notes payable in the accompanying consolidated balance sheets. In certain circumstances, Premier LP may provide an accelerated payout option to former partners on a discounted basis.
Premier LP maintains a distribution policy in which semi-annual cash distributions are made each February attributable to the recently completed six months ended December 31 and each September attributable to the recently completed six months ended June 30. As provided in the limited partnership agreement, the amount of actual cash distributed may be reduced by the amount of such distributions used by limited partners to offset contribution loans or other amounts payable to the Company.
Premier LP distributed $214.5 million to its limited partners in September 2013, of which $2.8 million was retained to reduce limited partner notes payable and related interest obligations and an additional $3.4 million was retained to reduce other amounts payable by limited partners to the Company, resulting in a cash distribution of $208.3 million.
(13) EARNINGS PER SHARE
Basic earnings per share of the Company is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would result in the reduction of a loss or the increase in income per share. Diluted earnings per share is computed by dividing net income by the number of weighted average common shares outstanding increased by the dilutive effects of potential common shares outstanding during the period. The number of potential common shares outstanding is determined in accordance with the treasury stock method. Common stock subscribed is included in the calculation of basic earnings per share since the subscribed shares have full voting and dividend participation rights on the day of subscription. There are no potentially dilutive securities outstanding as of September 30, 2013 and 2012, respectively.

35



(14) RELATED PARTY TRANSACTIONS
Premier LP and its wholly owned subsidiary, Provider Select, LLC, maintain a group purchasing agreement with GYNHA Services, Inc. ("GNYHA") whereby GNYHA utilizes the Company's GPO supplier contracts. GNYHA converted from a non‑owner member to a member owner effective January 1, 2013. GNYHA owned approximately 15% of the outstanding partnership interests in Premier LP as of September 30, 2013. Net administrative fees revenue recorded under the arrangement with GNYHA was $17.4 million for the three months ended September 30, 2013. Receivables from GNYHA, included in due from related party in the accompanying consolidated balance sheets, net, were $0.0 million and $1.1 million as of September 30, 2013 and June 30, 2013, respectively.
PSCI's 50% ownership share of Innovatix's net income included in other income, net in the accompanying consolidated statements of income is $4.1 million and $2.8 million for the three months ended September 30, 2013 and 2012, respectively. The Company maintains a group purchasing agreement with Innovatix under which Innovatix members are permitted to utilize Premier LP's GPO supplier contracts. Gross administrative fees revenue and a corresponding revenue share recorded under the arrangement were $8.2 million and $6.6 million for the three months ended September 30, 2013 and 2012, respectively. At September 30, 2013 and June 30, 2013, the Company has recorded Innovatix revenue share obligations, included in accounts payable and accrued expenses in the accompanying consolidated balance sheets, of $9.0 million and $2.8 million, respectively.
The Company conducts all operational activities for American Excess Insurance Exchange Risk Retention Group ("AEIX"), a reciprocal risk retention group that provides excess hospital, professional, umbrella and general liability insurance to certain hospital and healthcare system members. The Company is reimbursed by AEIX for actual costs, plus an annual incentive management fee not to exceed $500,000 per calendar year. The Company received cost reimbursement of $1.1 million and $1.0 million from AEIX for the three months ended September 30, 2013 and 2012, respectively, and annual incentive management fees of $0.1 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively. As of September 30, 2013 and June 30, 2013, $0.6 million and $0.5 million, respectively, in amounts payable by AEIX are included in due from related party in the accompanying consolidated balance sheets.
(15) COMMITMENTS AND CONTINGENCIES
The Company is not currently involved in any significant litigation. However, the Company is periodically involved in litigation, arising in the ordinary course of business or otherwise, which from time to time may include claims relating to commercial, employment, antitrust, intellectual property or other regulatory matters, among others. If current or future government regulations are interpreted or enforced in a manner adverse to the Company or its business, specifically those with respect to antitrust or healthcare laws, the Company may be subject to enforcement actions, penalties and other material limitations which could have a material adverse effect on the Company's business, financial condition and results of operations.
(16) SUBSEQUENT EVENTS
Reorganization and IPO
On October 1, 2013, Premier consummated its IPO and, immediately subsequent, the Reorganization became effective, at which time Premier, Inc. became the sole member of Premier GP and Premier GP became the general partner of Premier LP. Premier LP became the operating partnership and parent company to all of Premier's other operating subsidiaries, including PSCI and PHSI. As a result, consolidated financial statements will not be presented for PHSI, but rather Premier, Inc., in subsequent periods.
As part of the Reorganization and IPO, PHSI sold its 1% controlling general partner interest in Premier LP to Premier, Inc. for $30.1 million, resulting in estimated taxes payable of $8.4 million. See Note 5 - Subsequent Events of Premier, Inc.'s financial statements for more information.
Acquisition
On October 31, 2013, Premier completed the acquisition of a data acquisition and integration-as-a-service company that spans multiple hospital transaction systems including enterprise resource planning, materials management, enterprise health records and patient accounting. The terms of the acquisition were not material to the Company.

