UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K/A
(Amendment No. 2)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-19480
PER-SE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-1651222
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1145 SANCTUARY PARKWAY, SUITE 200 30004
ALPHARETTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(770) 237-4300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 7, 2004, was approximately $332,332,411 calculated
using the closing price on such date of $10.51. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of May 7, 2004, was
31,620,591.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 7, 2004, are incorporated herein by reference in Part III.
EXPLANATORY NOTE
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, as amended,
Per-Se Technologies, Inc. hereby amends its Annual Report on Form 10-K for the
year ended December 31, 2003 in response to certain comments of the staff of the
Securities and Exchange Commission in connection with its review of our
Registration Statement on Form S-1 (File No. 333-119012) filed on September 15,
2004 and amended on November 23, 2004, January 7, 2005, February 10, 2005, March
7, 2005 and March 9, 2005. The revisions contained in this Form 10-K/A do not
include the restatement of any financial information previously reported in our
Annual Report on Form 10-K for the year ended December 31, 2003 except that the
Company's Consolidated Statement of Cash Flows for the years ended December 31,
2003, 2002, and 2001 has been restated as indicated therein.
For convenience and ease of reference, we are filing the amended Annual
Report in its entirety. Unless otherwise stated, all information contained in
this amended Annual Report is as of May 13, 2004, the filing date of our
original Annual Report on Form 10-K for the year ended December 31, 2003. For
more current information, readers should refer to the reports and other
documents we have filed with or furnished to the Commission subsequent to May
13, 2004.
PER-SE TECHNOLOGIES, INC.
FORM 10-K/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE OF
FORM 10-K/A
-----------
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 7
ITEM 3. LEGAL PROCEEDINGS........................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.................................................. 10
ITEM 6. SELECTED FINANCIAL DATA..................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 14
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 35
ITEM 9A CONTROLS AND PROCEDURES..................................... 35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 37
ITEM 11. EXECUTIVE COMPENSATION...................................... 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................. 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................... 38
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 38
PART I
ITEM 1. BUSINESS
INTRODUCTION
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is focused on
providing solutions that improve the administrative functions of the healthcare
industry. Specifically, Per-Se provides Connective Healthcare solutions that
help physicians and hospitals achieve their income potential. Connective
Healthcare solutions support and unite healthcare providers, payers and patients
with innovative technology processes that improve and accelerate reimbursement
and reduce the administrative cost of care. The Company serves the healthcare
industry through two divisions: Physician Services and Hospital Services. Refer
to "Note 19 - Segment Reporting" in the Company's Notes to Consolidated
Financial Statements for financial information regarding the Physician Services
and Hospital Services divisions.
The Physician Services division provides Connective Healthcare solutions
that manage the revenue cycle for physician groups. The division provides a
complete outsourcing service, therefore, allowing physician groups to avoid the
infrastructure investment in their own in-house billing office. The division is
the largest provider of business management outsourced services that supplant
all or most of the administrative functions of a physician group. The target
market is primarily hospital-affiliated physician groups in the specialties of
radiology, anesthesiology, emergency medicine and pathology as well as physician
groups practicing in the academic setting and other large physician groups.
Services include clinical data collection, data input, medical coding, billing,
contract management, cash collections, accounts receivable management and
extensive reporting of metrics related to the physician practice. These services
help physician groups to be financially successful by improving cash flows and
reducing administrative costs and burdens. Fees for these services are primarily
based on a percentage of net collections on the Company's clients' accounts
receivable. The division recognizes revenue and bills customers when the
customers receive payment on those accounts receivable, which aligns the
division's interests with the interests of the physician groups it services. The
division's offerings have historically focused on the back-end processes
required to ensure that physicians are properly reimbursed for care delivery.
The division also offers a physician practice management ("PPM") solution that
is delivered via an application service provider ("ASP") model and collects a
monthly usage fee from the physician practices using the system. The division's
revenue model is 100% recurring in nature due to the transaction-based nature of
its fee revenue in the outsourced services business and the monthly usage fee in
the PPM business.
Formed in July 2003 through the combination of the former e-Health
Solutions and Application Software divisions, the Hospital Services division
provides Connective Healthcare solutions that focus on revenue cycle and
resource management to improve the financial health of hospitals. The division
has one of the largest electronic clearinghouses in the medical industry, which
provides an important infrastructure to support its revenue cycle management
offerings. The clearinghouse delivers dedicated electronic and Internet-based
business-to-business solutions that focus on electronic processing of medical
transactions as well as complementary transactions, such as electronic
remittance advices, realtime eligibility verification and high-speed print and
mail services. Other revenue cycle management solutions provide insight into a
hospital's revenue cycle inefficiencies, such as denial management. Denial
management allows hospitals to identify charges denied reimbursement by a payer
and to take corrective actions such as resubmitting for reimbursement. Hospitals
may opt to outsource portions of their revenue cycle management process to the
Company, such as secondary insurance billing. The division also provides
resource management solutions that enable hospitals to efficiently manage
resources to reduce costs and improve their bottom line. The division's staff
scheduling software efficiently plans nurse schedules, accommodating individual
preferences as well as environmental factors, such as acuity levels, as well as
schedules all the personnel across the hospital enterprise. The division's
patient scheduling software helps effectively manage a hospital's most expensive
and profitable area, the operating room, as well as schedules patients across
the enterprise. The division primarily recognizes revenue on a per-transaction
basis for its revenue cycle management solutions
1
and primarily recognizes revenue on a percentage-of-completion basis or upon
software shipment for sales of its resource management software solutions.
Approximately 88% of the division's revenue is recurring due to its
transaction-based business and the maintenance revenue from its substantial
installed base for the resource management software.
The Company markets its products and services to constituents of the
healthcare industry, primarily to hospital-affiliated physician practices,
physician groups in academic settings, hospitals and integrated delivery
networks ("IDNs").
As stated previously, the Company focuses on the administrative functions
of the healthcare market, with the majority of its business based in the United
States. Healthcare spending in the United States reached an estimated $1.7
trillion or 15.3% of gross domestic product in 2003. It has been estimated that
as much as 31% of annual healthcare spending is for administrative functions.
The Company's solutions help make the reimbursement of healthcare more efficient
and help improve the overall patient care experience by simplifying the revenue
cycle process for physicians and hospitals. The Company's services and solutions
are not capital-intensive for providers, making them a cost-effective solution
as providers focus on their financial health.
During 2003 and early 2004, the Company took steps to strengthen its
strategic focus and financial health. Two non-core software product lines for
hospitals were divested -- a clinical information system was divested in July
2003, and a patient financial management system was divested in January 2004.
Both product lines were enterprise-wide software solutions that required a
hospital or IDN to invest significant capital and time to implement. Both
product lines generated negative cash flow during 2003. In July 2003, the
Company reorganized, aligning its operations around its two key constituents:
physicians and hospitals. The Company incurred approximately $0.8 million in
restructuring charges in 2003 related to this reorganization. In September 2003,
the Company made significant improvements to its capital structure. The Company
permanently retired $35 million of its then- outstanding debt of $160 million.
The Company refinanced the remaining balance of $125 million at substantially
lower interest rates.
The Company recorded research and development costs of approximately $8.0
million, $10.1 million and $5.3 million in 2003, 2002 and 2001 respectively.
RECENT DEVELOPMENTS
RESTATEMENT OF FINANCIAL STATEMENTS
As a result of allegations of improprieties made during 2003 and 2004, the
Company's independent registered public accounting firm advised the Company and
the Audit Committee of the Board of Directors that additional procedures should
be performed related to the allegations. These additional procedures, which
predicated the 2003 Form 10-K filing delay, were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement
Audit, ("SAS No. 99") that became effective for periods beginning on or after
December 15, 2002. Due to the volume and, in some cases, vague nature of many of
the allegations, the scope of the additional procedures was broad and extensive.
The additional procedures included the review of certain of the Company's
revenues, expenses, assets and liabilities accounts for the years 2001 through
2003. Certain financial items were identified during the additional procedures
that warranted further review by the Company. The Company reviewed these items
and determined that it was appropriate to restate certain prior period financial
statements. The restatements affect the financial statements for the years ended
December 31, 2002 and 2001 and for the nine months ended September 30, 2003, and
are included in this report.
The overall impact of the restatements is a net increase to reported net
income totaling approximately $2.1 million, or $.07 per share on a fully diluted
basis for the years 2001 and 2002, and for the nine months ended September 30,
2003. On an annual basis, the net decrease to the reported net loss for 2001 is
approximately $0.2 million or $.01 per share, and the net increase to reported
net income for 2002 is approximately $1.0 million or $.03 per share on a fully
diluted basis. The net increase to reported net income for the nine months ended
September 30, 2003, is approximately $0.8 million or $.03 per share on
2
a fully diluted basis. In the periods presented on a quarterly basis, the impact
of the restatements is a net increase to reported net income, except for the
second quarter of 2002, which has a decrease to reported net income of $0.2
million. The restatements were primarily related to certain liability accounts
that were determined to be over-accrued based on the correction of errors and
the subsequent refinement of estimates originally made in establishing the
accruals.
The impact of the restatements is detailed in Note 2 of Notes to the
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data.
The Company expects to record costs totaling approximately $6 million to $7
million during 2004 for the additional procedures. Approximately $4 million of
costs associated with the additional procedures were recorded for the three
months ended March 31, 2004 with the remainder to be recorded during the three
months ended June 30, 2004
As a result of errors that caused the restatements to the Company's
financial statements, the Company's independent registered public accounting
firm determined that a material weakness exists related to the Company's
internal controls and procedures. The Company's independent registered public
accounting firm reported to the Company that the errors that resulted in the
restatements reflected in this Form 10-K, which generally related to the
recording of accruals for sales commissions, vacation liabilities, legal
expenses, health insurance, incentive compensation and other liabilities, were
the result of not having appropriate controls over the estimation process
associated with the establishment of accruals and reserves and the lack of
adequate supervision of accounting personnel. The Company has taken steps to
improve controls in these areas, including hiring a new Corporate Controller and
principal accounting officer, reorganizing the Company's accounting groups so
that the divisional accounting departments now report directly to the Corporate
Controller, strengthening controls over the month-end close process and
requiring monthly review and documented approval for all balance sheet
reconciliations. The Company believes the actions taken and additional controls
implemented have effectively addressed the material weakness identified by its
independent registered public accounting firm.
Under the $175 million Credit Agreement (refer to "Note 10 -- Long-Term
Debt" in the Company's Notes to Consolidated Financial Statements for more
information), the Company has certain reporting requirements for the submission
of its financial statements to the Lenders, as defined in the Credit Agreement.
On April 30, 2004, the Company was granted an extension of the May 15, 2004,
submission deadline for its results for the period ended March 31, 2004. The
Company has until the extended deadline of May 28, 2004, to submit its first
quarter 2004 financial statements to the Lenders.
On April 5, 2004, the Company received a noncompliance notification from
The Nasdaq Stock Market ("Nasdaq") due to the delay in filing of the 2003 Form
10-K. On April 29, 2004, the Company had a hearing on the matter before a Nasdaq
Listing Qualifications Panel (the "Panel"). The Panel has not yet issued its
decision, but is expected to do so shortly. The Company is currently in the
process of finalizing its first quarter 2004 results. As required, the Company
expects to receive a noncompliance notification from Nasdaq due to the delay in
filing its first quarter 2004 Form 10-Q, which was due on May 10, 2004. The
Company is working to file its first quarter 2004 Form 10-Q as quickly as
possible.
LLOYD'S OF LONDON LITIGATION SETTLEMENT
On May 10, 2004, the Company reached a settlement with its former insurance
carrier, certain underwriters at Lloyd's of London (collectively "Lloyd's"). The
Company was in litigation with Lloyd's after its attempt in May 2002 to rescind
certain errors and omissions ("E&O") policies and directors and officers and
company reimbursement ("D&O"), policies that it had issued to the Company from
the period December 31, 1998, to June 30, 2002. In the settlement Lloyd's agreed
to pay the Company $20 million in cash by July 9, 2004. Lloyd's also agreed to
defend, settle or otherwise resolve at their expense the two remaining pending
claims under the E&O policies. In exchange, the Company provided Lloyd's with a
full release of all E&O and D&O policies. The California Superior Court retained
jurisdiction to enforce any aspect of the settlement agreement.
3
As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O policy settlements covered by Lloyd's.
Effective on May 12, 2004, as a result of negotiations among the Company,
Lloyd's, and a party to a prior E&O policy settlement with the Company, the
Lloyd's settlement was amended to reduce by $3.8 million the additional amounts
to be paid by the Company under the prior E&O policy settlements covered by
Lloyd's. This amendment reduced the amount of cash payable by Lloyd's to the
Company in the settlement from $20.0 million to $16.2 million, and reduced the
amount of the Company's receivable from Lloyd's by $3.8 million. The Company
expects to record a gain of approximately $1.7 million on settlement when the
cash is received.
STATEMENT OF CASH FLOWS -- RESTATED
Certain amounts in the Company's Consolidated Statements of Cash Flows
related to Funds Due to Clients have been reclassified for the years ended
December 31, 2003, 2002, and 2001. These reclassifications decreased net cash
provided by operating activities and increased net cash provided by financing
activities by approximately $0.2 million, $1.1 million, and $0.9 million in the
years ended December 31, 2003, 2002 and 2001, respectively. Additionally, for
the year ended December 31, 2003, the Company reclassified approximately $4.3
million related to its debt refinancing from cash flows from operating
activities to cash used for financing activities. The Company determined that
these reclassifications, when aggregated, required the Company to restate its
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002, and 2001.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 19 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
BUSINESS MANAGEMENT OUTSOURCED SERVICES FOR PHYSICIANS
Approximately 225,000 U.S.-based hospital-affiliated physicians represent
the Company's target market for business management outsourced services. The
target market consists of large physician groups -- typically 10 or more
physicians depending upon the specialty -- and represents an estimated market
opportunity of approximately $7 billion. The Company estimates that
approximately 20% to 30% of the physicians in the target market currently
outsource their business management needs, with the remainder of physicians
performing these services in house. The Company's Physician Services division is
the largest provider of comprehensive business management outsourcing services
to the U.S. hospital-based physician market, supporting approximately 1,100
clients in 42 states. The business of providing integrated business management
outsourcing services is highly competitive. The division competes with regional
and local billing companies as well as physician groups performing these
services in house. Competition among outsourcing companies is based upon the
relationship with the client or prospective client, the efficiency and
effectiveness of converting medical services to cash while minimizing compliance
risk, the ability to provide proactive practice management services and, to the
extent that service offerings are comparable, price. The Company believes there
is a trend toward outsourcing among physician groups performing these revenue
cycle management services in house due to the complexity of reimbursement
regulations and the financial pressures physician groups face.
ASP-BASED PHYSICIAN PRACTICE MANAGEMENT SYSTEMS
Representing less than 5% of the revenue of the Physician Services
division, the Company's ASP-based PPM solution is targeted at office-based
physicians and physician groups in the United States, and is the largest PPM
solution delivered via ASP in the nation serving approximately 4,000 physicians.
Today, the solution is regionally focused, mostly in the upper Midwest. The PPM
market is highly competitive with large national competitors as well as small
regionally or locally focused competition.
4
REVENUE CYCLE MANAGEMENT SOLUTIONS FOR HOSPITALS
The market for hospital revenue cycle management solutions ranges from
providing technology tools that allow a hospital's central billing office
("CBO") to more effectively manage its cash flow to full or partial outsourced
solutions. Technology tools include electronic transactions, such as claims
processing, that can be delivered via the Web or through dedicated electronic
data interfaces as well as license-based solutions, such as automated cash
posting solutions, that are deployed at the CBO. The Company's Hospital Services
division has the third largest electronic clearinghouse (based on Company market
research) in the healthcare industry and processes approximately 320 million
transactions on an annual basis. The clearinghouse supports more than 1,400
governmental and commercial payer connections in 48 states. The Company's
revenue cycle management solutions are currently in approximately 400 hospitals
in the United States. Competition in the revenue cycle management market is
based on providing solutions that enable hospitals to improve their cash flow.
Competitors include traditional electronic data interface companies, Internet
healthcare companies, outsourcing companies and specialized software vendors.
RESOURCE MANAGEMENT SOLUTIONS FOR HOSPITALS
The market for resource management solutions for hospitals focuses on
license-based and Internet solutions to help hospitals efficiently and
effectively manage their costs. The Company's resource management business
focuses on the areas of staff and patient scheduling. The Company provides staff
and patient scheduling solutions to approximately 1,600 hospitals, primarily in
the United States. The Company's Hospital Services division has the
market-leading staff scheduling solution and a market-leading patient scheduling
solution. Competition in this market segment is based on enabling a hospital to
decrease costs by improving the utilization of its personnel and facilities. The
Company competes against national software vendors, specialized software vendors
and Internet healthcare companies.
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
segment operating expenses, segment operating profit and identifiable assets
attributable to each division for each of the fiscal years ended 2003, 2002 and
2001 and as of December 31, 2003 and 2002, is presented in Note 19 of Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.
HEALTHCARE INDUSTRY
Trends in the United States healthcare industry affect Per-Se's business.
As healthcare expenditures have become a larger percentage of the gross domestic
product, increasing focus has been placed on the administrative costs and
burdens associated with the delivery of care. As a result, payers have sought to
control costs by changing from the traditional fee-for-service reimbursement
model to managed care, fixed fee and capitation arrangements. These
reimbursement models, coupled with extensive regulatory control and government
healthcare fraud and abuse initiatives, have resulted in a significantly more
complex accounting, coding, billing and collection environment. Such industry
changes create a more positive market for solutions that reduce a healthcare
provider's administrative burdens, help ensure compliance in the complex
regulatory environment and minimize medical coding and billing errors, while
improving reimbursement and reducing costs.
Both governmental and private payers continue to restrict payments for
healthcare services, using measures such as payment bundling, medical necessity
edits and post-payment audits. These measures may decrease revenue to the
Company's provider clients and consequently decrease revenue derived by the
Company from such clients, as well as increase the cost of providing services.
The healthcare industry continues to focus on the impact that regulations
governing standards for electronic transactions, privacy and information
security issued under the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") have on operations and information technology systems. HIPAA was
designed to reduce administrative waste in healthcare and protect the privacy
and security of patients'
5
health information. HIPAA regulations identify and impose standards for all
aspects of handling patient health information. These regulations, which are
described in more detail below under the subheading "Regulation," may require
the Company to enhance its internal systems and software applications sold, but
HIPAA may also create an increased demand for the Company's services and
solutions. While the Company has incurred and will continue to incur costs to
comply with HIPAA, management believes these compliance costs will not have a
material impact on the Company's results of operations.