36



Revolving Facility
On October 11, 2013, Premier repaid $30.0 million of the balance outstanding on the Revolving Facility and repaid the remaining balance of $30.0 million on October 18, 2013.
Distributions to Limited Partners
On November 8, 2013, the board of directors of Premier, Inc. approved the distribution of partnership income to the limited partners of Premier LP of $78.0 million, of which $11.8 million was paid as of September 30, 2013.

37



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Quarterly Report and the Prospectus. The following discussion includes certain forward-looking statements. For a discussion of important factors, including the continuing development of our business and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see "Risk Factors" in the Prospectus and "Cautionary Note Concerning Forward-Looking Statements" contained in this Quarterly Report.
Business Overview
Our Business
We are a national healthcare alliance, consisting of approximately 2,900 U.S. hospitals, approximately 100,000 alternate sites and approximately 400,000 physicians, that plays an important role in the U.S. healthcare industry. We unite hospitals, health systems, physicians and other healthcare providers with the common goal of improving and innovating in the clinical, financial and operational areas of their business to meet the demands of a rapidly evolving healthcare industry. We deliver value through a comprehensive technology-enabled platform that offers critical supply chain services, clinical, financial, operational and population health SaaS informatics products, advisory services and performance improvement collaborative programs.
As of September 30, 2013, we were owned by 181 U.S. hospitals, health systems and other healthcare organizations and, upon the consummation of the Reorganization and IPO on October 1, 2013, all of them were issued shares of Class B common stock representing approximately 78% of our outstanding Class A common stock and Class B common stock. Our current membership base includes many of the country's most progressive and forward-thinking healthcare organizations and we continually seek to add new members that are at the forefront of innovation in the healthcare industry.
Our Business Segments
Our business model and solutions are designed to provide our members access to scale efficiencies, spread the cost of their development, derive intelligence from our data warehouse, mitigate the risk of innovation and disseminate best practices that will help our member organizations succeed in their transformation to higher quality and more cost-effective healthcare. We deliver our integrated platform of solutions that address the areas of total cost management, quality and safety improvement and population health management through two business segments: supply chain services and performance services. Our supply chain services segment includes one of the largest healthcare GPOs in the United States, serving acute and alternate sites, a specialty pharmacy and our direct sourcing activities. Our performance services segment includes one of the largest informatics and advisory services businesses in the United States focused on healthcare providers. Our SaaS informatics products utilize our comprehensive data set to provide actionable intelligence to our members, enabling them to benchmark, analyze and identify areas of improvement across three main categories: cost management, quality and safety and population health management. This segment also includes our technology‑enabled performance improvement collaboratives.
Reorganization and IPO
On October 1, 2013, Premier completed its IPO by issuing 32,374,751 shares of its Class A common stock, at a price of $27.00 per share, which included 4,222,793 shares sold pursuant to the overallotment option granted to the underwriters by Premier, raising net proceeds of approximately $821.7 million, after underwriting discounts and commissions but before expenses. In addition, on October 1, 2013, upon the consummation of the IPO, Premier completed the Reorganization. See Note 5 - Subsequent Events to Premier, Inc.'s financial statements for more information.
We incurred strategic and financial restructuring expenses in connection with the Reorganization and IPO of approximately $5.2 million during fiscal year 2013 and an additional $1.8 million during the first quarter of 2014. We expect to incur up to $0.5 million of additional strategic and financial restructuring expenses in the second quarter of 2014. In addition, we anticipate future ongoing incremental expenses associated with being a public company to approximate between $4.0 million and $5.0 million on an annual basis, excluding compensation expense related to the equity incentive plan established in connection with the Reorganization and IPO.
SYMMEDRx Acquisition
On July 19, 2013, we purchased all the issued and outstanding units of SYMMEDRx for $28.8 million. We funded the acquisition by drawing on our senior secured revolving credit facility (see Note 6 - Lines of Credit to the consolidated financial statements of PHSI for more information). The primary reason for the acquisition of SYMMEDRx, a business with a track record of analyzing and reducing costs for health systems through the innovative use of data, is to continue to strengthen our ability to