REGULATION
Per-Se's business is subject to numerous federal and state laws, programs
to combat healthcare fraud and abuse, and increasing restrictions on
reimbursement for healthcare services. Each of the major federal healthcare
payment programs (Medicare, Medicaid and TRICARE) has its own set of complex and
sometimes conflicting regulations. The Balanced Budget Act of 1997 and HIPAA
have mandated additional regulations, and many states have passed legislation
addressing billing and payment for healthcare services.
The federal government is making significant efforts to detect and
eliminate healthcare fraud and abuse, particularly through its enforcement of
the False Claims Act, the Medicare and Medicaid Patient and Program Protection
Act of 1987 and HIPAA, all of which provide the federal government with the
authority to impose both civil and criminal sanctions and penalties for
submission of false claims to governmental payers. The federal government may
impose civil monetary penalties up to $50,000 per offense as well as exclude a
provider from participation in Medicare and other governmental healthcare
programs. In addition, the False Claims Act allows a private party to bring a
"qui tam" or "whistleblower" suit alleging the filing of false or fraudulent
Medicare or Medicaid claims and potentially share in damages and civil penalties
paid to the government. The U.S. Centers for Medicare & Medicaid Services
("CMS") offers rewards for information leading to the recovery of Medicare
funds, and CMS engages private contractors to detect and investigate fraudulent
billing practices.
The Company's compliance program, which is modeled after the Office of
Inspector General's Compliance Program Guidance for Third-Party Medical Billing
Companies, is designed and maintained to detect and prevent regulatory
violations. The Company believes its compliance program is effective; however, a
compliance program cannot be expected to provide absolute compliance with the
law. The existence of an effective compliance program may, nevertheless,
mitigate civil and criminal sanctions for certain healthcare-related offenses.
Under HIPAA, the federal government published final rules regarding the
standards for electronic transactions as well as standards for privacy and
security of individually identifiable health information. These rules set new or
higher standards for the healthcare industry in handling healthcare transactions
and information, with penalties for noncompliance.
The HIPAA rules regarding standards for electronic transactions require
healthcare providers, healthcare clearinghouses and health plans that send or
receive healthcare transaction data electronically to use standard data formats.
The compliance deadline for standard electronic transactions was October 16,
2003. In September 2003, CMS issued transitional guidance that allowed
noncompliant electronic transactions after the October 2003 compliance deadline.
The industry continues to work toward compliance. The Company has modified the
operations of its subsidiaries that are engaged in the electronic transmission
of such data substantially to comply with HIPAA's electronic transaction
standards.
The HIPAA rules regarding privacy of patient health information require
organizations that handle such information to establish safeguards regarding
access, use and disclosure, and to restrict how other entities use that
information. The privacy rules had a compliance deadline of April 14, 2003, and
the Company implemented them on or before the deadline. The Company believes
that its operations are in material compliance with the privacy rule
requirements. Although the HIPAA privacy rules do not provide a private right of
action for individuals, individuals could bring a privacy action under
applicable state law for misuse or improper disclosure of their health
information.
6
The HIPAA rules regarding the security of medical information became final
on February 20, 2003. Under these rules, health insurers, certain healthcare
providers and healthcare clearinghouses must establish procedures and mechanisms
to protect the confidentiality, integrity and availability of electronic
protected health information. These rules have a compliance deadline of April
21, 2005. Management believes that the costs of compliance with the HIPAA
security rules will not materially impact the Company's results of operations.
EMPLOYEES
The Company currently employs approximately 4,800 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
FORWARD-LOOKING STATEMENTS
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report,
including certain statements set forth under the captions "Recent Developments,"
"Description of Business by Industry Segment," "Healthcare Industry,"
"Regulation," "Employees," "Legal Proceedings," "Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities," "Recent Accounting Pronouncements," "Overview of Critical
Accounting Policies," "Other," "Results of Operations," "Liquidity and Capital
Resources," "Interest Rate Sensitivity," "Exchange Rate Sensitivity," "Controls
and Procedures," "Summary of Significant Accounting Policies," "Discontinued
Operations," "Long-term Debt," "Legal Matters," "Subsequent Events," and "Cost
of Additional Procedures (Unaudited)" are "forward-looking statements" within
the meaning of the Securities Act of 1933 and the Securities Exchange Act of
1934, as amended by the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Forward-looking statements include the Company's expectations
with respect to meritorious defenses to the claims and other issues asserted in
pending legal matters, industry growth segments, effect of industry and
regulatory changes on the Company's customer base, the state of employee
relations, use of estimates for revenue recognition, bad debt accruals in
reserve for doubtful accounts receivable and other estimates used for accounting
purposes, effect of adoption of recent accounting pronouncements, timing of
arbitration, overall profitability, the availability of capital and other
similar matters. Although the Company believes that the statements it has made
are based on reasonable assumptions, they are based on current information and
beliefs and, accordingly, the Company can give no assurance that its
expectations will be achieved. In addition, these statements are subject to
factors that could cause actual results to differ materially from those
suggested by the forward-looking statements. These factors include, but are not
limited to, factors identified under the caption "Factors That May Affect Future
Results of Operations, Financial Condition or Business" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7. The Company disclaims any responsibility to update any forward-looking
statements.
ITEM 2. PROPERTIES
The Company's principal executive office is leased and is located in
Atlanta, Georgia. The lease for that office expires in February 2005. Effective
July 2004, the Company plans to relocate its principal executive office to
Alpharetta, Georgia. The lease for that office space will expire in June 2014.
For more information, see "Note 21 -- Subsequent Events" in the Company's Notes
to Consolidated Financial Statements.
PHYSICIAN SERVICES
Physician Services' principal office is leased and is located in the
Company's principal executive office. In addition to its principal office,
Physician Services operates 76 business offices throughout the United States.
One of the facilities is owned. All of the remaining facilities are leased with
various expiration dates through June 2011.
7
HOSPITAL SERVICES
Hospital Services' principal office is leased and is located in the
Company's principal executive office. In addition to its principal office,
Hospital Services operates 6 offices in the United States and one in the United
Kingdom. These facilities are leased with various expiration dates through
November 2006.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is included in Note 12 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
pages F-26 to F-27.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company:
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
---- --- -------------------------------- ---------------
Philip M. Pead.................. 51 Chairman, President, Chief 1999
Executive Officer and Director
of the Company
Chris E. Perkins................ 41 Executive Vice President and 2000
Chief Financial Officer of the
Company
Philip J. Jordan................ 56 Senior Vice President of the 2003
Company and the President of the
Company's Hospital Services
division
Paul J. Quiner.................. 44 Senior Vice President, General 2001
Counsel and Secretary of the
Company
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
Philip M. Pead has served as the Chairman, President and Chief Executive
Officer of the Company since May 2003. He was named President and Chief
Executive Officer in November 2000. He has also been a member of Per-Se's Board
of Directors since November 2000. From August 1999 to November 2000, Mr. Pead
served as Executive Vice President and Chief Operating Officer of the Company.
Mr. Pead joined the Company in April 1997 as a senior executive in the hospital
software business and formed the Company's electronic transaction processing
business segment in 1999. He served as President of the hospital software
business from May 1997 until August 1999. From May 1996 to April 1997, Mr. Pead
was employed by Dun & Bradstreet Software as a senior executive, with
responsibility for international operations.
Chris E. Perkins has served as Executive Vice President and Chief Financial
Officer of the Company since February 2001. From April 2000 to February 2001,
Mr. Perkins served as Senior Vice President of Corporate Development. Prior to
joining Per-Se in April 2000, Mr. Perkins held various executive management
positions with AGCO Corporation. He was appointed as AGCO's Chief Financial
Officer in January 1996, after serving as Vice President of Finance and
Administration for the Europe, Africa and Middle East division, and in various
roles within corporate development. In July 1998, Mr. Perkins was named Vice
President of AGCO's parts division, a $500 million global business unit, for
which he was
8
responsible for all operations. Mr. Perkins also spent seven years in public
accounting with Arthur Andersen LLP.
Philip J. Jordan has served as President of the Hospital Services division
since August 2003. In this position, Mr. Jordan is responsible for the entire
operations of the Hospital Services division. Prior to joining Per-Se in August
2003, Mr. Jordan led Kelvick Ltd., an investment and management consulting
company that he founded. Previously, he was Chief Executive Officer of
SmartStream Technologies Ltd., a company specializing in "straight through
processing" solutions for the banking industry. Mr. Jordan also has held
positions at Geac Computers Ltd. overseeing its operations in Europe, Africa,
Middle East and Latin America. He also has held various leadership positions
with software and services companies that include Pilot Executive Software, TECS
Ltd., and Comshare Computers Ltd.
Paul J. Quiner has served as Senior Vice President, General Counsel and
Secretary of the Company since May 2001. Prior to joining the Company, Mr.
Quiner was a private investor from January 2000 to May 2001. He served as Senior
Vice President, Mergers & Acquisitions of Coram Healthcare Corporation from July
1998 to December 1999. Prior to serving in that position, he had six years of
experience in Coram's legal department, including service from March 1995 to
July 1998 as Senior Vice President and General Counsel. Prior to joining Coram,
Mr. Quiner was a partner in the Atlanta/New York/ Washington, D.C. law firm of
Alston & Bird LLP, where he specialized in healthcare, medical malpractice
defense, media and general corporate litigation.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Due to the Company's delayed filing of the 2003 annual report on Form 10-K
with the U.S. Securities and Exchange Commission (the "Commission"), the Company
received a notification from the Nasdaq Listing Qualifications Department
stating that the Company was not in compliance with National Association of
Securities Dealers, Inc. ("NASD") Marketplace Rule 4310(c)(14). The notification
began a process that includes an avenue for appeals, which the Company is
following. The notification stated that unless the Company requested an appeals
hearing on the matter before a Nasdaq Listing Qualification Panel (the "Panel"),
the Company's shares would be delisted from The Nasdaq National Market
("Nasdaq") at the opening of business on April 13, 2004. The Company requested a
hearing and that hearing occurred on April 29, 2004. Under NASD Marketplace
Rules, the hearing request will stay the delisting process pending the Panel's
decision. During this process, the Company's shares will continue to trade on
Nasdaq but the trading symbol changed from "PSTI" to "PSTIE" as of the opening
of trading on April 5, 2004. The Company's delay in filing its Form 10-K is the
only listing deficiency cited in the notification.
Once the Company is current with required filings with the Commission, the
Company expects to be compliant with Nasdaq listing standards.
The prices in the table below represent the high and low sales price for
the Common Stock as reported on Nasdaq for the periods presented. Such prices
are based on inter-dealer bid and asked prices without markup, markdown or
commissions and may not represent actual transactions.
YEAR ENDED DECEMBER 31, 2003 HIGH LOW
---------------------------- ------ ------
First Quarter............................................... $9.070 $5.750
Second Quarter.............................................. 11.740 7.780
Third Quarter............................................... 16.580 10.650
Fourth Quarter.............................................. 17.250 11.640
YEAR ENDED DECEMBER 31, 2002 HIGH LOW
---------------------------- ------- ------
First Quarter............................................... $13.230 $9.760
Second Quarter.............................................. 13.450 8.200
Third Quarter............................................... 9.930 6.810
Fourth Quarter.............................................. 10.700 8.250
The last reported sales price of the Common Stock as reported on Nasdaq on
May 7, 2004, was $10.51 per share. As of May 7, 2004, the Company's Common Stock
was held by 3,234 stockholders of record.
Per-Se has never paid cash dividends on its Common Stock. The Credit
Agreement entered into on September 11, 2003, contains restrictions on the
Company's ability to pay dividends (see Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data for more information).
10
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about Common Stock that may be issued
under all of the Company's existing compensation plans as of December 31, 2003.
NUMBER OF
SECURITIES REMAINING
AVAILABLE FOR FUTURE
NUMBER OF SECURITIES WEIGHTED-AVERAGE ISSUANCE UNDER
TO BE ISSUED UPON EXERCISE PRICES OF EQUITY COMPENSATION
EXERCISE OF OUTSTANDING PLANS (EXCLUDING
OUTSTANDING OPTIONS OPTIONS AND SECURITIES REFLECTED
PLAN CATEGORY AND RIGHTS RIGHTS IN FIRST COLUMN)
------------- -------------------- ------------------ --------------------
Equity Compensation Plans Approved
by Stockholders.................. 270,658(1) $10.80 228,543
3,562,288(2) $ 8.80 896,658
n/a n/a 600,000(3)
Equity Compensation Plans Not
Approved by Stockholders......... 2,625,003(4) $ 9.33 817,456
177,088(5) $12.83 --
--------- ------ ---------
Total......................... 6,635,037 $ 9.31 2,542,657(6)
========= ====== =========
---------------
(1) Amended and Restated Per-Se Technologies, Inc. Non-Employee Director Stock
Option Plan (the "Director Stock Option Plan"). The Director Stock Option
Plan, which was approved by the Company's stockholders on May 8, 2003,
provides stock options for non-employees who serve on the Company's Board of
Directors.
(2) Second Amended and Restated Per-Se Technologies, Inc. Stock Option Plan, as
amended (the "Executive Stock Option Plan"). The Executive Stock Option
Plan, which was approved by the Company's stockholders on May 4, 2000,
provides options to purchase Common Stock to employees of the Company who
are executive-level employees on the date of grant.
(3) Per-Se Technologies, Inc. Deferred Stock Unit Plan (the "Deferred Stock Unit
Plan"). The Deferred Stock Unit Plan, which was approved by the Company's
stockholders on May 2, 2002, is a deferred compensation plan under which
directors and selected key employees may elect to defer compensation in the
form of deferred stock units that are payable in shares of Common Stock at a
future date. Pursuant to its terms, shares distributed under the Deferred
Stock Unit Plan must be shares that were previously issued and reacquired by
the Company, and are not original issue shares.
(4) Per-Se Technologies, Inc. Non-Qualified Stock Option Plan for Non-Executive
Employees, as amended (the "Non-Executive Stock Option Plan"). The
Non-Executive Stock Option Plan provides options to purchase Common Stock to
employees of the Company who are not executive-level employees on the date
of grant. Options granted under the Non-Executive Stock Option Plan
generally vest over a three to five-year period, and expire 11 years after
the date of grant.
(5) Per-Se Technologies, Inc. Non-Qualified Stock Option Plan for Employees of
Acquired Companies, as amended (the "Acquired Companies Stock Option Plan").
The Acquired Companies Stock Option Plan provides options to purchase Common
Stock to employees of the Company who were immediately prior to an
acquisition employed by the business that was the subject of such
acquisition. Options granted under the Acquired Companies Stock Option Plan
generally vest over a three to five-year period, and expire 11 years after
the date of grant.
(6) Includes the 600,000 outstanding shares that may be distributed under the
Deferred Stock Unit Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Per-Se for and as of each of the five fiscal years in the period ended
December 31, 2003. The selected consolidated financial information of Per-Se for
each of the three years in the period ended December 31, 2003, and as of
11
December 31, 2003, 2002 and 2001, has been derived from the audited consolidated
financial statements of Per-Se, which present the operations of the Patient1
clinical product line ("Patient1"), and the Business1 patient accounting product
line ("Business1") as discontinued operations. The selected consolidated
financial information of Per-Se for each of the two fiscal years ended December
31, 2000, and as of December 31, 2000, and 1999, has been derived from the
unaudited consolidated financial statements of Per-Se, which present the
operations of Patient1 and Business1 as discontinued operations. The year ended
December 31, 1999, presents the operations of Medaphis Services Corporation
("MSC") and Impact Innovations Group ("Impact") as discontinued operations. MSC
was sold in 1998 and Impact was sold in 1999 as part of management's plan to
divest non-core business operations.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
-------- ------------- ------------- -------- --------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue............................... $335,169 $325,564 $305,822 $291,561 $302,011
Salaries and wages.................... 194,139 186,075 182,597 182,075 202,725
Other operating expenses.............. 87,183 90,857 86,800 90,388 102,169
Depreciation.......................... 9,375 10,908 12,223 15,044 19,582
Amortization.......................... 7,134 7,836 9,229 7,412 6,498
Interest expense...................... 14,646 18,069 18,009 18,238 18,483
Interest income....................... (297) (471) (1,121) (3,728) (2,388)
Loss on extinguishment of debt........ 6,255 -- -- -- --
Process improvement project........... -- -- 3,423 -- --
Litigation settlements................ -- -- -- 1,147 24,811
Restructuring and other expenses...... 830 -- 593 2,382 --
Income tax expense (benefit).......... 27 800 343 (733) (777)
Income (loss) from continuing
operations.......................... 15,877 11,490 (6,274) (20,664) (69,092)
Net income (loss)(1).................. 11,989 8,989 (6,109) (48,202)(2) (33,702)
Shares used in computing net income
(loss) per common share -- basic.... 30,594 30,061 29,915 29,852 28,097
Shares used in computing net income
(loss) per common
share -- diluted.................... 32,661 31,966 29,915 29,852 28,097
PER SHARE DATA
Income (loss) from continuing
operations -- basic................. $ 0.52 $ 0.38 $ (0.21) $ (0.69) $ (2.46)
Net income (loss) per common share --
basic............................... $ 0.39 $ 0.30 $ (0.20) $ (1.62) $ (1.20)
Income (loss) from continuing
operations -- diluted............... $ 0.49 $ 0.36 $ (0.21) $ (0.69) $ (2.46)
Net income (loss) per common share --
diluted............................. $ 0.37 $ 0.28 $ (0.20) $ (1.62) $ (1.20)
12
AS OF DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
-------- ------------- ------------- -------- --------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital.................... $ 20,313 $ 20,602 $ 22,519 $ 22,885 $ 89,897
Intangible assets.................. 52,336 55,494 61,929 57,168 31,689
Total assets....................... 171,653 209,631 202,270 214,128 265,017
Total debt......................... 121,875 175,020 175,091 175,000 177,138
Stockholders' (deficit) equity..... (17,612) (37,972) (49,901) (44,136)(2) 1,440
---------------
(1) Reflects the results from discontinued operations of $(3.9) million, $(2.5)
million, $0.2 million, $10.1 million and $35.4 million for 2003, 2002, 2001,
2000 and 1999, respectively.
(2) Reflects a $37.7 million cumulative effect of accounting change for the
change in accounting for revenue pursuant to Staff Accounting Bulletin
Number 101, Revenue Recognition in Financial Statements, and the
corresponding increase in the Company's deferred tax valuation allowance.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements about events that
have not yet occurred. All statements, trend analysis and other information
contained below relating to markets, products and trends in revenue, as well as
other statements including words such as "anticipates," "believes" or "expects"
and statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks, and
actual events or the Company's actual future results could differ materially
from those set forth in the forward-looking statements due to such risks and
uncertainties. The Company disclaims any responsibility to update any
forward-looking statement. Risks and uncertainties that may affect future
results and performance include, but are not limited to, those discussed under
the heading "Factors That May Affect Future Results of Operations, Financial
Condition or Business" at pages 31 to 35 of this Annual Report on Form 10-K.
PERFORMANCE MEASUREMENTS IMPORTANT TO MANAGEMENT
The Company's management is focused on profitable, organic revenue growth.
The Company's business model is designed such that revenue is generally
recurring in nature and cash flow generation is relatively consistent.
Management follows certain key metrics in monitoring its performance. Such key
metrics include, but are not limited to:
- net new business sold in the Physician Services division (defined by the
Company as the annualized revenue value of new contracts signed in a
period, less the annualized revenue value of terminated business in that
same period);
- net backlog in the Physician Services division (defined by the Company as
the annualized revenue related to new contracts signed with the business
still to be implemented, less the annualized revenue related to existing
contracts where discontinuance notification has been received);
- transaction volume in the Hospital Services division;
- new business sold in the Hospital Services division;
- sales pipelines and sales personnel productivity in both divisions;
- EBITDA (a non-Generally Accepted Accounting Principle ("GAAP") measure
defined as earnings before interest, taxes, depreciation and
amortization) and operating margins in both divisions;
- days in accounts receivable in both divisions;
- cash flow generated from operations; and
- free cash flow (a non-GAAP measure defined as net cash provided by
continuing operations less investments in capitalized software
development costs and capital expenditures and represents cash flow
available for activities unrelated to operations, such as debt
reduction).
The financial health of the Company is also dependent upon its capital
structure. Management tracks its debt-to-EBITDA ratio and interest expense
coverage ratio in monitoring the appropriateness of its capital structure.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 17, 2003, the Securities and Exchange Commission (the
"Commission") issued Staff Accounting Bulletin Number 104, Revenue
Recognition("SAB 104"). SAB 104 revises or rescinds portions of the
interpretative guidance included in Topic 13 of the codification of staff
accounting bulletins in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and the Commission's
rules and regulations. The principal revisions relate to the rescission of
material no longer necessary because of private sector developments in U.S.
generally accepted accounting principles. Revisions include those necessitated
by the Financial Accounting Standards Board ("FASB")
14
Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements With
Multiple Deliverables("EITF No. 00-21"). SAB 104 did not affect the Company's
Consolidated Statements of Operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No. 150
establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument within its scope as a
liability (or in some circumstances an asset). Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatorily redeemable financial instruments of nonpublic
entities. The Company adopted SFAS No. 150 on May 31, 2003; however, SFAS No.
150 did not affect the Company's Consolidated Statements of Operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company adopted SFAS No. 149 on June 30, 2003; however, SFAS No.
149 did not affect the Company's Consolidated Statements of Operations.
In January 2003, the FASB issued and subsequently revised in December 2003,
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN No.
46"), which clarifies the consolidation accounting guidance of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entities to
finance their activities without additional subordinated financial support from
other parties. Such entities are known as variable interest entities ("VIE").
Controlling financial interests of a VIE are identified by the exposure of a
party to the VIE to a majority of either the expected losses or residual rewards
of the VIE, or both. Such parties are primary beneficiaries of the VIE, and FIN
No. 46 requires that the primary beneficiary of a VIE consolidate the VIE. FIN
No. 46 also requires new disclosures for significant relationships with VIEs,
whether or not consolidation accounting is either used or anticipated.
Application of FIN No. 46 is required in the financial statements of public
entities that have interests in VIEs or potential VIEs commonly referred to as
special-purpose entities for periods after December 15, 2003. Application by
public entities for all other types of entities is required in financial
statements for periods ending after March 15, 2004. The Company currently
believes that it does not have any relationships with a VIE, however; the
Company will evaluate all new business relationships.
At the November 21, 2002 EITF meeting, the EITF reached a consensus on EITF
00-21. EITF 00-21 addresses how to determine if an arrangement involving
multiple deliverables contains more than one unit of accounting. In applying
EITF 00-21, separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a
package and should, therefore, be evaluated as a single arrangement in
considering whether there are one or more units of accounting. That presumption
may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The EITF indicated that the
guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company adopted EITF 00-21 on
January 1, 2003; however, EITF 00-21 did not have a material effect on the
Company's Consolidated Statements of Operations.
In November 2002, FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN No. 45"). The Interpretation requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken by issuing the guarantee. The Interpretation
also requires additional
15
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees it has issued. FIN No.
45 does not have a material effect on the Company's consolidated financial
statements for the year ended December 31, 2003. Certain of the Company's sales
agreements contain infringement indemnity provisions that are covered by FIN No.
45. Under these sales agreements, the Company agrees to defend and indemnify a
customer in connection with infringement claims made by third parties with
respect to the customer's authorized use of the Company's products and services.
The indemnity obligations contained in sales agreements generally have no
specified expiration date and generally limit the award to the amount of fees
paid. The Company has not previously incurred costs to settle claims or pay
awards under these indemnification obligations. Also, the Company maintains
membership in a group captive insurance company for its workers compensation
insurance. The member companies agree to jointly insure the group's liability
risks up to a certain threshold. As a member, the Company guarantees to pay an
assessment, if an assessment becomes due, as a result of insured losses by its
members. This guarantee will never exceed a percentage of the Company's loss
funds. Based on the Company's historical experience, the Company does not
anticipate such an assessment. As a result, the Company's estimated fair value
of the infringement indemnity provision obligations and the captive insurance
guarantee is nominal.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Critical accounting policies are those accounting policies that management
believes are most important to the portrayal of the Company's financial
condition and results, and/or they require management's most difficult,
subjective and/or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
REVENUE RECOGNITION
The Company's revenue is derived from services and products delivered to
the healthcare industry through its two operating divisions:
Physician Services provides Connective Healthcare solutions that
manage the revenue cycle for physician groups. The division provides
outsourced revenue cycle management services that are targeted at
hospital-affiliated and academic physician practices. Fees for these
services are primarily based on a percentage of net collections on the
Company's clients' accounts receivable. The division recognizes revenue and
bills its customers when the customers receive payment on those accounts
receivable. Contracts are typically multi-year in length and require no
payment from the customer upon contract signing. Since this is an
outsourced service delivered on the Company's proprietary technology, there
are no license or maintenance fees to be paid by the physician group
customers. The division also recognizes approximately 5% of its revenue on
a monthly service fee and per-transaction basis from the physician practice
management ("PPM") product line. The Physician Services division does not
rely, to any material extent, on estimates in the recognition of revenue.
Revenue is recognized in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition.
Hospital Services provides Connective Healthcare solutions that
improve revenue cycle and resource management for hospitals.
Revenue cycle management solutions primarily include services that
allow a hospital's CBO to more effectively manage its cash flow. These
services include electronic and paper transactions, such as claims
processing, which can be delivered via the Web or through dedicated
electronic data interfaces and high-speed print and mail services. Revenue
related to these transactions is billed and recognized when the services
are performed on a per-transaction basis. Contracts are typically multi-
16
year in length. The division also recognizes revenue related to direct and
indirect payments it receives from payers for the electronic transmission
of transactions to the payers. The division recognizes revenue on these
transactions at the time the electronic transactions are sent. Revenue is
recognized on these transactions in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition.
Resource management solutions include staff and patient scheduling
software that enable hospitals to efficiently manage their resources, such
as personnel and the operating room, to reduce costs and improve their
bottom-line. The resource management software is sold as a one-time license
fee plus implementation services and an annual maintenance fee. Contracts
are typically structured to require a portion of the license fee and
implementation services to be paid periodically throughout the installation
process, including a portion due upon signing. For software contracts that
require the division to make significant production, modification or
customization changes, the division recognizes revenue for the license fee
and implementation services using the percentage-of-completion method over
the implementation period.
The division relies on estimates of work to be completed to determine
the amount of revenue to be recognized related to each contract. Because
estimates of the extent of completion that differ from actual results could
affect revenue, the division periodically reviews the estimated hours or
days to complete major projects and compares these estimates to budgeted
hours or days to support the revenue recognized on that project.
Approximately 9%, 9% and 12% of the division's revenue (or 2%, 2% and 2% of
total Company revenue) was determined using percentage-of-completion
accounting for the years ended December 31, 2003, 2002 and 2001,
respectively.
When the division receives payment prior to shipment or fulfillment of
its significant obligations, the Company records such payments as deferred
revenue and recognizes them as revenue upon shipment or fulfillment of
significant vendor obligations. An unbilled receivable is recorded when the
division recognizes revenue on the percentage-of-completion basis prior to
achieving a contracted billing milestone. For minor add-on software license
sales where no significant customization remains outstanding, the fee is
fixed, an agreement exists and collectibility is probable, the division
recognizes revenue upon shipment. For software maintenance payments
received in advance, the division defers and recognizes as revenue these
payments ratably over the term of the maintenance agreement, which is
typically one year. Revenue recognized on the percentage-of-completion
basis is done so in accordance with Statement of Position 81-1, Accounting
for Performance of Construction Type and Certain Production Type Contracts.
Revenue recognized upon software shipment is done so in accordance with
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2").
For arrangements that include one or more elements, or
multiple-element arrangements, to be delivered at a future date, revenue is
recognized in accordance with SOP 97-2 as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2, as amended, requires the Company to allocate
revenue to each element in a multiple-element arrangement based on the
element's respective vendor-specific objective evidence, or VSOE, of fair
value. Where VSOE does not exist for all delivered elements (typically
software license fees), revenue from multiple-element arrangements is
recognized using the residual method. Under the residual method, if VSOE of
the fair value of the undelivered elements exists, the Company defers
revenue recognition of the fair value of the undelivered elements. The
remaining portion of the arrangement fee is then recognized either by using
the percentage-of-completion method if significant production, modification
or customization is required or upon delivery, assuming all other
conditions for revenue recognition have been satisfied. VSOE of fair value
of maintenance services is based upon the amount charged for maintenance
when purchased separately, which is the renewal rate. Maintenance services
are stated separately in an arrangement. VSOE of fair value of professional
services (i.e. implementation and consulting services not essential to the
functionality of the software) is based upon the price charged when
professional services are sold separately and is based on an hourly rate
for professional services.
17
AMORTIZATION AND VALUATION OF INTANGIBLES
Amortization of intangible assets includes the amortization of client
lists, developed technology and software development costs (prior to the
Company's adoption of SFAS No. 142 on January 1, 2002, amortization of
intangible assets also included the amortization of goodwill and other
indefinite lived intangible assets). The Company relies on estimates of the
useful lives and net realizable value, as appropriate, of these assets on which
to base its amortization. The Company bases these estimates on historical
experiences, market conditions, expected future revenues and maintenance costs
and the products or services provided. The Company periodically evaluates
whether to revise estimates of the remaining useful lives of the intangible.
Additionally the Company evaluates whether any changes would render its
intangibles impaired or indicate that an asset has a different useful life.
Conditions that may indicate an impairment include an economic downturn or
change in future operations. In the event such a condition exists, the Company
performs an assessment using a variety of methodologies, including cash flow
analysis, estimates of sales proceeds and independent appraisals. Where
applicable, the estimate uses an appropriate interest rate based on appropriate
discount rates.
During 2001, in accordance with Accounting Principles Board ("APB") Opinion
No. 16, Business Combinations, the Company finalized the purchase price
allocation of its most recent acquisitions, with a portion of the amount
previously allocated to goodwill being reallocated to finite-lived intangible
assets. The amounts reallocated to finite-lived intangible assets totaled
approximately $9.2 million. Due to this reallocation, amortization expense
related to these finite-lived intangibles increased $1.8 million in 2002, which
was offset by a reduction in goodwill amortization of $3.5 million due to
adoption of SFAS No. 142. The net reduction in amortization expense in 2002 was
$1.7 million, or $0.05 per share on a diluted basis.
Goodwill -- Goodwill represents the excess of the cost of businesses
acquired and the value of their workforce in the Physician Services
division in 1995 and the Hospital Services division from 1995 to 2001, over
the fair market value of their identifiable net assets. As a result of the
Company's reorganization in July 2003, the Company transferred the
estimated fair value of the goodwill associated with the PPM assets to the
Physician Services division from the former e-Health division. Prior to the
adoption of SFAS No. 142 on January 1, 2002, the Company amortized its
goodwill over its estimated useful life of no greater than twenty years.
Under SFAS No. 142, the Company no longer amortizes goodwill and indefinite
lived intangible assets but reviews them annually for impairment.
Trademarks -- Trademarks represent the value of the trademarks
acquired in the Hospital Services division from 2000 to 2001. The Company
expects the trademarks to contribute to cash flows indefinitely and
therefore deems the trademarks to have indefinite useful lives. Under SFAS
No. 142, the Company no longer amortizes trademarks but reviews them
annually for impairment.
SFAS No. 142 required companies with goodwill and indefinite lived
intangible assets to complete an initial impairment test by June 30, 2002.
The Company completed the initial impairment test of its goodwill and other
indefinite lived intangible assets and did not identify an asset impairment
as a result of the impairment test. Additionally, the Company performed its
periodic review of its goodwill and other indefinite lived intangible
assets for impairment as of December 31, 2003, and did not identify an
asset impairment as a result of the review. The Company's initial
impairment and periodic review of its goodwill and other indefinite lived
intangible assets were based upon a discounted future cash flow analysis
that included revenue and cost estimates, market growth rates and
appropriate discount rates. The Company will continue to test its goodwill
and other indefinite lived intangible assets annually for impairment as of
December 31.
Client Lists -- Client lists represent the value of clients acquired
in the Physician Services division from 1992 to 1996 and the Hospital
Services division from 1995 to 2001. The Company amortizes client lists
using the straight-line method over their estimated useful lives, which
range from five to ten years.
18
Developed Technology -- Developed technology represents the value of
the systems acquired in the Hospital Services division from 2000 to 2001.
The Company amortizes these intangible assets using the straight-line
method over their estimated useful lives of five years.
Software Development Costs -- Software development includes costs
incurred in the development or the enhancement of software in the Physician
Services and Hospital Services divisions for resale or internal use.
Software development costs related to external use software are
capitalized upon the establishment of technological feasibility for each
product and capitalization ceases when the product or process is available
for general release to customers. Technological feasibility is established
when all planning, designing, coding and testing activities required to
meet a product's design specifications are complete. The Company amortizes
external use software development costs over the greater of the ratio that
current revenues bear to total and anticipated future revenues for the
applicable product or straight-line method over the estimated economic
lives of the assets, which are generally three to five years. The Company
monitors the net realizable value of all capitalized external use software
development costs to ensure that it can recover the investment through
margins from future sales.
Software development costs related to internal use software are
capitalized after the preliminary project stage is complete, management
with the relevant authority authorizes and commits to the funding of the
software project, it is probable that the project will be completed and the
software will be used to perform the function intended. Capitalization
ceases no later than the point at which the project is substantially
complete and ready for its intended use. The Company expenses software
development costs related to internal use software as incurred during the
planning and post-implementation phases of development. Internal-use
software is amortized on a straight-line basis over its estimated useful
life, generally five years. The estimated useful life considers the effects
of obsolescence, technology, competition and other economic factors.
LLOYD'S RECEIVABLE
On May 10, 2004, the Company reached a settlement with its former insurance
carrier, certain underwriters at Lloyd's of London (collectively "Lloyd's"). The
Company was in litigation with Lloyd's after its attempt in May 2002 to rescind
certain errors and omissions ("E&O") policies and directors and officers and
company reimbursement ("D&O"), policies that it had issued to the Company from
the period December 31, 1998, to June 30, 2002. In the settlement Lloyd's agreed
to pay the Company $20 million in cash by July 9, 2004. Lloyd's also agreed to
defend, settle or otherwise resolve at their expense the two remaining pending
claims under the E&O policies. In exchange, the Company provided Lloyd's with a
full release of all E&O and D&O policies. The California Superior Court retained
jurisdiction to enforce any aspect of the settlement agreement.
As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O policy settlements covered by Lloyd's.
Effective on May 12, 2004, as a result of negotiations among the Company,
Lloyd's, and a party to a prior E&O policy settlement with the Company, the
Lloyd's settlement was amended to reduce by $3.8 million the additional amounts
to be paid by the Company under the prior E&O policy settlements covered by
Lloyd's. This amendment reduced the amount of cash payable by Lloyd's to the
Company in the settlement from $20.0 million to $16.2 million, and reduced the
amount of the Company's receivable from Lloyd's by $3.8 million. The Company has
classified the Lloyd's receivable as of December 31, 2003, as a short-term
asset.
OTHER
Additionally, the Company does not have:
-- Material exposure to foreign exchange fluctuations
-- Any derivative financial instruments
19
-- Any material off-balance sheet arrangements other than its operating
leases disclosed in Notes 10 and 11 of Notes to Financial Statements in
Item 8 and certain vendor financing arrangements in the ordinary course
of business or
-- Any material related party transactions
GENERAL OVERVIEW
Management believes the key elements for assessing the Company's
performance are the ability to generate stable and improving operating profit
margins on the Company's existing business, and to generate margin expansion
through higher contribution margins on incremental revenue growth. Higher
contribution margins on incremental revenue are generally achieved by leveraging
the Company's existing infrastructure and resources. The assessment of the
Company's performance sometimes involves evaluating the Company's business
excluding non-operational items that may be incurred.
On a consolidated basis, the Company experienced margin expansion from 2002
to 2003 driven by revenue growth combined with decreased operating expenses. The
decreased operating expenses resulted from a Company-wide initiative to limit
discretionary spending and general cost control efforts to maintain or decrease
other variable costs.
Another positive trend has been the Company's ability to decrease interest
expense. Interest expense decreased approximately $3.4 million, or 19%, from
2002 to 2003 due to a debt refinancing undertaken in September 2003, which
lowered the Company's interest rate from a fixed 9.50% to a LIBOR plus 4.25%
rate (approximately 5.41% at the time of the refinancing).