38



drive improvement in member cost savings (see Note 4 - Business Acquisitions to the consolidated financial statements of PHSI for more information).
Market and Industry Trends and Outlook
We expect that certain trends and economic or industry-wide factors will continue to affect our business, both in the short-term and long-term. We have based our expectations described below on assumptions made by us and on information currently available to us. To the extent our underlying assumptions about, or interpretation of, available information prove to be incorrect, our actual results may vary materially from our expected results. See "Cautionary Note Regarding Forward-Looking Statements."
Trends in the U.S. healthcare market affect our revenues in the supply chain services and performance services segments. The trends we see affecting our current healthcare business include the implementation of healthcare reform legislation, expansion of insurance coverage, intense cost pressure, payment reform, provider consolidation, shift in care to the alternate site market and increased data availability and transparency. To meet the demands of this environment, there will be increased focus on scale and cost containment and healthcare providers will need to measure and report on, and bear financial risk for, outcomes. We believe these trends will result in increased demand for our supply chain services and performance services solutions in the areas of cost management, quality and safety, population health management and our Enterprise Provider Analytics Platform.
Key Components of Our Results of Operations
Net Revenue
Net revenue consists of (i) service revenue, which includes net administrative fees revenue and other services and support revenue and (ii) product revenue. Net administrative fees revenue consists of GPO administrative fees in our supply chain services segment. Other services and support revenue consists primarily of fees generated by our performance services segment in connection with our SaaS informatics products subscriptions, advisory services and performance improvement collaborative subscriptions. Product revenue consists of specialty pharmacy and direct sourcing product sales, which are included in the supply chain services segment.
Supply Chain Services
Supply chain services revenue consists of GPO net administrative fees (gross administrative fees received from suppliers, reduced by the amount of any revenue share paid to members), specialty pharmacy revenue and direct sourcing revenue.
The success of our supply chain services revenue streams are influenced by the following factors:
Net administrative fee revenue - The number of members that utilize our GPO supplier contracts and the volume of their purchases.
Revenue share - The number of members with contractual arrangements that provide for differing levels of revenue share and their use of our GPO supplier contracts relative to our member owners' use of our GPO supplier contracts.
Specialty pharmacy revenue - The number of members that utilize our specialty pharmacy, as well as the impact of changes in the defined allowable reimbursement amounts determined by Medicare, Medicaid and other managed care plans.
Direct sourcing revenue - The number of members that purchase products through our direct sourcing activities and the impact of competitive pricing.
Performance Services
Performance services revenue consists of SaaS informatics products subscriptions, performance improvement collaborative and other service subscriptions, professional fees for advisory services, and insurance services management fees and commissions from endorsed commercial insurance programs.
Our performance services growth will be dependent upon the expansion of our SaaS informatics products, performance improvement collaboratives and advisory services to new and existing members and the renewal of existing subscriptions to our SaaS informatics products.

39



Cost of Revenue
Cost of service revenue includes expenses related to employees (including compensation and benefits) and outside consultants who directly provide services related to revenue-generating activities, including advisory services to members and implementation services related to SaaS informatics products. Cost of service revenue also includes expenses related to hosting services, related data center capacity costs, third-party product license expenses and amortization of the cost of internal use software.
Cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products. Our cost of product revenue will be influenced by the cost and availability of specialty pharmaceuticals and the manufacturing and transportation costs associated with direct sourced medical products.
Operating Expenses
Selling, general and administrative expenses consist of expenses directly associated with selling and administrative employees and indirect costs associated with employees that primarily support revenue-generating activities (including compensation and benefits) and travel-related expenses, as well as occupancy and other indirect costs, insurance costs, professional fees, and other general overhead expenses. We expect that general and administrative expenses will increase as we incur additional expenses related to being a public company, including stock-based compensation expense related to the equity incentive plan established in connection with the Reorganization and IPO.
Research and development expenses consist of employee-related compensation and benefits expenses, and third-party consulting fees of technology professionals, incurred to develop, support and maintain our software‑related products and services.
Amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions.
Other Income, Net
Other income, net consists primarily of equity in net income of unconsolidated affiliates that is generated from our 50% ownership interest in Innovatix. A change in the number of, and use by, members that participate in our GPO programs through Innovatix could have a significant effect on the amounts earned from this investment. Other income, net also includes interest income, net, and realized gains and losses on our marketable securities as well as gain or loss on disposal of assets.
Income Tax Expense
Income tax expense includes the income tax expense attributable to PHSI and PSCI. The low effective tax rate is attributable to the flow through of partnership income which is not subject to federal income taxes. For federal income tax purposes, income realized by Premier LP is taxable to its partners.
Net Income Attributable to Noncontrolling Interest
As of September 30, 2013, PHSI owns a 1% controlling general partner interest in Premier LP through its wholly owned subsidiary Premier Plans and a 60% voting and economic interest in S2S Global and therefore consolidates their operating results. Net income attributable to noncontrolling interest represents the portion of net income attributable to the limited partners of Premier LP (99%) and the portion of net loss attributable to the noncontrolling equity holders of S2S Global (40%). Our noncontrolling interest attributable to limited partners of Premier LP was reduced to approximately 78% upon the Reorganization.
Other Key Business Metrics
The other key business metrics we consider are adjusted EBITDA, segment adjusted EBITDA and adjusted fully distributed net income.
We define EBITDA as net income before interest and investment income, net, income tax expense, depreciation and amortization and amortization of purchased intangible assets. We define adjusted EBITDA as EBITDA before merger and acquisition related expenses and non-recurring, non-cash or non-operating items, and including equity in net income of unconsolidated affiliates. For all non-GAAP financial measures, we consider non-recurring items to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years. Such expenses include certain strategic and financial restructuring expenses. Non-operating items include gain or loss on disposal of assets.
We define segment adjusted EBITDA as the segment's net revenue less operating expenses directly attributable to the segment excluding depreciation and amortization, amortization of purchased intangible assets, merger and acquisition related expenses and

40



non-recurring or non-cash items, and including equity in net income of unconsolidated affiliates. Operating expenses directly attributable to the segment include expenses associated with sales and marketing, general and administrative and product development activities specific to the operation of each segment. General and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of Segment Adjusted EBITDA.
We define adjusted fully distributed net income as net income attributable to PHSI (i) excluding income tax expense, (ii) excluding the effect of non-recurring and non-cash items, (iii) assuming the exchange of all the Class B common units into shares of Class A common stock, which results in the elimination of noncontrolling interest in Premier LP, and (iv) reflecting an adjustment for income tax expense on pro forma fully distributed net income before income taxes at our estimated effective income tax rate. Adjusted Fully Distributed Net Income is a non-GAAP financial measure because it represents net income attributable to PHSI before merger and acquisition related expenses and non-recurring or non-cash items and the effects of noncontrolling interests in Premier LP.
Adjusted EBITDA is a supplemental financial measure used by us and by external users of our financial statements. We consider Adjusted EBITDA an indicator of the operational strength and performance of our business. Adjusted EBITDA allows us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business. Segment Adjusted EBITDA is the primary earnings measure we use to evaluate the performance of our business segments.
We use Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our results prepared in accordance with GAAP, provides a more complete understanding of factors and trends affecting our business than GAAP measures alone. We believe Adjusted EBITDA and Segment Adjusted EBITDA assist our board of directors, management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of our asset base (primarily depreciation and amortization) and items outside the control of our management team (taxes), as well as other non-cash (impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (strategic and financial restructuring expenses), from our operations. We believe Adjusted Fully Distributed Net Income assists our board of directors, management and investors in comparing our net income on a consistent basis from period to period because it removes non-cash (impairment of intangible assets, purchase accounting adjustments and stock-based compensation) and non-recurring items (strategic and financial restructuring expenses), and eliminates the variability of noncontrolling interest as a result of member owner exchanges of Class B common units into shares of Class A common stock (which exchanges are a member owner’s cumulative right, but not obligation, beginning on October 31, 2014, and each year thereafter, and are limited to one-seventh of the member owner’s initial allocation of Class B common units).
Despite the importance of these non-GAAP financial measures in analyzing our business, determining compliance with certain financial covenants in our Revolving Facility, measuring and determining incentive compensation and evaluating our operating performance relative to our competitors, Adjusted EBITDA is not a measurement of financial performance under GAAP, has limitations as an analytical tool and should not be considered in isolation from, or as an alternative to, net income or any other measure of our performance derived in accordance with GAAP. Some of the limitations of Adjusted EBITDA and Segment Adjusted EBITDA include that they do not reflect: our capital expenditures or our future requirements for capital expenditures or contractual commitments; changes in, or cash requirements for, our working capital needs; the interest expense or the cash requirements to service interest or principal payments under our Revolving Facility; income tax payments we are required to make; and any cash requirements for replacements of assets being depreciated or amortized. In addition, Adjusted EBITDA and Segment Adjusted EBITDA are not measures of liquidity under GAAP, or otherwise, and are not alternatives to cash flows from continuing operating activities.
We also urge you to review the reconciliation of these non-GAAP measures included elsewhere in this Quarterly Report. To properly and prudently evaluate our business, we encourage you to review the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the audited consolidated financial statements and related notes included in the Prospectus, and to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income are susceptible to varying calculations, the Adjusted EBITDA, Segment Adjusted EBITDA and Adjusted Fully Distributed Net Income measures, as presented in this Quarterly Report, may differ from, and may therefore not be comparable to, similarly titled measures used by other companies.
Results of Operations
Our historical consolidated operating results do not reflect (i) the Reorganization, (ii) the IPO and the contemplated use of the estimated net proceeds from the IPO or (iii) additional expenses we will incur as a public company. As a result, our historical consolidated operating results will not be indicative of what our results of operations will be for future periods. Therefore, in