20
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes.
YEARS ENDED DECEMBER 31, 2003, AND 2002
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
-------- -------------
(AS RESTATED)
(IN THOUSANDS)
Physician Services.......................................... $251,251 $245,383
Hospital Services........................................... 97,240 92,854
Eliminations................................................ (13,322) (12,673)
-------- --------
$335,169 $325,564
======== ========
Revenue for the Physician Services division increased approximately 2% in
2003 compared to 2002. Pricing for the division's services was stable compared
to the prior year. Revenue growth can be attributed to the implementation of net
new business sold of approximately $6 million in the first half of 2003. Net new
business sold is defined as the annualized revenue value of new contracts signed
in a period, less the annualized revenue value of terminated business in that
same period. Due to the timing of new sales, the division had a negative net
backlog of approximately $2 million as of December 31, 2003, compared to a
positive net backlog of approximately $4 million at December 31, 2002. At
January 31, 2004, the division had a positive net backlog of approximately $11
million due to the significant level of new business sold during the first month
of 2004. The Company focuses on maintaining a positive net backlog and believes
it is a useful indicator of future revenue growth.
Revenue for the Hospital Services division increased approximately 5% in
2003 compared to 2002, despite the phasing out of a large print and mail
customer, which began in the second half of 2002. This customer's business was
not related to medical claims. Pricing for the division's services and products
was stable compared to the prior year. Revenue growth in the division is a
result of an approximately 5% increase in revenue of the division's revenue
cycle management solutions, evidenced by the approximate 15% increase in the
division's medical transaction volume for the year compared to 2002, as well as
a 5% increase in revenue of the division's resource management software
products. Revenue growth does not necessarily correlate directly to transaction
volume due to the mix of products sold by the division. The Company believes
transaction volume is a useful indicator of future revenue growth as business is
implemented into the division's recurring revenue model.
The Hospital Services division revenue includes intersegment revenue for
services provided to the Physician Services division, which is shown as
Eliminations to reconcile to total consolidated revenue.
Segment Operating Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expenses, other operating
expenses, restructuring expenses, depreciation and amortization. Segment
operating profit, classified by the Company's divisions, is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
-------- -------------
(AS RESTATED)
(IN THOUSANDS)
Physician Services.......................................... $ 29,356 $ 25,864
Hospital Services........................................... 22,569 18,840
Corporate................................................... (15,417) (14,816)
-------- --------
$ 36,508 $ 29,888
======== ========
21
Physicians Services' segment operating profit increased 14% in 2003 over
2002, resulting in operating margins of approximately 11.7% versus approximately
10.5% in the prior year. The margin expansion can be attributed to incremental
margins achieved on increased revenue as well as a decrease in other operating
expenses of approximately 1.7 percentage points as a percentage of revenue. The
decrease in other operating expenses can be attributed to a Company-wide
initiative to limit discretionary spending and general cost control efforts to
maintain or decrease other variable costs. The operating margins were negatively
affected by approximately $3.4 million of costs related to the conversion of the
current ASP-based physician practice management solution clients onto a new,
web-based platform.
Hospital Services' segment operating profit increased approximately 20% in
2003 over 2002, resulting in operating margins of approximately 23.2% versus
approximately 20.3% in the prior year. The operating margin improvement can be
attributed to the previously mentioned increase in revenue as well as lower
operating expenses due to a Company-wide initiative to limit discretionary
spending and general cost control efforts to maintain or decrease other variable
costs. Other operating expenses decreased 1.9 percentage points as a percentage
of revenue.
The Company's corporate overhead expenses, which include certain executive
and administrative functions, increased approximately 4% in 2003 over 2002.
Corporate overhead expenses include approximately $0.3 million of restructuring
expenses in 2003 related to the July 2003 realignment of the Company into the
Physician Services and Hospital Services divisions following the Patient1
divestiture. Corporate overhead expenses included approximately $2.8 million and
$3.0 million in 2003 and 2002, respectively, of increased insurance premiums and
litigation expenses related to the Company's former underwriters, Lloyd's of
London's, attempt to rescind certain insurance policies (refer to Note 12 of
Notes to Financial Statements in Item 8. Financial Statements and Supplementary
Data on pages F-26 to F-27 for more information).
Interest. Interest expense was approximately $14.6 million for the twelve
months ended December 31, 2003, as compared to approximately $18.1 million for
the same period in 2002. During 2003, the Company retired its $175 million 9
1/2% Senior Notes due 2005 (the "Notes") by permanently retiring $50 million of
the Notes and refinancing the remaining $125 million (see Liquidity and Capital
Resources Section). This refinancing resulted in a reduction of approximately
$3.6 million of interest expense due to lower debt levels and a substantially
lower interest rate on the new debt (9.5% versus LIBOR + 4.25% or 5.41% as of
December 31, 2003). Interest income decreased to $0.3 million in 2003 from $0.5
million in 2002, due to a decrease in investment rates and lower cash-on-hand
balances.
Loss on Extinguishment of Debt. During the year ended December 31, 2003,
the Company incurred a write-off of approximately $1.6 million of deferred debt
issuance costs related to the retirement of our 2005 Notes related to their
retirement. In addition, the Company incurred expenses associated with the
retirement of the Notes of approximately $4.7 million.
Restructuring and Other Expenses. During the year ended December 31, 2003,
the Hospital Services and Corporate divisions incurred approximately $0.5
million and $0.3 million, respectively, of restructuring expenses related to the
July 2003 realignment of the Company into the Physician Services and Hospital
Services divisions following the Patient1 divestiture.
Income Taxes. Income tax expense, which is related to state, local and
foreign income taxes, was approximately $0.8 million in the years ended December
31, 2003, and 2002. The 2003 income tax expense was offset by a benefit for a
federal income tax refund of approximately $0.8 million related to the gain on
the sale of Healthcare Recoveries, Inc. ("HRI"), resulting in a net tax expense
of $27,000. A tax law revision identified by the Company permitted the Company
to file for an automatic refund. The Company expects to receive the refund in
late 2004.
As of December 31, 2003, and 2002, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a full valuation allowance against the deferred tax asset of $185.6
million and $212.3 million was required as of December 31, 2003, and December
31, 2002, respectively. Realization of the net deferred tax asset is dependent
upon the Company generating sufficient
22
taxable income prior to the expiration of the federal net operating loss
carryforwards. When it becomes more likely than not that the Company will
generate sufficient taxable income to realize the deferred tax asset, the
Company will adjust this valuation allowance accordingly. At December 31, 2003,
the Company had federal net operating loss carryforwards ("NOLs") for income tax
purposes of approximately $406.9 million. The NOLs will expire at various dates
between 2004 and 2022 (refer to Note 16 of Notes to Financial Statements in Item
8. Financial Statements and Supplementary Data on pages F-31 to F-32 for more
information regarding NOL expiration dates and respective amounts).
Discontinued Operations. In June 2003, the Company announced that it
agreed to sell its Patient1 clinical product line ("Patient1") to Misys
Healthcare Systems, a division of Misys plc ("Misys") for $30 million in cash.
Patient1 was the Company's only clinical product line and its sale allowed the
Company to better focus on improving reimbursement and administrative
efficiencies for physician practices and hospitals. The sale was completed on
July 28, 2003. The Company recognized a gain on the sale of Patient1 of
approximately $10.4 million, subject to closing adjustments, in 2003. Net
proceeds on the sale of Patient1 were approximately $27.9 million, subject to
closing adjustments. The Company is currently in arbitration with Misys
regarding the final closing adjustments, which would represent additional
purchase price payments to the Company. The Company expects the arbitration
process to be completed by the end of the second quarter of 2004.
In September 2003, the Company initiated a process to sell its Business1
patient accounting product line ("Business1"). As with the sale of Patient1, the
discontinuance of Business1 allowed the Company to focus resources on solutions
that provide meaningful, strategic returns for the Company, its customers and
its shareholders. Pursuant to SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), the Company wrote down the net
assets of Business1 to fair market value less costs to sell and incurred an $8.5
million expense. On February 2, 2004, the Company announced the sale of
Business1, effective January 31, 2004, to a privately held company for $0.6
million, which will be received in three payments through June 2006. No cash
consideration was received at closing.
Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Summarized operating results for the
discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2003 2002
---------------------------------- ----------------------------------
(AS RESTATED)
PATIENT1(1) BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
------------ --------- ------- -------- ------------- -------
(IN THOUSANDS)
Revenue............... $15,247 $ 474 $15,721 $25,855 $ 2,498 $28,353
======= ======= ======= ======= ======= =======
(Loss) income from
discontinued
operations before
income taxes........ $(1,270) $(3,589) $(4,859) $ 888 $(1,921) $(1,033)
Income tax expense.... 46 -- 46 443 -- 443
------- ------- ------- ------- ------- -------
(Loss) income from
discontinued
operations, net of
tax................. $(1,316) $(3,589) $(4,905) $ 445 $(1,921) $(1,476)
======= ======= ======= ======= ======= =======
---------------
(1) Patient1 financial information includes activity through the sale date of
July 28, 2003.
Revenue for the Patient1 product line decreased approximately 41% in 2003
compared 2002. The Company recognized revenue using the percentage-of-completion
method of accounting. The 2003 decrease in revenue was related to the short
reporting period due to the sale of the product line in July 2003.
23
The loss for the Patient1 product line was approximately $1.3 million in
2003, as compared to operating income of approximately $0.4 million in 2002. The
decline was due to lower productivity pending the sale of the product line in
2003.
Revenue for the Business1 product line decreased approximately 81% in 2003
compared to 2002. The Company recognized revenue using the
percentage-of-completion method of accounting, and the decrease over the prior
year period was the result of lower Business1 sales in prior periods in addition
to implementation delays at a major customer.
The loss for the Business1 product line increased approximately $1.7
million in 2003 compared to 2002, due to lower Business1 revenue in the current
period.
On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment. Pursuant to APB No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the
consolidated financial statements of the Company have been presented to reflect
the activity associated with MSC and Impact as discontinued operations for all
periods presented.
For the year ended December 31, 2002, the Company expensed $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO Group, Inc. ("NCO"), the buyer of the Company's MSC
division. When NCO bought MSC, the Company agreed to indemnify NCO for limited
periods of time in the event NCO incurred certain damages related to MSC. NCO
incurred such damages in connection with an alleged environmental liability of
MSC, and the Company agreed to reimburse NCO for a portion of those damages, in
satisfaction of the Company's indemnification obligation. The Company paid $0.3
million to NCO on September 16, 2002. The Company intends to pay the remaining
balance of $0.4 million, plus interest at the then-current prime rate, in equal
payments to NCO, on the second and third anniversaries of that date.
The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to MSC have passed without the assertion by NCO
of any other significant claims. These limitations do not apply to a small
number of other types of potential claims to which statutory limitations apply,
such as those involving title to shares, taxes and billing and coding under
Medicare and Medicaid; however, management believes that such other types of
claims are unlikely to occur.
During the years ended December 31, 2003, and 2002, the Company incurred
expenses of approximately $0.9 million and $0.3 million, respectively, which
were primarily legal costs associated with MSC and Impact. These expenses were
recognized through (loss) income from discontinued operations in the Company's
Consolidated Statements of Operations.
YEARS ENDED DECEMBER 31, 2002, AND 2001
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001
------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Physician Services......................................... $245,383 $236,627
Hospital Services.......................................... 92,854 80,942
Eliminations............................................... (12,673) (11,747)
-------- --------
$325,564 $305,822
======== ========
Revenue for the Physician Services division increased approximately 4% in
2002 compared to 2001. Pricing for the division's services was stable compared
to the prior year. Revenue growth can be attributed to the implementation of net
new business sold of approximately $3 million in the second and third quarters
as well as growth in the business of the division's clients of approximately $6
million. Net revenue
24
backlog at December 31, 2002, was approximately $4 million compared to
approximately $3 million at December 31, 2001. The increase in net backlog can
be attributed to the division's second half 2002 new sales performance. The
Company focuses on maintaining a positive net backlog and believes it is a
useful indicator of future revenue growth.
Revenue for the Hospital Services division increased approximately 15% in
2002 compared to 2001, despite the phasing out of a large print and mail
customer, which began in the second half of 2002. This customer's business was
not related to medical claims. Pricing for the division's services and products
was stable compared to the prior year. Revenue growth in the division is a
result of an approximately 25% increase in revenue of the division's revenue
cycle management solutions, evidenced by the approximate 26% increase in the
division's medical transaction volume for the year compared to 2001. This growth
was primarily driven by the implementation of new business sold of revenue cycle
management solutions. Revenue growth in the division was also driven by an
approximately 3% increase in revenue of the division's resource management
software products. Revenue growth does not necessarily correlate directly to
transaction volume due to the mix of products sold by the division. The Company
believes transaction volume is a useful indicator of future revenue growth as
business is implemented into the division's recurring revenue model.
Segment Operating Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expenses, other operating
expenses, restructuring expenses, depreciation and amortization. Segment
operating profit, classified by the Company's divisions, is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001
------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Physician Services......................................... $ 25,864 $ 10,526
Hospital Services.......................................... 18,840 13,411
Corporate.................................................. (14,816) (12,980)
-------- --------
$ 29,888 $ 10,957
======== ========
Physicians Services' segment operating profit increased 146% in 2002
compared to 2001, resulting in operating margins of approximately 10.5% versus
approximately 4.4% in the prior year. The margin expansion can be attributed in
part to incremental margins achieved on increased revenue. In addition, during
2001, the division incurred expenses of approximately $3.4 million associated
with the process improvement project, which it did not incur during 2002. This
together with cost savings realized as a result of the process improvement
project, also improved margins during 2002 (see Process Improvement Project
discussion below for additional information).
Hospital Services' segment operating profit increased approximately 40% in
2002 over 2001, resulting in operating margins of approximately 20.3% versus
approximately 16.6% in the prior year. The margin expansion can be attributed to
operational efficiencies and cost savings gained from increased transaction
volume combined with the incremental margins achieved on increased revenue. The
division's operating income and margins also benefited from the reduction of
amortization expense of approximately $1.7 million related to the adoption of
SFAS No. 142.
The Company's corporate overhead expenses increased approximately 14% in
2002 compared to 2001. The increase can be attributed to increased insurance
premiums and litigation expenses of approximately $3.0 million related to the
attempt by the Company's former underwriters, Lloyd's of London, to rescind
certain insurance policies (refer to Note 12 of Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data on pages F-26 to F-27 for
more information).
Interest. Interest expense increased approximately $0.1 million to $18.1
million in 2002 from $18.0 million in 2001. Interest income decreased
approximately 58% to $0.5 million in 2002 from $1.1 million in 2001, due to a
decrease in investment rates.
25
Process Improvement Project. The Company incurred approximately $3.4
million of expense in 2001, associated with the implementation of a process
improvement project within the Physician Services division (the "Project"). The
Project installed a formalized set of productivity and quality measures,
workflow processes and a management operating system in certain of the Company's
major processing centers. The Project focused on productivity improvements that
resulted in both improved client service and improved profitability for the
division.
The Company completed the first phase of the Project, which involved
implementation in twelve of the division's larger processing centers, in the
third quarter of 2001 with all costs for this phase incurred as of September 30,
2001. In 2001, the costs associated with the Project primarily consisted of
professional fees paid to outside consultants retained exclusively for
implementation of the Project. Annualized cost savings resulting from phase one
are approximately $6 million, of which approximately $4 million were realized in
2001. The full benefit of phase one cost savings was realized in 2002.
The Company completed the second phase of the Project, which began in the
first quarter of 2002, as of September 30, 2002, with implementation into an
additional fifteen processing centers. The Company implemented the second phase
with internal resources and therefore did not incur any external project costs.
Annualized cost savings for phase two of the Project are approximately $2.5
million, of which approximately $1 million were realized in 2002.
Restructuring and Other Expenses. During the first quarter of 2001, the
Company recorded severance expense of approximately $0.6 million associated with
former executive management.
Income Taxes. Income tax expense, which was related to state, local and
foreign income taxes, was approximately $0.8 million in 2002, compared to
approximately $0.3 million in 2001.
As of December 31, 2002, and 2001, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a full valuation allowance against the deferred tax asset was
required as of December 31, 2002, and December 31, 2001. Realization of the net
deferred tax asset is dependent upon the Company generating sufficient taxable
income prior to the expiration of the federal net operating loss carryforwards.
When it becomes more likely than not that the Company will generate sufficient
taxable income to realize the deferred tax asset, the Company will adjust this
valuation allowance accordingly.
Discontinued Operations. Summarized operating results of the discontinued
operations are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
(AS RESTATED) (AS RESTATED)
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- ------------- ------- -------- ------------- -------
(IN THOUSANDS)
Revenue.............. $25,855 $ 2,498 $28,353 $19,905 $ 2,272 $22,177
======= ======= ======= ======= ======= =======
(Loss) income from
discontinued
operations before
income taxes....... $ 888 $(1,921) $(1,033) $(2,167) $(1,554) $(3,721)
Income tax expense... 443 -- 443 2 -- 2
------- ------- ------- ------- ------- -------
(Loss) income from
discontinued
operations, net of
tax................ $ 445 $(1,921) $(1,476) $(2,169) $(1,554) $(3,723)
======= ======= ======= ======= ======= =======
Revenue for the Patient1 product line increased approximately 30% in 2002
compared to 2001. The Company recognized revenue using the
percentage-of-completion method of accounting, and the increase over the prior
year period was the result of two significant clinical sales made during 2001.
26
The income for the Patient1 product line was approximately $0.4 million in
2002 compared to operating loss of approximately $2.2 million in 2001. The
improvement was due to the increased Patient1 revenue mentioned previously.
Revenue for the Business1 product line increased approximately 10% in 2002
compared to 2001. The Company recognized revenue using the
percentage-of-completion method of accounting, and the increase over the prior
year period was the result of one significant sale made during 2001.
The loss for the Business1 product line increased approximately $0.4
million in 2002 compared to 2001, due to the costs of amortizing capitalized
development expenses exceeding the revenue increase in 2002.
On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment. Pursuant to SFAS No. 144, the consolidated financial
statements of the Company have been presented to reflect the activity associated
with MSC and Impact as discontinued operations for all periods presented.
In October of 2001, the Company received $1.0 million in cash from the
buyer of the government division of Impact when the term of the purchase
agreement escrow expired. The Company recognized this amount through
discontinued operations. In May of 2001, the Company received an insurance
settlement related to a matter filed against the commercial division of Impact
of approximately $3.0 million, which was recognized through discontinued
operations. The Company continues to pursue claims against a former vendor of
this division for damages incurred in this matter.