41



addition to presenting the historical actual results, we have presented pro forma results reflecting the Reorganization for all periods presented to provide a more indicative presentation of the future results.
The following table summarizes our historical results of operations for PHSI, and the pro forma consolidated results of operations for Premier, Inc. for the periods shown (in thousands):
 
Three Months Ended September 30,
 
Actual
 
Pro Forma
 
2013
 
2012
 
2013
 
2012
 
Amount
% of Net Revenue
 
Amount
% of Net Revenue
 
Amount
% of Net Revenue
 
Amount
% of Net Revenue
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
Net administrative fees
$
143,576

59.7
 %
 
$
117,489

59.2
 %
 
$
102,313

51.3
 %
 
$
100,032

55.2
 %
Other services and support
53,252

22.1
 %
 
48,147

24.2
 %
 
53,252

26.7
 %
 
48,147

26.6
 %
Services
196,828

81.8
 %
 
165,636

83.4
 %
 
155,565

78.0
 %
 
148,179

81.8
 %
Products
43,748

18.2
 %
 
32,930

16.6
 %
 
43,748

22.0
 %
 
32,930

18.2
 %
 
240,576

100.0
 %
 
198,566

100.0
 %
 
199,313

100.0
 %
 
181,109

100.0
 %
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Services
27,488

11.4
 %
 
24,080

12.1
 %
 
27,488

13.8
 %
 
24,080

13.3
 %
Products
40,038

16.7
 %
 
30,152

15.2
 %
 
40,038

20.1
 %
 
30,152

16.6
 %
 
67,526

28.1
 %
 
54,232

27.3
 %
 
67,526

33.9
 %
 
54,232

29.9
 %
Gross profit
173,050

71.9
 %
 
144,334

72.7
 %
 
131,787

66.1
 %
 
126,877

70.1
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
62,318

26.0
 %
 
55,732

28.1
 %
 
62,643

31.4
 %
 
55,732

30.8
 %
Research and development
852

0.3
 %
 
3,638

1.8
 %
 
852

0.4
 %
 
3,638

2.0
 %
Amortization of purchased intangible assets
601

0.2
 %
 
385

0.2
 %
 
601

0.3
 %
 
385

0.2
 %
Total operating expenses
63,771

26.5
 %
 
59,755

30.1
 %
 
64,096

32.1
 %
 
59,755

33.0
 %
Operating income
109,279

45.4
 %
 
84,579

42.6
 %
 
67,691

34.0
 %
 
67,122

37.1
 %
Other income, net
4,338

1.8
 %
 
3,005

1.5
 %
 
4,338

2.1
 %
 
3,005

1.6
 %
Income before income taxes
113,617

47.2
 %
 
87,584

44.1
 %
 
72,029

36.1
 %
 
70,127

38.7
 %
Income tax expense
891

0.4
 %
 
2,517

1.3
 %
 
6,761

3.4
 %
 
8,144

4.5
 %
Net income
112,726

46.8
 %
 
85,067

42.8
 %
 
65,268

32.7
 %
 
61,983

34.2
 %
Add: Net loss attributable to noncontrolling interest in S2S Global
210

0.1
 %
 
305

0.2
 %
 
210

0.1
 %
 
305

0.2
 %
Less: Net income attributable to noncontrolling interest in Premier LP
(113,214
)
(47.1
)%
 