For the year ended December 31, 2002, the Company charged $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO Group, Inc. ("NCO"), the buyer of the Company's MSC
division. When NCO bought MSC, the Company agreed to indemnify NCO for limited
periods of time in the event NCO incurred certain damages related to MSC. NCO
incurred such damages in connection with an alleged environmental liability of
MSC, and the Company agreed to reimburse NCO for a portion of those damages, in
satisfaction of the Company's indemnification obligation. The Company paid $0.3
million to NCO on September 16, 2002. The Company intends to pay the remaining
balance of $0.4 million, plus interest at the then-current prime rate, in equal
payments to NCO, on the second and third anniversaries of that date.
The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to MSC have passed without the assertion by NCO
of any other significant claims. These limitations do not apply to a small
number of other types of potential claims to which statutory limitations apply,
such as those involving title to shares, taxes and billing and coding under
Medicare and Medicaid; however, management believes that such other types of
claims are unlikely to occur.
For the years ended December 31, 2002, and 2001, the Company incurred
expenses of approximately $0.3 million and $0.1 million, respectively, which
were primarily legal costs associated with MSC and Impact. These expenses were
recognized through (loss) income from discontinued operations in the Company's
Consolidated Statements of Operations.
27
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the Company's cash balances and cash
flows from continuing operations for the years ended December 31, 2003, and 2002
(in thousands):
2003 2002
------------- -------------
(AS RESTATED) (AS RESTATED)
Unrestricted cash and cash equivalents at December 31...... $ 25,271 $ 46,748
Cash provided by continuing operations..................... $ 28,471 $ 23,178
Cash provided by (used for) investing activities from
continuing operations.................................... $ 17,527 $(11,486)
Cash (used for) provided by financing activities from
continuing operations.................................... $(54,768) $ 4,004
Unrestricted cash and cash equivalents include all highly liquid
investments with an initial maturity of no more than three months at the date of
purchase.
The release of restricted cash is the result of using the Company's
Revolving Credit Facility (refer to "Note 10 -- Long-Term Debt" in the Company's
Notes to Consolidated Financial Statements for more information) rather than
cash as security for the Company's letters of credit. Restricted cash at
December 31, 2003, represents amounts collected on behalf of certain Physician
Services and Hospital Services clients, a portion of which is held in trust
until it is remitted to such clients.
During 2003, the Company generated approximately $28.5 million in cash from
continuing operations which includes cash generated from normal operations and a
release of restricted cash of approximately $4.2 million offset by interest
payments of approximately $18.4 million and the payment of approximately $7.4
million in expenses and legal settlements related to Lloyd's of London (refer to
"Note 12 -- Legal Matters" in the Company's Notes to Consolidated Financial
Statements for more information).
During 2002, the Company generated approximately $24.2 million and cash
payments related to the extinguishment of debt of approximately $5.4 million
during 2003 in cash from continuing operations which includes cash generated
from normal operations offset by interest payments of approximately $16.8
million during 2002 and the payment of approximately $8.9 million in expenses
and legal settlements related to Lloyd's of London (refer to "Note 12 -- Legal
Matters" in the Company's Notes to Consolidated Financial Statements for more
information).
During 2003, the Company generated approximately $17.5 million in cash from
investing activities from continuing operations consisting of net proceeds of
$27.9 million from the sale of the Patient1 product line during July 2003 offset
by capital expenditures and software development costs of $10.3 million.
During 2002, the Company used approximately $11.5 million in cash from
investing activities from continuing operations consisting of approximately $9.9
million in capital expenditures and software development costs as well as
approximately $1.5 million paid as additional consideration for a 2001
acquisition (refer to "Note 3 -- Acquisitions" in the Company's Notes to
Consolidated Financial Statements for more information).
During 2003, the Company used approximately $54.8 million in cash from
financing activities primarily for repayment of the Company's long-term debt.
The Company used cash-on-hand as well as the net proceeds from the Patient1
divestiture to retire $53.1 million of long-term debt during 2003. The Company
refinanced the remaining $125 million in long-term debt during September 2003 by
entering into a $175 million Credit Agreement (the "Credit Agreement"). The
Credit Agreement consists of a $125 million Term Loan B (the "Term Loan B") and
a $50 million revolving credit facility (the "Revolving Credit Facility"). In
conjunction with the refinancing transaction, the Company capitalized
approximately $5.5 million in expenses, including legal and other professional
fees related to the Credit Agreement and other costs, which are included in the
Company's Other Long-Term Assets on the Consolidated Balance Sheet. The Company
will amortize these costs over the next three and five years and
28
include them in interest expense. In addition, the Company incurred expenses
associated with the retirement of the Notes and the 2001 Credit Facility of
approximately $6.3 million that are included in the Company's interest expense
for 2003, including the tender offer premium, the call premium and the write-
off of unamortized debt issuance costs associated with the Notes as well as the
unamortized debt issuance costs associated with entering into the 2001 Credit
Facility. Financing cash flows associated with the repayment of long-term debt
in 2003 were offset with approximately $8.0 million of proceeds from employees'
exercise of stock options.
During 2002, the Company generated approximately $2.9 million in cash from
financing activities consisting of approximately $1.1 million of proceeds from
employees' exercise of stock options and an approximately $2.0 million payment
related to a Capital Contribution (refer to "Note 1 -- Summary of Significant
Accounting Policies" in the Company's Notes to Consolidated Financial Statements
for more information).
For more information about the Company's long-term debt, refer to "Note 10
-- Long-Term Debt" in the Company's Notes to Consolidated Financial Statements.
Under the $175 million Credit Agreement, the Company has certain reporting
requirements for the submission of its financial statements to the Lenders, as
defined in the Credit Agreement. On April 30, 2004, the Company was granted an
extension of the May 15, 2004, submission deadline for its results for the
period ended March 31, 2004. The Company has until the extended deadline of May
28, 2004, to submit its first quarter 2004 financial statements to the Lenders.
The level of the Company's indebtedness could adversely impact the
Company's ability to obtain additional financing. A substantial portion of the
Company's cash flow from operations could be dedicated to the payment of
principal and interest on its indebtedness.
With the exception of the Lloyd's receivable discussed previously, the
Company has not experienced material changes in the underlying components of
cash generated from continuing operations. The Company believes that existing
cash and the cash provided by operations will provide sufficient capital to fund
its working capital requirements, contractual obligations, investing and
financing needs.
On September 11, 2003, the Company entered into the Revolving Credit
Facility. Under the Credit Agreement, the Company has the option of entering
into LIBOR based loans or base rate loans, each as defined in the Credit
Agreement. LIBOR based loans under the Revolving Credit Facility bear interest
at LIBOR plus amounts ranging from 3.0% to 3.5% based on the Company's leverage
ratio, as defined in the Credit Agreement. Base rate loans under the Revolving
Credit Facility bear interest at the Base Rate plus amounts ranging from 1.50%
to 2.00% based on the Company's leverage ratio, as defined in the Credit
Agreement. In addition, the Company pays a quarterly commitment fee on the
unused portion of the Revolving Credit Facility of 0.50% per annum. The Company
has not incurred any borrowing under the Revolving Credit Facility and does not
expect to incur any borrowings under the Credit Facility to fund its working
capital or investing needs.
The Company was in litigation with certain underwriters at Lloyd's
following an attempt by Lloyd's to rescind certain of the Company's insurance
policies (refer to "Note 12 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). For the years ended
December 31, 2003, and 2002, the Company incurred approximately $2.8 million and
$3.0 million, respectively, of expenses related to significantly increased
insurance premiums and the cost of pursuing litigation against Lloyd's. These
costs have been reflected in the Company's Corporate Segment. In the
Consolidated Statements of Operations these costs are included in Other
Operating Expenses.
On May 10, 2004, the Company reached a $20 million settlement with Lloyd's.
The settlement entails a $20 million cash payment that is payable by Lloyd's 60
days from the settlement date or by July 9, 2004. Lloyd's also agreed to assume
responsibility for the two remaining pending claims under the original errors
and omissions ("E&O") policies. As of the settlement date, the Company had an
$18.3 million receivable from Lloyd's, of which approximately $5 million has not
been paid, that includes costs
29
associated with the interim funding of legal costs and litigation settlements
related to E&O claims that were incurred by the Company in excess of the Lloyd's
E&O policies' deductible.
The Company's 2003 cash flow was negatively impacted by approximately $7.4
million, which consisted of approximately $2.1 million related to insurance
premium increases for new insurance coverage and the cost of pursuing litigation
against Lloyd's and approximately $5.3 million related to the funding of legal
costs and litigation settlements covered by the Lloyd's E&O policies. The
negative impact of these items on the Company's 2002 cash flow was approximately
$8.9 million, which consisted of approximately $3.6 million related to insurance
premium increases for new insurance coverage and the cost of pursuing litigation
against Lloyd's and approximately $5.3 million related to the funding of legal
costs and litigation settlements covered by the Lloyd's E&O policies.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual obligations as of
December 31, 2003:
PAYMENTS DUE BY PERIOD
AS OF DECEMBER 31, 2003
----------------------------------------------------
LESS THAN 1 - 3 3 - 5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
-------- --------- ------- ------- ---------
(IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
Long-term debt....................... $109,375 $ -- $32,813 $76,562 $ --
Current portion of long-term debt.... 12,500 12,500 -- -- --
Operating lease obligations(1)....... 35,535 12,635 13,945 5,647 3,308
Purchase obligations Capital
expenditure obligations........... 1,025 1,025 -- -- --
Other purchase obligations........ 1,834 1,834 -- -- --
Other long-term liabilities reflected
on the Company's Balance Sheet
under GAAP:
Restructuring reserves and
other(2)........................ 1,376 289 455 322 310
Settlement obligations related to
Lloyd's receivable.............. 6,300 2,100 4,200 -- --
Settlement obligations --
NCO(3).......................... 225 -- 225 -- --
-------- ------- ------- ------- ------
Total.................................. $168,170 $30,383 $51,638 $82,531 $3,618
======== ======= ======= ======= ======
---------------
(1) The operating lease obligations do not include amounts related to the
Company's lease for its new principal executive office that was entered into
in February 2004, and becomes effective July 2004. For more information, see
"Note 21 -- Subsequent Events" in the Company's Notes to Consolidated
Financial Statements.
(2) The amounts reflected under restructuring reserves and other are amounts
reserved for estimated lease termination costs associated with the Company's
Physician Services division's 1995 restructuring. For more information, see
"Note 5 -- Restructuring and Other Expenses" in the Company's Notes to
Consolidated Financial Statements.
(3) For more information, see "Note 4 -- Discontinued Operations and
Divestitures" in the Company's Notes to Consolidated Financial Statements.
30
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
As discussed under the caption "Forward-Looking Statements" in Item 1,
Per-Se provides the following risk factor disclosures in connection with its
continuing efforts to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include, but are not limited to, the following:
If the Company fails to maintain an effective system of internal controls, the
Company may not be able to accurately report the Company's financial results on
a timely basis. As a result, current and potential stockholders could lose
confidence in the Company's financial reporting which would harm the Company's
business and the trading price of the Company's stock.
As a result of errors that caused the restatements to the Company's
financial statements for the years ended December 31, 2001, and 2002, and the
nine months ended September 30, 2003, the Company's independent registered
public accounting firm determined that a material weakness exists related to the
Company's internal controls and procedures. The Company's independent registered
public accounting firm reported to the Company that the errors that resulted in
the restatements reflected in this Form 10-K, were the result of not having
appropriate controls over the estimation process associated with the
establishment of accruals and reserves and the lack of adequate supervision of
accounting personnel. The errors generally related to the recording of accruals
for sales commissions, vacation liabilities, legal expenses, health insurance,
incentive compensation and other liabilities. While the Company has taken
immediate steps to improve controls in these areas, the Company cannot be
certain that these steps will ensure that it implements and maintains adequate
controls over financial processes and reporting. Failure to maintain adequate
controls of this type could adversely impact the accuracy and future timeliness
of its financial reports filed pursuant to the Securities Exchange Act of 1934.
If the Company cannot provide reliable and timely financial reports, its
business and operating results could be harmed, investors could lose confidence
in its reported financial information, its common stock could be delisted from
the Nasdaq Stock Market, and the trading price of its common stock could fall.
In addition, beginning with its 2004 audit, the Company must comply with Section
404(a) of the Sarbanes-Oxley Act, which requires an annual management assessment
of the effectiveness of the Company's internal controls over financial reporting
and a report by the Company's independent registered public accounting firm
addressing that assessment. In light of the material weakness identified in
connection with the Company's 2003 audit, there can be no assurance that the
Company or its independent registered public accounting firm will be able to
conclude that the Company has effective internal controls over financial
reporting in connection with the 2004 audit, which could raise the same concerns
identified above.
If the Company is unable to file its quarterly and annual reports with the
Commission on a timely basis, the Company's common stock may be delisted from
the Nasdaq National Market, which would have an adverse impact on the market
for the Company's common stock.
On April 5, 2004, the Company received a noncompliance notification from
The Nasdaq Stock Market ("Nasdaq") due to the delay in filing of the 2003 Form
10-K. On April 29, 2004, the Company had a hearing on the matter before a Nasdaq
Listing Qualifications Panel (the "Panel"). The Panel has not yet issued its
decision, but is expected to do so shortly. In addition, the Company has
concluded that the Company will be unable to timely file the Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004, although the Company expects to
do so shortly after the due date. Although the Company believes that it will
meet all Nasdaq listing standards upon filing of this Form 10-K and its Form
10-Q for the quarter ended March 31, 2004 and that the Nasdaq delisting process
will thereupon be vacated, there can be no assurance that the delisting process
will be vacated and that the Company's common stock will continue to trade on
the Nasdaq National Market. If the Company's common stock is delisted from the
Nasdaq National Market, it could have an adverse impact on the market for the
Company's common stock.
31
The Company has a significant amount of long-term debt and obligations to make
payments, which could limit the Company's funds available for other
activities.
The Company has approximately $122 million of long-term indebtedness and,
as a result, has obligations to make interest and principal payments on that
debt. If unable to make the required debt payments, the Company could be
required to reduce or delay capital expenditures, sell certain assets,
restructure or refinance its indebtedness, or seek additional equity capital.
The Company's ability to make payments on its debt obligations will depend on
future operating performance, which may be affected by conditions beyond the
Company's control.
Under the $175 million Credit Agreement, the Company has certain reporting
requirements for the submission of its financial statements to the Lenders, as
defined in the Credit Agreement. On April 30, 2004, the Company was granted an
extension of the May 15, 2004, submission deadline for its results for the
period ended March 31, 2004. The Company has until the extended deadline of May
28, 2004, to submit its first quarter 2004 financial statements to the Lenders.
In the event the Company cannot meet the extended deadline, it must request an
additional extension from the Lenders. There is no guarantee that the Lenders
will grant this request or that the Company will not be required to compensate
the Lenders in order to receive an additional extension.
In the event the settlement agreement with Lloyd's falls through and the
Company is unsuccessful in its litigation with Lloyd's, the Company would be
required to record a write-off of the then-current receivable related to
Lloyd's and certain claims presently pending against the Company would be
uninsured.
On May 10, 2004, the Company reached a $20 million settlement with Lloyd's.
The settlement entails a $20 million cash payment that is payable by Lloyd's 60
days from the settlement date or by July 9, 2004. Lloyd's also agreed to assume
responsibility for the two remaining pending claims under the original errors
and omissions ("E&O") policies. In the event the settlement agreement falls
through and the litigation against Lloyd's proceeds, certain claims presently
pending against the Company would not be covered by insurance (refer to "Note
12 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information). As of December 31, 2003, the Company had incurred
approximately $17.4 million of costs related to claims under Lloyd's that are
classified as Lloyd's receivable in the Company's Consolidated Balance Sheet. As
of December 31, 2003, approximately $10.6 million of these costs had been paid
by the Company. As of December 31, 2003, there are only two active remaining
cases that are covered under the Lloyd's E&O policies. In the event the
settlement agreement falls through and the litigation against Lloyd's proceeds
and if the Company is unsuccessful in its ongoing litigation with Lloyd's, the
Company would be required to record a write-off of the then-current receivable
related to Lloyd's. The write-off would have a minimal cash flow impact as the
majority of the claims have been paid as incurred. However, any remaining claims
which have not been resolved would be uninsured.
The Company is regularly involved in litigation, which may expose the Company
to significant liabilities.
The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not yet resulted in legal
action.
The Company may not be able to successfully resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, its insurance coverage, errors and omissions
coverage or other coverage, may not fully cover any damages assessed against the
Company. Although the Company maintains all insurance coverage in amounts that
it believes is sufficient for its business, such coverage may prove to be
inadequate or may become unavailable on acceptable terms, if at all. A
32
successful claim brought against the Company, which is uninsured or
under-insured, could materially harm its business, results of operations or
financial condition.
The physician management outsourcing business is highly competitive and the
Company's inability to successfully compete for business could adversely
affect the Company.
The physician business management outsourcing business, especially for
revenue cycle management, is highly competitive. The Company competes with
regional and local physician reimbursement organizations as well as physician
groups that provide their own business management services in house. Successful
competition within this industry is dependent on numerous industry and market
conditions.
Potential industry and market changes that could adversely affect the
Company's ability to compete for business management outsourcing services
include an increase in the number of local, regional or national competitors
providing comparable services and new alliances between healthcare providers and
third-party payers in which healthcare providers are employed by such
third-party payers.
The business of providing services and solutions to hospitals for both revenue
cycle and resource management is also highly competitive and the Company's
inability to successfully compete for business could adversely affect the
Company.
The business of providing services and solutions to hospitals for both
revenue cycle and resource management is also highly competitive. The Company
competes with traditional electronic data interface companies, outsourcing
companies and specialized software vendors with national, regional and local
bases. Some competitors have longer operating histories and greater financial,
technical and marketing resources than that of the Company. The Company's
successful competition within this industry is dependent on numerous industry
and market conditions.
The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions and the Company's inability to keep pace could adversely
affect the Company.
The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including its
ability to enhance existing products and services; introduce new products and
services quickly and cost effectively; achieve market acceptance for new
products and services; and respond to emerging industry standards and other
technological changes.
Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing its technology going forward.
The costs associated with refining, enhancing and developing these systems may
increase significantly in the future. Existing software and technology may
become obsolete as a result of ongoing technological developments in the
marketplace.
The healthcare marketplace is characterized by consolidation, which may result
in fewer potential customers for the Company's services.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.
Consolidation of management and billing services through integrated
delivery systems may result in a decrease in demand for the Company's business
management outsourcing services for particular physician practices.
33
The healthcare industry is highly regulated, which may increase the Company's
costs of operation.
As discussed in Item 1 under the captions "Healthcare Industry" and
"Regulation," the healthcare industry is highly regulated and is subject to
changing political, economic and regulatory influences. Federal and state
legislatures have periodically considered programs to reform or amend the U.S.
healthcare system at both the federal and state level and to change healthcare
financing and reimbursement systems, such as the Balanced Budget Act of 1997.
These programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Current or future government
regulations or healthcare reform measures may affect the Company's business.
Healthcare industry participants may respond by reducing their investments or
postponing investment decisions, including investments in the Company's products
and services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid or other government-funded healthcare programs.
In the past, the Company has been the subject of federal investigations,
and it may become the subject of false claims litigation or additional
investigations relating to its billing and collection activities. Any such
proceeding or investigation could have a material adverse effect on the
Company's business.
Under HIPAA, final rules have been published regarding standards for
electronic transactions as well as standards for privacy and security of
individually identifiable health information. The HIPAA rules set new or higher
standards for the healthcare industry in handling healthcare transactions and
information, with penalties for noncompliance. The Company has incurred and will
continue to incur costs to comply with these rules. Although management believes
that future compliance costs will not have a material impact on the Company's
results of operations, compliance with these rules may prove to be more costly
than is anticipated. Failure to comply with such rules may have a material
adverse effect on the Company's business and may subject the Company to civil
and criminal penalties as well as loss of customers.
The Company relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA-compliant format. While the Company
believes it will be fully and properly prepared to process electronic medical
claims in a HIPAA-compliant format, there can be no assurance that third
parties, including healthcare providers and payers, will likewise be prepared to
supply all the data elements required to process electronic medical claims and
make electronic remittance under HIPAA's standards. If payers reject electronic
medical claims and such claims are processed manually rather than
electronically, there could be a material adverse effect on the Company's
business.
Currently in the area of privacy and security of health information,
numerous federal and state civil and criminal laws govern the collection, use,
storage and disclosure of health information. Federal or state governments may
impose penalties for noncompliance, both criminal and civil. Persons who believe
their health information has been misused or disclosed improperly may bring
claims and payers who believe instances of noncompliance with privacy and
security standards have occurred may bring administrative sanctions or remedial
actions against offending parties.
Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that the debate on healthcare reform will continue. The Company
also expects that the federal government as well as state governments will pass
laws and issue regulations addressing healthcare issues and reimbursement of
healthcare providers. The Company cannot predict whether the government will
enact new legislation and regulations, and, if enacted, whether such new
developments will affect its business.
34
The trading price of the Company's common stock may be volatile and negatively
affect your investment.
The trading price of the Company's Common Stock may be volatile. The market
for the Company's Common Stock may experience significant price and volume
fluctuations in response to a number of factors including actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments
and other factors, many of which are beyond the Company's control. Furthermore,
the stock market in general and the market for software, healthcare business
services and high technology companies in particular, has experienced volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of the Company's Common Stock, regardless of actual operating
performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, the Company does not expect any
fluctuation in the prevailing interest rates to have a material effect on its
financial statements.
The Company has the option of entering into loans based on LIBOR or on base
rates under the Term Loan B and the Revolving Credit Facility. As such, the
Company could experience fluctuations in the interest rates under the Term Loan
B, and, if the Company were to borrow amounts under the Revolving Credit
Facility, the Company could experience fluctuations in interest rates under the
Revolving Credit Facility. The Company had borrowings totaling $122 million
under the Term Loan B at December 31, 2003, and has not incurred any borrowings
under the Revolving Credit Facility.
The Company has a process in place to monitor fluctuations in interest
rates and could hedge against significant forecast changes in interest rates if
necessary.
EXCHANGE RATE SENSITIVITY
The majority of the Company's sales and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains or losses to date. The Company conducts only limited transactions
in foreign currencies and does not expect material foreign exchange gains or
losses in the future. The Company does not engage in any foreign exchange
hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of December 31,
2003, and have concluded that these disclosure controls and procedures were not
operating effectively at December 31, 2003, because of the material weakness
described below.
As a result of errors that caused the restatements to the Company's
financial statements for the years ended December 31, 2001, and 2002, and the
nine months ended September 30, 2003, the Company's independent registered
public accounting firm determined that a material weakness related to the
35
Company's internal controls and procedures exists which was reported to the
Company in a letter from the Company's independent registered public accounting
firm dated May 12, 2004. The Company's independent registered public accounting
firm reported to the Company that the errors that resulted in the restatements
reflected in this Form 10-K, which generally related to the recording of
accruals for sales commissions, vacation liabilities, legal expenses, health
insurance, incentive compensation and other liabilities, were the result of not
having appropriate controls over the estimation process associated with the
establishment of accruals and reserves and the lack of adequate supervision of
accounting personnel.
No change in the Company's internal control over financial reporting
occurred during the fourth quarter of 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting; however, the Company has caused additional procedures to be
performed subsequent to that quarter in connection with the preparation of its
2003 financial statements to mitigate the effects of the material weakness and
to ensure that the financial statements in this annual report on Form 10-K are
presented in accordance with generally accepted accounting principles. See
"Recent Developments" in Item 1 of Part I, on pages 2-4. The Company is in the
process of implementing improvements to its internal control over financial
reporting to address the identified material weakness, including implementing
additional controls and procedures related to the review of accruals and
reserves, changing reporting relationships for divisional accounting personnel,
and adding new accounting personnel. The Company expects that such improvements
will be fully implemented by the end of the third quarter of 2004.
The Company also expects that, in connection with the efforts to comply in
2004 with Section 404 of the Sarbanes-Oxley Act, it will implement changes in
internal controls and procedures and that these changes will be made on an
ongoing basis.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, are detected. Further, the design of any control system is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Because of these inherent
limitations in a cost-effective system, misstatements due to error or fraud may
occur and not be detected. The Company's management, including the Chief
Executive Officer and the Chief Financial Officer, does not expect that the
Company's disclosure controls and procedures or internal controls over financial
reporting will prevent all errors and all fraud.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers that is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Board of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held on June 7, 2004, and is incorporated herein by
reference.
The Registrant has adopted Standards of Conduct, which meet the definition
of a "code of ethics" under Item 406 of the Securities and Exchange Commission's
Regulation S-K, and which are applicable to and binding upon all of the
Registrant's employees (including the principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions) and, as required by the context, directors. Any
waiver of the Standards of Conduct for officers or directors of the Registrant
must be approved by the Board of Directors of the Registrant and must be
publicly disclosed in accordance with Securities and Exchange Commission and
Nasdaq rules. The Standards of Conduct are posted in the corporate governance
area of the investors section of the Registrant's Internet website at
www.per-se.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on June 7, 2004, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is included in the sections entitled
"Director and Executive Officer Common Stock Ownership" and "Principal
Stockholders" of the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 7, 2004, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is certain information as of December 31, 2003, regarding
an outstanding loan made in November 2000 pursuant to the employment agreement
between the Company and Philip M. Pead.
LARGEST AGGREGATE AMOUNT BALANCE AS
NAME AND POSITION NATURE OF INDEBTEDNESS OUTSTANDING IN 2003 OF 12/31/03 INTEREST
----------------- ------------------------ ------------------------ ----------- --------
Philip M. Pead, Chairman,
President, Chief Executive
Officer and Director........... Common Stock purchase(1) $250,000 $250,000 (2)
---------------
(1) The loan is secured by an aggregate of 74,000 shares of Common Stock, and is
payable in full upon the earlier to occur of the termination of Mr. Pead's
employment or the sale of all or any part of those shares.
(2) The terms of the loan provide that any overdue payment shall bear interest
at a rate equal to the rate of interest then imputed by the Internal Revenue
Service plus 4% per annum, or the maximum rate permitted by law, whichever
is lower, but such terms do not otherwise require the payment of interest.
This information is also included in the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on June 7, 2004.
37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is included in the section entitled
"Selection of Independent Auditors" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on June 7, 2004, and is incorporated herein
by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Report of Independent Registered Public Accounting Firm;
Consolidated Balance Sheets -- as of December 31, 2003, and 2002;
Consolidated Statements of Operations -- years ended December 31, 2003,
2002, and 2001;
Consolidated Statements of Cash Flows -- years ended December 31, 2003,
2002, and 2001;
Consolidated Statements of Stockholders' Deficit -- years ended December
31, 2003, 2002, and 2001; and
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 2003, 2002 and 2001;
Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference to
other filings:
EXHIBIT
NUMBER DOCUMENT
------- --------
2.1 -- Asset Purchase Agreement dated as of June 18, 2003, among
Misys Hospital Systems, Inc., Misys Healthcare Systems
(International) Limited, Misys plc, Registrant, and PST
Products, LLC., together with the First Amendment thereto
dated as of June 28, 2003 (incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed on August 5,
2003).
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K")).
3.2 -- Restated By-laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
the year ended December 31, 2003 (the "2003 Form 10-K")).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1999 Form 10-K).
4.2 -- Form of Option Agreement relating to Registrant's Amended
and Restated Non-Employee Director Stock Option Plan
(incorporated by reference to Appendix B to Definitive Proxy
Statement dated April 1, 2003, relating to Registrant's 2003
Annual Meeting of Stockholders).
4.3 -- Form of Option Agreement relating to Registrant's Second
Amended and Restated Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the 1999 Form
10-K).
38
EXHIBIT
NUMBER DOCUMENT
------- --------
4.4 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees
(incorporated by reference to Exhibit 4.6 to the 1999 Form
10-K).
4.5 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Employees of Acquired
Companies (incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-3, File No. 33-71552).
4.6 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K")).
4.7 -- Settlement Agreement dated as of June 24, 1999, by and among
Lori T. Caudill, William J. DeZonia, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust, Paulanne H. Thacker Retained Annuity
Trust and Borrower (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.8 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.9 -- First Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of May 4, 2000 (incorporated by
reference to Exhibit 4.4 to Quarterly Report of Form 10-Q
for the quarter ended March 31, 2000).
4.10 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 Form 10-K")).
4.11 -- Third Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of March 10, 2003 (incorporated by
reference to Exhibit 4.13 to Annual Report on Form 10-K for
the year ended December 31, 2002 (the "2002 Form 10-K")).
10.1 -- Credit Agreement dated as of September 11, 2003, by and
among Registrant, certain subsidiaries of Registrant
identified therein, as Guarantors, the Lenders identified
therein, and Bank of America, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed on September 12, 2003).
10.2 -- Amended and Restated Per-Se Technologies, Inc. Non-Employee
Director Stock Option Plan (incorporated by reference to
Appendix B to Definitive Proxy Statement dated April 1,
2003, relating to Registrant's 2003 Annual Meeting of
Stockholders).
10.3 -- Second Amended and Restated Per-Se Technologies, Inc.
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.1 to the 1999 Form 10-K).
10.4 -- First Amendment to Second Amended and Restated Per-Se
Technologies, Inc. Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.45 to the 1999 Form
10-K).
10.5 -- Registrant's Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 to Annual Report on Form 10-K for the year
ended December 31, 1996 (the "1996 Form 10-K")).
10.6 -- First Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.24 to the 1996 Form 10-K).
10.7 -- Second Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.25 to Annual Report on Form 10-K for the year
ended December 31, 1997 (the "1997 Form 10-K")).
39
EXHIBIT
NUMBER DOCUMENT
------- --------
10.8 -- Third Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.26 to the 1997 Form 10-K).
10.9 -- Fourth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.27 to the 1997 Form 10-K).
10.10 -- Fifth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.28 to the 1997 Form 10-K).
10.11 -- Sixth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.32 to Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 Form 10-K")).
10.12 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.24 to the 1999 Form 10-K).
10.13 -- Eighth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.26 to Annual Report on Form 10-K for the year
ended December 31, 2000 (the "2000 Form 10-K")).
10.14 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
10.15 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.31 to the 2002 Form 10-K).
10.16 -- Registrant's Non-Qualified Stock Option Plan for Employees
of Acquired Companies (incorporated by reference to Exhibit
99.1 to Registration Statement on Form S-8, File No.
33-67752).
10.17 -- First Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-71556).
10.18 -- Second Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-88442).
10.19 -- Third Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.14 to the 1995 Form 10-K).
10.20 -- Fourth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99.2 to Registration Statement on Form
S-8, File No. 333-3213).
10.21 -- Fifth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07627).
10.22 -- Sixth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.21 to the 1996 Form 10-K).
10.23 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.23 to the 1998 Form 10-K).
10.24 -- Eighth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.12 to the 1999 Form 10-K).
10.25 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.12 to the 2000 Form 10-K).
10.26 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.1 to Quarterly Report of Form 10-Q
for the quarter ended June 30, 2002).
40
EXHIBIT
NUMBER DOCUMENT
------- --------
10.27 -- Restricted Stock Plan of Registrant, dated as of August 12,
1994 (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-4, File No. 33-88910).
10.28 -- The Per-Se Technologies Employees' Retirement Savings Plan
(incorporated by reference to Exhibit 10.26 to the 1999 Form
10-K).
10.29 -- First Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.29 to the 2000 Form 10-K).
10.30 -- Second Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001).
10.31 -- Third Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001).
10.32 -- Fourth Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).
10.33 -- Fifth Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.38 to the 2002 Form 10-K).
10.34 -- Sixth Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.34 to the 2003 Form 10-K).
10.35 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.36 -- Registrant's Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.37 -- First Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
10.38 -- Second Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
10.39 -- Third Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.76 to the 1997 Form
10-K).
10.40 -- Fourth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.32 to the 1999 Form
10-K).
10.41 -- Fifth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.36 to the 2000 Form
10-K).
10.42 -- Per-Se Technologies, Inc. Executive Deferred Compensation
Plan effective as of January 1, 2002 (incorporated by
reference to Exhibit 10.40 to the 2001 Form 10-K).
10.43 -- Per-Se Technologies, Inc. Non-Qualified Deferred
Compensation Plan Trust Agreement dated as of February 12,
2002, between Registrant and Merrill Lynch Trust Company,
FSB (incorporated by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).
10.44 -- Written description of Registrant's Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit 10.2
to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
10.45 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan
(incorporated by reference to Exhibit 10.44 to the 2001 Form
10-K).
41
EXHIBIT
NUMBER DOCUMENT
------- --------
10.46 -- First Amendment to Per-Se Technologies, Inc. Deferred Stock
Unit Plan (incorporated by reference to Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
10.47 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan Trust
Agreement dated as of May 1, 2002, between Registrant and
Merrill Lynch Trust Company, FSB (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
10.48 -- Registrant's Long Term Incentive Plan (incorporated by
reference to Exhibit 10.3 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.49 -- Employment Agreement dated November 19, 1996, between
Registrant and David E. McDowell (incorporated by reference
to Exhibit 10.49 to the 1996 Form 10-K).
10.50 -- Amendment Number 1 to Employment Agreement between
Registrant and David E. McDowell, dated October 20, 1999
(incorporated by reference to Exhibit 10.37 to the 1999 Form
10-K).
10.51 -- Employment Agreement dated as of November 13, 2000, between
Registrant and Philip M. Pead (incorporated by reference to
Exhibit 10.42 to the 2000 Form 10-K).
10.52 -- Amendment No. 1 to Employment Agreement between Registrant
and Philip M. Pead, dated May 8, 2003 (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).
10.53 -- Employment Agreement dated April 14, 2000, between
Registrant and Chris E. Perkins (incorporated by reference
to Exhibit 10.43 to the 2000 Form 10-K).
10.54 -- Amendment Number 1 to Employment Agreement between
Registrant and Chris E. Perkins, dated as of February 7,
2001 (incorporated by reference to Exhibit 10.44 to the 2000
Form 10-K).
10.55 -- Employment Agreement dated June 5, 1998, between Registrant
and Frank B. Murphy (incorporated by reference to Exhibit
10.46 to the 2000 Form 10-K).
10.56 -- Employment Agreement dated July 1, 2003, between Registrant
and Philip J. Jordan (incorporated by reference to Exhibit
10.3 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
10.57 -- Employment Agreement dated as of May 31, 2001, between
Registrant and Paul J. Quiner (incorporated by reference to
Exhibit 10.57 to the 2003 Form 10-K).
10.58 -- Amended and Restated Employment Agreement dated April 7,
2004, between Registrant and Frank B. Murphy(incorporated by
reference to Exhibit 10.58 to the Form 10-K).
21 -- Subsidiaries of Registrant(incorporated by reference to
Exhibit 21 to the Form 10-K).
23 -- Consent of Ernst & Young LLP.
31.1 -- Certification of Chief Executive Officer pursuant Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
---------------
The exhibits, which are referenced in the above documents, are hereby
incorporated by reference. Such exhibits have been omitted for purposes of this
filing but will be furnished supplementary to the Commission upon request.
42
(b) Reports on Form 8-K
The Company filed or furnished the following reports on Form 8-K during the
quarter ended December 31, 2003:
FINANCIAL
STATEMENTS DATE FILED
ITEM REPORTED FILED DATE OF REPORT OR FURNISHED
------------- ---------- ----------------- -----------------
Press release dated October 28, 2003,
announcing results of the Company's
operations for the quarterly period ended
September 30, 2003 No October 28, 2003 October 28, 2003
Press release dated November 11, 2003, with
a statement in response to unusual trading
activity on that date in the Company's
common stock No November 11, 2003 November 13, 2003
Press release dated November 24, 2003,
announcing that the Company's Audit
Committee had completed an independent
review of allegations contained in an
anonymous letter sent to research analysts,
and that the letter's allegations had been
found to be baseless No November 24, 2003 November 26, 2003
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
PER-SE TECHNOLOGIES, INC.
(Registrant)
By: /s/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: March 9, 2005
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Per-Se Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Per-Se
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 2003 (as restated -- see Note 2). Our audits also included the financial
statement schedule listed in the index at Item 15(a)2. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Per-Se
Technologies, Inc. and subsidiaries at December 31, 2003 and 2002, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 (as restated), in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the accompanying consolidated financial
statements, the Company restated its financial statements for the years ended
December 31, 2003, 2002 and 2001.
/s/ Ernst & Young LLP
Atlanta, Georgia
May 12, 2004, except for the last paragraph
in Note 2, as to which the
date is March 4, 2005.