(83,116
)
(41.9
)%
 
(51,030
)
(25.6
)%
 
(48,398
)
(26.7
)%
Net income attributable to noncontrolling interest
(113,004
)
(47.0
)%
 
(82,811
)
(41.7
)%
 
(50,820
)
(25.5
)%
 
(48,093
)
(26.5
)%
Net (loss) income attributable to PHSI/Premier, Inc. shareholders
$
(278
)
(0.2
)%
 
$
2,256

1.1
 %
 
$
14,448

7.2
 %
 
$
13,890

7.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA (1)
$
124,334

51.7
 %
 
$
94,689

47.7
 %
 
$
83,071

41.7
 %
 
$
77,232

42.6
 %
Adjusted Fully Distributed Net Income (2)
NM

 
 
NM

 
 
$
43,983

22.1
 %
 
$
41,882

23.1
 %
NM - not meaningful

42



(1)
The table that follows shows the reconciliation of net income to Adjusted EBITDA and the reconciliation of Segment Adjusted EBITDA to operating income for the periods presented (in thousands):
 
Three Months Ended September 30,
 
Actual
 
Pro Forma
 
2013
2012
 
2013
2012
Net income
$
112,726

$
85,067

 
$
65,268

$
61,983

Interest and investment income, net (a)
(220
)
(224
)
 
(220
)
(224
)
Income tax expense
891

2,517

 
6,761

8,144

Depreciation and amortization
8,356

6,390

 
8,356

6,390

Amortization of purchased intangible assets
601

385

 
601

385

EBITDA
122,354

94,135

 
80,766

76,678

Stock-based compensation


 
325


Acquisition related expenses (b)
142


 
142


Strategic and financial restructuring expenses (c)
1,842

554

 
1,842

554

Gain on disposal of assets (d)
(4
)

 
(4
)

Adjusted EBITDA
$
124,334

$
94,689

 
$
83,071

$
77,232

 
 
 
 
 
 
Segment Adjusted EBITDA:
 
 
 
 
 
Supply Chain Services
$
125,480

$
98,267

 
$
84,217

$
80,810

Performance Services
16,329

12,000

 
16,329

12,000

Corporate (e)
(17,475
)
(15,578
)
 
(17,475
)
(15,578
)
Adjusted EBITDA
124,334

94,689

 
83,071

77,232

Depreciation and amortization
(8,356
)
(6,390
)
 
(8,356
)
(6,390
)
Amortization of purchased intangible assets
(601
)
(385
)
 
(601
)
(385
)
Stock-based compensation


 
(325
)

Acquisition related expenses (b)
(142
)

 
(142
)

Strategic and financial restructuring expenses (c)
(1,842
)
(554
)
 
(1,842
)
(554
)
Equity in net income of unconsolidated affiliates
(4,114
)
(2,781
)
 
(4,114
)
(2,781
)
 
109,279

84,579

 
67,691

67,122

Stock-based compensation in Premier, Inc.


 
325


Pro forma adjustment for revenue share post-IPO


 
41,263

17,457

Operating income
$
109,279

$
84,579

 
$
109,279

$
84,579

(a)
Represents interest income and realized gains and losses on our marketable securities.
(b)
Represents legal, accounting and other expenses directly related to the acquisition of SYMMEDRx.
(c)
Represents legal, accounting and other expenses directly related to the Reorganization and IPO.
(d)
Represents gains on disposal of property and equipment.
(e)
Corporate consists of general and administrative corporate expenses that are not specific to either of our segments.

43



(2)
The table that follows shows the reconciliation of pro forma net income attributable to PHSI/Premier, Inc. shareholders to pro forma Adjusted Fully Distributed Net Income for the periods presented (in thousands):
 
Three Months Ended September 30,
 
Pro Forma
 
2013
2012
Adjusted Fully Distributed Net Income
 
 
Net income attributable to Premier, Inc. shareholders
$
14,448

$
13,890

Income tax expense
6,761

8,144

Stock-based compensation