F-1
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2003 2002
--------- -------------
(AS RESTATED)
(IN THOUSANDS, EXCEPT PAR
VALUE DATA)
Current Assets:
Cash and cash equivalents................................. $ 25,271 $ 46,748
Restricted cash........................................... 66 4,296
--------- ---------
Total cash and cash equivalents................... 25,337 51,044
Accounts receivable, billed (less allowances of $4,267 and
$3,880, respectively).................................. 46,335 41,117
Accounts receivable, unbilled (less allowances of $528 and
$408, respectively).................................... 1,613 2,176
Lloyd's receivable........................................ 17,405 --
Other..................................................... 6,183 3,838
--------- ---------
Total current assets.............................. 96,873 98,175
Property and equipment, net of accumulated depreciation..... 16,434 19,549
Goodwill, net of accumulated amortization................... 32,549 32,549
Other intangible assets, net of accumulated amortization.... 19,787 22,945
Other....................................................... 5,881 3,485
Lloyd's receivable.......................................... -- 6,849
Assets of discontinued operations, net...................... 129 26,079
--------- ---------
Total assets...................................... $ 171,653 $ 209,631
========= =========
Current Liabilities:
Accounts payable.......................................... $ 6,587 $ 3,525
Accrued compensation...................................... 18,102 19,741
Accrued expenses.......................................... 19,037 20,915
Current portion of long-term debt......................... 12,500 15,020
--------- ---------
56,226 59,201
Deferred revenue.......................................... 20,334 18,372
--------- ---------
Total current liabilities......................... 76,560 77,573
Long-term debt.............................................. 109,375 160,000
Other obligations........................................... 2,908 2,140
Liabilities of discontinued operations...................... 422 7,890
--------- ---------
Total liabilities................................. 189,265 247,603
--------- ---------
Commitments and contingencies (Notes 11 and 12)
Stockholders' Deficit:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
31,322 and 30,163 issued and outstanding as of December
31, 2003, and December 31, 2002, respectively.......... 313 302
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 786,297 778,021
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (805,286) (817,275)
Treasury stock at cost, 122 shares as of December 31,
2003, and 90 as of December 31, 2002................... (1,303) (1,045)
Deferred stock unit plan obligation....................... 1,303 1,045
Accumulated other comprehensive loss...................... (431) (515)
--------- ---------
Total stockholders' deficit....................... (17,612) (37,972)
--------- ---------
Total liabilities and stockholders' deficit....... $ 171,653 $ 209,631
========= =========
See notes to consolidated financial statements.
F-2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue..................................................... $335,169 $325,564 $305,822
-------- -------- --------
Salaries and wages.......................................... 194,139 186,075 182,597
Other operating expenses.................................... 87,183 90,857 86,800
Depreciation................................................ 9,375 10,908 12,223
Amortization................................................ 7,134 7,836 9,229
Process improvement project................................. -- -- 3,423
Restructuring expenses...................................... 830 -- 593
-------- -------- --------
Operating income.......................................... 36,508 29,888 10,957
Interest expense............................................ 14,646 18,069 18,009
Interest income............................................. (297) (471) (1,121)
Loss on extinguishment of debt.............................. 6,255 -- --
-------- -------- --------
Income (loss) before income taxes......................... 15,904 12,290 (5,931)
Income tax expense.......................................... 27 800 343
-------- -------- --------
Income (loss) from continuing operations.................. 15,877 11,490 (6,274)
-------- -------- --------
Discontinued operations (see Note 4)
(Loss) income from discontinued operations, net of
tax -- Patient1......................................... (1,316) 445 (2,169)
Gain on sale of Patient1, net of tax...................... 10,417 -- --
Loss from discontinued operations, net of
tax -- Business1........................................ (3,589) (1,921) (1,554)
Loss from discontinued operations, net of tax -- Business1
write-down of assets.................................... (8,528) -- --
(Loss) income from discontinued operations, net of
tax -- Other............................................ (872) (1,025) 3,888
-------- -------- --------
(3,888) (2,501) 165
-------- -------- --------
Net income (loss).................................. $ 11,989 $ 8,989 $ (6,109)
======== ======== ========
Net income (loss) per common share-basic:
Income (loss) from continuing operations.................. $ 0.52 $ 0.38 $ (0.21)
(Loss) income from discontinued operations, net of
tax -- Patient1......................................... (0.04) 0.01 (0.07)
Gain on sale of Patient1, net of tax...................... 0.34 -- --
Loss from discontinued operations, net of
tax -- Business1........................................ (0.12) (0.06) (0.05)
Loss from discontinued operations, net of tax -- Business1
write-down of assets.................................... (0.28) -- --
(Loss) income from discontinued operations, net of
tax -- Other............................................ (0.03) (0.03) 0.13
-------- -------- --------
Net income (loss) per common share-basic........... $ 0.39 $ 0.30 $ (0.20)
======== ======== ========
Weighted average shares used in computing basic income
(loss) per common share................................... 30,594 30,061 29,915
======== ======== ========
Net income (loss) per common share-diluted:
Income (loss) from continuing operations.................. $ 0.49 $ 0.36 $ (0.21)
(Loss) income from discontinued operations, net of
tax -- Patient1......................................... (0.04) 0.01 (0.07)
Gain on sale of Patient1, net of tax...................... 0.32 -- --
Loss from discontinued operations, net of
tax -- Business1........................................ (0.11) (0.06) (0.05)
Loss from discontinued operations, net of tax -- Business1
write-down of assets.................................... (0.26) -- --
(Loss) income from discontinued operations, net of
tax -- Other............................................ (0.03) (0.03) 0.13
-------- -------- --------
Net income (loss) per common share-diluted......... $ 0.37 $ 0.28 $ (0.20)
======== ======== ========
Weighted average shares used in computing diluted income
(loss) per common share-diluted........................... 32,661 31,966 29,915
======== ======== ========
See notes to consolidated financial statements.
F-3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income (loss)..................................... $ 11,989 $ 8,989 $(6,109)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization...................... 16,509 18,744 21,452
Loss (income) from discontinued operations......... 14,305 2,501 (165)
Gain on sale of Patient1........................... (10,417) -- --
Amortization of deferred financing costs........... 1,269 1,403 1,329
Loss on extinguishment of debt..................... 6,255 -- --
Changes in assets and liabilities, excluding
effects of acquisitions and divestitures:
Restricted cash.................................. 4,162 337 2,062
Accounts receivable, billed...................... (5,326) (327) 4,457
Accounts receivable, unbilled.................... 563 (458) 1,091
Accounts payable................................. 3,062 (2,446) (4,287)
Accrued compensation............................. (1,639) (1,144) 3,665
Accrued expenses................................. (6,655) 1,671 (1,830)
Accrued litigation settlements................... -- -- (1,602)
Deferred revenue................................. 1,962 231 (694)
Other, net....................................... (7,568) (6,323) (1,034)
--------- -------- -------
Net cash provided by continuing operations....... 28,471 23,178 18,335
Net cash (used for) provided by discontinued
operations.................................... (10,419) (1,283) 6,641
--------- -------- -------
Net cash provided by operating activities..... 18,052 21,895 24,976
--------- -------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment................... (6,367) (6,471) (4,752)
Software development costs............................ (3,976) (3,425) (2,398)
Proceeds from sale of Patient1, net of tax............ 27,925 -- --
Proceeds from sale of property and equipment.......... 23 50 1,537
Acquisitions, net of cash acquired.................... (78) (1,640) (10,846)
--------- -------- -------
Net cash provided by (used for) continuing
operations.................................. 17,527 (11,486) (16,459)
Net cash used for discontinued operations..... (2,288) (4,172) (3,590)
--------- -------- -------
Net cash provided by (used for) investing
activities.................................. 15,239 (15,658) (20,049)
--------- -------- -------
Cash Flows From Financing Activities:
Proceeds from borrowings.............................. 125,000 -- --
Debt issuance costs................................... (9,797) -- (539)
Proceeds from the exercise of stock options........... 7,969 1,071 299
Payments of debt...................................... (178,145) (94) (74)
Capital contribution (see Note 1)..................... -- 1,969 --
Other................................................. 205 1,058 924
--------- -------- -------
Net cash (used for) provided by financing
activities.................................. (54,768) 4,004 610
--------- -------- -------
Cash and Cash Equivalents:
Net change............................................ (21,477) 10,241 5,537
Balance at beginning of period........................ 46,748 36,507 30,970
--------- -------- -------
Balance at end of period.............................. $ 25,271 $ 46,748 $36,507
========= ======== =======
See notes to consolidated financial statements.
F-4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
DEFERRED
STOCK
COMMON COMMON PAID-IN ACCUMULATED TREASURY UNIT PLAN
SHARES STOCK CAPITAL WARRANTS DEFICIT STOCK OBLIGATION
------ ------ -------- -------- ----------- -------- ----------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
2000.................. 29,902 $299 $774,603 $1,495 $(820,155) $ -- $ --
Net loss (as
restated)............. -- -- -- -- (6,109) -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- --
TOTAL COMPREHENSIVE LOSS
(AS RESTATED).........
Issuance of common stock
in acquisitions....... 5 -- 35 -- -- -- --
Exercise of stock
options............... 62 1 295 -- -- -- --
Other................... -- -- 50 -- -- -- --
------ ---- -------- ------ --------- ------- ------
BALANCE AT DECEMBER 31,
2001 (AS RESTATED).... 29,969 300 774,983 1,495 (826,264) -- --
Net income (as
restated)............. -- -- -- -- 8,989 -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- --
TOTAL COMPREHENSIVE
INCOME (AS
RESTATED).............
Exercise of stock
options............... 194 2 1,069 -- -- -- --
Deferred stock unit plan
activity.............. -- -- -- -- -- (1,045) 1,045
Capital contribution
(see Note 1).......... -- -- 1,969 -- -- -- --
------ ---- -------- ------ --------- ------- ------
BALANCE AT DECEMBER 31,
2002 (AS RESTATED).... 30,163 302 778,021 1,495 (817,275) (1,045) 1,045
Net income.............. -- -- -- -- 11,989 -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- --
TOTAL COMPREHENSIVE
INCOME................
Exercise of stock
options............... 1,159 11 7,958 -- -- -- --
Tax effect of exercise
of stock options...... -- -- 318 -- -- -- --
Deferred stock unit plan
activity.............. -- -- -- -- -- (258) 258
------ ---- -------- ------ --------- ------- ------
BALANCE AT DECEMBER 31,
2003.................. 31,322 $313 $786,297 $1,495 $(805,286) $(1,303) $1,303
====== ==== ======== ====== ========= ======= ======
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
(LOSS)/INCOME DEFICIT
------------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
2000.................. $(378) $(44,136)
Net loss (as
restated)............. -- (6,109)
Foreign currency
translation
adjustment............ (37) (37)
--------
TOTAL COMPREHENSIVE LOSS
(AS RESTATED)......... (6,146)
Issuance of common stock
in acquisitions....... -- 35
Exercise of stock
options............... -- 296
Other................... -- 50
----- --------
BALANCE AT DECEMBER 31,
2001 (AS RESTATED).... (415) (49,901)
Net income (as
restated)............. -- 8,989
Foreign currency
translation
adjustment............ (100) (100)
--------
TOTAL COMPREHENSIVE
INCOME (AS
RESTATED)............. 8,889
Exercise of stock
options............... -- 1,071
Deferred stock unit plan
activity.............. -- --
Capital contribution
(see Note 1).......... -- 1,969
----- --------
BALANCE AT DECEMBER 31,
2002 (AS RESTATED).... (515) (37,972)
Net income.............. -- 11,989
Foreign currency
translation
adjustment............ 84 84
--------
TOTAL COMPREHENSIVE
INCOME................ 12,073
Exercise of stock
options............... -- 7,969
Tax effect of exercise
of stock options...... -- 318
Deferred stock unit plan
activity.............. -- --
----- --------
BALANCE AT DECEMBER 31,
2003.................. $(431) $(17,612)
===== ========
See notes to consolidated financial statements.
F-5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of Per-Se Technologies, Inc. and its subsidiaries ("Per-Se" or the
"Company"). All intersegment accounts have been eliminated. The Hospital
Services division revenue includes intersegment revenue for services provided to
the Physician Services division, which has been eliminated in total consolidated
revenue. Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the current year presentation,
specifically, the realignment of the Company's segments and the presentation of
the Company's two non-core software product lines as discontinued operations.
The consolidated financial statements of the Company have been presented to
reflect the operations of the Hospital Services division's Patient1 clinical
product line ("Patient1") and Business1-PFM patient accounting product line
("Business1") as discontinued operations. Patient1 was sold on July 28, 2003,
and Business1 was sold effective January 31, 2004. Additionally, the activity
related to the Medaphis Services Corporation ("MSC") and Impact Innovations
Group ("Impact") businesses, which were sold in 1998 and 1999, respectively, are
also reflected as discontinued operations for all periods presented. For more
information about the Company's discontinued operations, refer to "Note 4
-- Discontinued Operations" in the Company's Notes to Consolidated Financial
Statements.
Restatement of Previously Reported Financial Information. The accompanying
consolidated financial information as of December 31, 2002, and for the two
years then ended, as well as quarterly information in the periods ended
September 30, 2003, and December 31, 2002, has been restated to correct errors
in those periods. See further discussion of the restatement in Note 2.
Recent Accounting Pronouncements. On December 17, 2003, the Securities and
Exchange Commission (the "Commission") issued Staff Accounting Bulletin Number
104, Revenue Recognition ("SAB 104"). SAB 104 revises or rescinds portions of
the interpretative guidance included in Topic 13 of the codification of staff
accounting bulletins in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and the Commission's
rules and regulations. The principal revisions relate to the rescission of
material no longer necessary because of private sector developments in U.S.
generally accepted accounting principles. Revisions include those necessitated
by the Financial Accounting Standards Board ("FASB") Emerging Issues Task Force
("EITF") Issue No. 00-21, Revenue Arrangements With Multiple Deliverables ("EITF
No. 00-21"). SAB 104 did not affect the Company's Consolidated Statements of
Operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS No. 150"). SFAS No. 150
establishes standards for classifying and measuring certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument within its scope as a
liability (or in some circumstances an asset). Many of those instruments were
previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatorily redeemable financial instruments of nonpublic
entities. The Company adopted SFAS No. 150 on May 31, 2003; however, SFAS No.
150 did not affect the Company's Consolidated Statements of Operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company adopted
F-6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 149 on June 30, 2003; however, SFAS No. 149 did not affect the
Company's Consolidated Statements of Operations.
In January 2003 the FASB issued and subsequently revised in December 2003,
FIN No. 46, Consolidation of Variable Interest Entities ("FIN No. 46"), which
clarifies the consolidation accounting guidance of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entities to finance their
activities without additional subordinated financial support from other parties.
Such entities are known as variable interest entities ("VIE"). Controlling
financial interests of a VIE are identified by the exposure of a party to the
VIE to a majority of either the expected losses or residual rewards of the VIE,
or both. Such parties are primary beneficiaries of the VIE, and FIN No. 46
requires that the primary beneficiary of a VIE consolidate the VIE. FIN No. 46
also requires new disclosures for significant relationships with VIEs, whether
or not consolidation accounting is either used or anticipated. Application of
FIN No. 46 is required in the financial statements of public entities that have
interests in VIEs or potential VIEs commonly referred to as special-purpose
entities for periods after December 15, 2003. Application by public entities for
all other types of entities is required in financial statements for periods
ending after March 15, 2004. The Company currently believes that it does not
have any relationships with a VIE; however, the Company will evaluate all new
business relationships.
At the November 21, 2002 EITF meeting, the EITF reached a consensus on EITF
00-21. EITF 00-21 addresses how to determine if an arrangement involving
multiple deliverables contains more than one unit of accounting. In applying
EITF 00-21, separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a
package and should, therefore, be evaluated as a single arrangement in
considering whether there are one or more units of accounting. That presumption
may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The EITF indicated that the
guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company adopted EITF 00-21 on
January 1, 2003; however, EITF 00-21 did not have a material effect on the
Company's Consolidated Statements of Operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"). The Interpretation requires
that a guarantor recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken by issuing the guarantee. The
Interpretation also requires the guarantor to make additional disclosures in its
interim and annual financial statements about its obligations under certain
guarantees it has issued. FIN No. 45 does not have a material effect on the
Company's consolidated financial statements for the year ended December 31,
2003. Certain of the Company's sales agreements contain infringement indemnity
provisions that are covered by FIN No. 45. Under these sales agreements, the
Company agrees to defend and indemnify a customer in connection with
infringement claims made by third parties with respect to the customer's
authorized use of the Company's products and services. The indemnity obligations
contained in sales agreements generally have no specified expiration date and
generally limit the award to the amount of fees paid. The Company has not
previously incurred costs to settle claims or pay awards under these
indemnification obligations. Also, the Company maintains membership in a group
captive insurance company for its workers compensation insurance. The member
companies agree to jointly insure the group's liability risks up to a certain
threshold. As a member, the Company guarantees to pay an assessment, if an
assessment becomes due as a result of insured losses by its members. This
guarantee will never exceed a percentage of the Company's loss funds. Based on
the Company's historical experience, the Company does not anticipate such an
assessment. As a result, the Company's estimated fair value of the infringement
indemnity provision obligations and the captive insurance guarantee is nominal.
F-7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Bad debt estimates. The Company relies on estimates to determine the
bad debt expense and the adequacy of the reserve for doubtful accounts
receivable. These estimates are based on the historical experience of the
Company and the industry in which it operates. If the financial condition
of the Company's customers deteriorated, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
Company actively reviews its accounts receivable and does not believe
actual results will vary materially from the Company's estimates.
Accrued expenses. The Company relies on estimates to determine the
amounts that are recorded in accrued expenses. Estimates of requirements
for legal services and settlements expected to be incurred in connection
with a loss contingency and to meet regulatory demands within our business
and industry are used to accrue legal expenses. Income tax accruals are
estimated based on historical experience of the Company, prevailing tax
rates and the current business environment. Restructuring and severance
cost accruals are made using estimates of the costs required to effect the
desired change within the Company.
Revenue Recognition. The Company derives revenue from products and
services delivered to the healthcare industry through its two operating
divisions:
Physician Services provides Connective Healthcare solutions that
manage the revenue cycle for physician groups. The division provides
outsourced revenue cycle management services that are targeted at
hospital-affiliated and academic physician practices. Fees for these
services are primarily based on a percentage of net collections on the
Company's clients' accounts receivable. The division recognizes revenue and
bills its customers when the customers receive payment on those accounts
receivable. Contracts are typically multi-year in length and require no
payment from the customer upon contract signing. Since this is an
outsourced service delivered on the Company's proprietary technology, there
are no license or maintenance fees to be paid by the physician group
customers. The division also recognizes approximately 5% of its revenue,
for all periods presented, on a monthly service fee and per-transaction
basis from the MedAxxis product line, an application service provider
("ASP") physician practice management system. The Physician Services
division does not rely, to any material extent, on estimates in the
recognition of this revenue. Revenue is recognized in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition.
Hospital Services provides Connective Healthcare solutions that
improve revenue cycle and resource management for hospitals.
Revenue cycle management solutions primarily include services that
allow a hospital's central billing office ("CBO") to more effectively
manage its cash flow. These services include electronic and paper
transactions, such as claims processing, which can be delivered via the Web
or through dedicated electronic data interfaces and high-speed print and
mail services. Revenue related to these transaction services are billed and
recognized when the services are performed on a per transaction basis.
Contracts are typically multi-year in length. The division also recognizes
revenue related to direct and indirect payments it receives from payers for
the electronic transmission of transactions to the payers. The division
recognizes revenue on these transactions at the time the electronic
transactions are sent. Revenue is recognized in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition.
F-8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Resource management solutions include staff and patient scheduling
software that enable hospitals to efficiently manage resources, such as
personnel and the operating room, to reduce costs and improve their bottom
line. The resource management software is sold as a one-time license fee
plus implementation services and an annual maintenance fee. Contracts are
typically structured to require a portion of the license fee and
implementation services to be paid periodically throughout the installation
process, including a portion due upon signing. For software contracts that
require the division to make significant production, modification or
customization changes, the division recognizes revenue for the license fee
and implementation services using the percentage-of-completion method over
the implementation period. The Hospital Services division relies on
estimates of work to be completed to determine the amount of revenue to be
recognized related to each contract. Because estimates of the extent of
completion that differ from actual results could affect revenue, the
division periodically reviews the estimated hours or days to complete major
projects and compares these estimates to budgeted hours or days to support
the revenue recognized on that project. Approximately 9%, 9% and 12% of the
division's revenue (or 2%, 2% and 2% of total Company revenue) was
determined using percentage-of-completion accounting for the years ended
December 31, 2003, 2002, and 2001, respectively.
When the division receives payment prior to shipment or fulfillment of
its significant obligations, the Company records such payments as deferred
revenue and recognizes them as revenue upon shipment or fulfillment of
significant obligations. An unbilled receivable is recorded when the
division recognizes revenue on the percentage-of-completion basis prior to
achieving a contracted billing milestone. For minor add-on software license
sales where no significant customization remains outstanding, the fee is
fixed, an agreement exists and collectibility is probable, the division
recognizes revenue upon shipment. For software maintenance payments
received in advance, the division defers and recognizes as revenue these
payments ratably over the term of the maintenance agreement, which is
typically one year. Revenue recognized on the percentage-of-completion
basis is done so in accordance with Statement of Position 81-1, Accounting
for Performance of Construction Type and Certain Production Type Contracts.
Revenue recognized upon software shipment is done so in accordance with
Statement of Position 97-2, Software Revenue Recognition.
For arrangements that include one or more elements, or
multiple-element arrangements, to be delivered at a future date, revenue is
recognized in accordance with SOP 97-2 as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2, as amended, requires the Company to allocate
revenue to each element in a multiple-element arrangement based on the
element's respective vendor-specific objective evidence, or VSOE, of fair
value. Where VSOE does not exist for all delivered elements (typically
software license fees), revenue from multiple-element arrangements is
recognized using the residual method. Under the residual method, if VSOE of
the fair value of the undelivered elements exists, the Company defers
revenue recognition of the fair value of the undelivered elements. The
remaining portion of the arrangement fee is then recognized either by using
the percentage-of-completion method if significant production, modification
or customization is required or upon delivery, assuming all other
conditions for revenue recognition have been satisfied. VSOE of fair value
of maintenance services is based upon the amount charged for maintenance
when purchased separately, which is the renewal rate. Maintenance services
are stated separately in an arrangement. VSOE of fair value of professional
services (i.e. implementation and consulting services not essential to the
functionality of the software) is based upon the price charged when
professional services are sold separately and is based on an hourly rate
for professional services.
Cash and Cash Equivalents. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months at the
date of purchase.
F-9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Cash. At December 31, 2003, restricted cash primarily
represents amounts collected on behalf of certain Physician Services and
Hospital Services clients, a portion of which is held in trust until it is
remitted to such clients. At December 31, 2002, restricted cash included amounts
held in trust and approximately $4.2 million restricted as security for the
Company's letters of credit.
Fair Value of Financial Instruments. The carrying amount of all of the
Company's financial instruments approximates fair value. Additionally, the
Company had unused letters of credit in the amount of $3.2 million and $4.2
million at December 31, 2003, and 2002, respectively.
Property and Equipment. Property and equipment, including equipment under
capital leases, are stated at cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally ten years for furniture and fixtures, three to ten years
for equipment and twenty years for buildings. Leasehold improvements are
recorded at cost and amortized over the remaining term of the lease.
Goodwill. Goodwill represents the excess of the cost of businesses
acquired and the value of their workforce in the Physician Services division in
1995 and the Hospital Services division from 1995 to 2001 over the fair market
value of their identifiable net assets.
Trademarks. Trademarks represent the value of the trademarks acquired in
the Hospital Services division from 2000 to 2001. The Company expects the
trademarks to contribute to cash flows indefinitely and therefore deems the
trademarks to have indefinite useful lives.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS No. 142"). SFAS No. 142 requires goodwill and indefinite lived
intangible assets to be reviewed periodically for impairment and no longer
amortized. The Company adopted SFAS No. 142 on January 1, 2002. SFAS No. 142
required companies with goodwill and indefinite lived intangible assets to
complete an initial impairment test by June 30, 2002. The Company completed the
initial impairment test of its goodwill and other indefinite-lived intangible
assets and did not identify an impairment of its trademark intangible assets,
which have an indefinite life. The Company also concluded that the fair value of
its reporting units exceeded the book value of the respective reporting units.
Additionally, the Company performs a periodic review of its goodwill and other
indefinite lived intangible assets for impairment as of December 31 each year.
The Company's initial impairment and periodic review of its goodwill and other
indefinite lived intangible assets were based upon a discounted future cash flow
analysis that included revenue and cost estimates, market growth rates and
appropriate discount rates. As of December 31, 2003, and 2002, the Company did
not identify an impairment of goodwill or indefinite-lived intangible assets as
a result of the review.
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill and indefinite lived intangible assets effective January 1, 2002.
For the year ended December 31, 2002, the Company had a reduction in
amortization expense of approximately $1.7 million related to the adoption of
SFAS No. 142. For the year ended December 31, 2001 a reconciliation has been
provided of previously reported net loss and net loss per share amounts. These
amounts exclude the amortization expense
F-10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized related to goodwill and intangible assets that are no longer
amortized (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
------- ------------- -------------
(AS RESTATED) (AS RESTATED)
Reported net income (loss)........................ $11,989 $8,989 $(6,109)
Add back:
Goodwill amortization, net of tax............... -- -- 2,300
Trademark amortization, net of tax.............. -- -- 56
Workforce amortization, net of tax.............. -- -- 42
------- ------ -------
Adjusted net income (loss)........................ $11,989 $8,989 $(3,711)
======= ====== =======
Net income (loss) per common share-basic:
Reported net income (loss) per common
share-basic..................................... $ 0.39 $ 0.30 $ (0.20)
Goodwill amortization, net of tax............... -- -- 0.08
Trademark amortization, net of tax.............. -- -- --
Workforce amortization, net of tax.............. -- -- --
------- ------ -------
Adjusted net income (loss) per common
share-basic..................................... $ 0.39 $ 0.30 $ (0.12)
======= ====== =======
Net income (loss) per common share-diluted:
Reported net income (loss) per common
share-diluted................................... $ 0.37 $ 0.28 $ (0.20)
Goodwill amortization, net of tax............... -- -- 0.08
Trademark amortization, net of tax.............. -- -- --
Workforce amortization, net of tax.............. -- -- --
------- ------ -------
Adjusted net income (loss) per common
share-diluted................................... $ 0.37 $ 0.28 $ (0.12)
======= ====== =======
Client Lists. Client lists represent the value of clients acquired in the
Physician Services division from 1992 to 1996 and the Hospital Services division
from 1995 to 2001. The Company amortizes client lists over their estimated
useful lives, which range from five to ten years.
Developed Technology. Developed technology represents the value of the
systems acquired in the Hospital Services division from 2000 to 2001. The
Company amortizes these intangible assets over their estimated useful lives of
five years.
Software Development Costs. Software development includes costs incurred
in the development or the enhancement of software in the Physician Services and
Hospital Services divisions for resale or internal use.
Software development costs, related to external use software, are
capitalized upon the establishment of technological feasibility for each product
and capitalization ceases when the product or process is available for general
release to customers. Technological feasibility is established when all
planning, designing, coding and testing activities required to meet a product's
design specifications are complete. The Company amortizes external use software
development costs over the greater of the ratio that current revenues bear to
total and anticipated future revenues for the applicable product or
straight-line method over the estimated economic lives of the assets, which are
generally three to five years. The Company monitors the net realizable value of
all capitalized external use software development costs to ensure that it can
recover its investment through margins from future sales.
F-11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software development costs, related to internal use software, are
capitalized after the preliminary project stage is complete, when management
with the relevant authority authorizes and commits to the funding of the
software project, when it is probable that the project will be completed and
when the software will be used to perform the function intended. Capitalization
ceases no later than the point at which the project is substantially complete
and ready for its intended use. The Company expenses software development costs,
related to internal use software, as incurred during the planning and post-
implementation phases of development. The Company amortizes internal-use
software on a straight-line basis over its estimated useful life, generally five
years. The estimated useful life considers the effects of obsolescence,
technology, competition and other economic factors.
Research and Development Costs. The Company expenses research and
development costs as incurred. The Company recorded research and development
costs of approximately $8.0 million, $10.1 million and $5.3 million in 2003,
2002 and 2001, respectively.
Advertising Costs. The Company expenses advertising costs as incurred. The
Company recorded advertising costs of approximately $0.7 million, $0.3 million
and $0.5 million in 2003, 2002 and 2001, respectively.
Shipping and Postage Costs. The Company expenses shipping and postage
costs as incurred. These costs are primarily incurred related to providing print
and mail services to customers, which are billed to the customer and included in
revenue. The Company recorded postage costs of approximately $19.3 million,
$20.5 million and $18.4 million in 2003, 2002 and 2001, respectively, in Other
Operating Expenses in the Company's Consolidated Statements of Operations.
Stock-Based Compensation Plans. In December 2002, the FASB issued SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS
No. 148"). SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002 and for interim
periods beginning after December 15, 2002. The annual disclosure requirements of
SFAS No. 148 were adopted by the Company on January 1, 2003.
At December 31, 2003, the Company has four stock-based compensation plans
described more fully in Note 14. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). No stock-based compensation cost
is reflected in the Company's Consolidated Statement of Operations, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) and net income (loss)
F-12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation.
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported..................... $11,989 $ 8,989 $ (6,109)
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects...... (4,210) (5,288) (5,001)
------- ------- --------
Pro forma net income (loss)....................... $ 7,779 $ 3,701 $(11,110)
======= ======= ========
Net income (loss) per common share:
Basic -- as reported............................ $ 0.39 $ 0.30 $ (0.20)
======= ======= ========
Basic -- pro forma.............................. $ 0.25 $ 0.12 $ (0.37)
======= ======= ========
Diluted -- as reported.......................... $ 0.37 $ 0.28 $ (0.20)
======= ======= ========
Diluted -- pro forma............................ $ 0.24 $ 0.12 $ (0.37)
======= ======= ========
Legal Costs. The Company expenses ordinary legal and administrative fees,
costs and expenses as incurred. Legal and administrative fees, costs, expenses,
damages or settlement losses for specific legal matters that the Company
determines to be probable are accrued at such time when they are reasonably
estimable.
Income Taxes. The Company recognizes deferred income taxes for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The Company
determines deferred tax assets and liabilities by reference to the tax laws and
changes to such laws. Management includes the consideration of future events in
assessing the likelihood that the Company will realize tax benefits. See Note 16
where the Company discusses the realizability of the deferred tax assets.
Net Income (Loss) Per Share. Net income per common share-basic is
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding during the period. Net income per common
share-diluted reflects the potential dilution that could occur from common
shares issuable through stock options and warrants. The following sets forth the
computation of basic and diluted
F-13
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net income (loss) per common share for the years ended December 31, 2003, 2002
and 2001 (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
------- ------------- -------------
(AS RESTATED) (AS RESTATED)
Net income (loss)................................. $11,989 $ 8,989 $(6,109)
======= ======= =======
Common shares outstanding:
Shares used in computing net income (loss) per
common share-basic........................... 30,594 30,061 29,915
Effect of potentially dilutive stock options and
warrants..................................... 2,067 1,905 --(a)
------- ------- -------
Shares used in computing net income (loss) per
common share-diluted......................... 32,661 31,966 29,915
======= ======= =======
Net income (loss) per common share:
Basic........................................... $ 0.39 $ 0.30 $ (0.20)
======= ======= =======
Diluted......................................... $ 0.37 $ 0.28 $ (0.20)
======= ======= =======
---------------
(a) The Company has excluded all stock options and warrants from the diluted
loss per common share because such securities are antidilutive for 2001.
Options and warrants to purchase 2.5 and 3.3 million shares of common stock
outstanding during 2003 and 2002, respectively, were excluded from the
computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares, and therefore, the
effect would have been antidilutive.
Options and warrants to purchase 8.7 million shares of common stock
outstanding during 2001 were excluded from the computation of diluted earnings
per share due to their antidilutive effect as a result of the Company's loss
from continuing operations for the period.
Capital Contribution. The Company recorded an approximately $2 million
capital contribution paid to the Company in November 2002 as a result of
recovering short-swing profits from an outside stockholder in accordance with
Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides
that any profit realized by an insider (defined as an officer, director or
principal stockholder of an issuer) from any purchase and sale, or any sale and
purchase, of an equity security of the issuer within any period of less than six
months are recoverable by the issuer, irrespective of the intention of the
insider in entering into such transaction.
Foreign Currency Translation and Comprehensive Income (Loss). The
functional currency of the Company's operations outside of the United States is
the local country's currency. Consequently, assets and liabilities of operations
outside the United States are translated into dollars using exchange rates at
the end of each reporting period. Revenue and expenses are translated at the
average exchange rates prevailing during the period. Cumulative translation
gains and losses are reported in accumulated other comprehensive income (loss).
In the years ended December 31, 2003, 2002 and 2001, the only component of other
comprehensive loss is the net foreign currency translation, which was $0.1
million, $0.1 million and $37,000, respectively.
Related Party Transactions. In November 2000, pursuant to the employment
agreement between the Company and Philip M. Pead, the Company's Chairman of the
Board, Chief Executive Officer, and President, the Company entered into a
promissory note agreement with Mr. Pead for $250,000. This amount is included in
Other assets in the accompanying consolidated balance sheet. The loan is secured
by
F-14
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an aggregate of 74,000 shares of Common Stock, which Mr. Pead purchased in the
open market with the proceeds of the note, and is payable in full upon the
earlier to occur of the termination of Mr. Pead's employment or the sale of all
or any part of those shares. Any overdue payment on the loan bears interest at a
rate equal to the rate of interest then imputed by the Internal Revenue Service
plus 4% per annum, or the maximum rate permitted by law, whichever is lower.
Because the shares were purchased in the open market by Mr. Pead, and the note
only bears interest in the event of an overdue payment, the Company did not
record any compensation expense associated with this arrangement at inception,
and has not recorded any compensation expense in any subsequent period.
2. ADDITIONAL PROCEDURES AND RESTATEMENTS OF THE CONSOLIDATED FINANCIAL
STATEMENTS
As a result of allegations of improprieties made during 2003 and 2004, the
Company's independent registered public accounting firm advised the Company and
the Audit Committee of the Board of Directors that additional procedures should
be performed related to the allegations. These additional procedures, which
predicated the 2003 Form 10-K filing delay, were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement
Audit, ("SAS No. 99") that became effective for periods beginning on or after
December 15, 2002. Due to the volume and, in some cases, vague nature of many of
the allegations, the scope of the additional procedures was broad and extensive
(see Note 22 for additional information). The additional procedures included the
review of certain of the Company's revenues, expenses, assets and liabilities
accounts for the years 2001 through 2003. Certain financial items were
identified during the additional procedures that warranted further review by the
Company. The Company reviewed these items and determined that it was appropriate
to restate prior period financial statements. The restatements affect the
financial statements as of December 31, 2002, and 2001, for the years ended
December 31, 2002, and 2001, and for the nine months ended September 30, 2003,
and are included in this report.
By year, the net decrease to the reported net loss for 2001 is
approximately $0.2 million or $.01 per share, and the net increase to reported
net income for 2002 is approximately $1.0 million or $.03 per share on a fully
diluted basis, and for the nine months ended September 30, 2003, is
approximately $0.8 million or $.03 per share on a fully diluted basis. In the
periods presented on a quarterly basis, the impact of the restatements is a net
increase to reported net income, except for the second quarter of 2002, which
has a decrease to reported net income of $0.2 million. The restatements were
generally related to the recording of accruals for sales commissions, vacation
liabilities, legal expenses, health insurance, incentive compensation and other
liabilities.
The impact of the restatements is presented below:
AS PREVIOUSLY
REPORTED(1) AS RESTATED
------------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenue................................................... $ 306,683 $ 305,822
Loss from continuing operations........................... (6,655) (6,274)
Net loss.................................................. (6,338) (6,109)
Loss from continuing operations per common
share -- basic......................................... (0.22) (0.21)
Loss from continuing operations per common
share -- diluted....................................... (0.22) (0.21)
Net loss per common share -- basic........................ (0.21) (0.20)
Net loss per common share -- diluted...................... (0.21) (0.20)
F-15
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS PREVIOUSLY
REPORTED(1) AS RESTATED
------------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
Revenue................................................... $ 79,133 $ 78,996
Income from continuing operations......................... 2,334 2,725
Net income................................................ 1,299 1,792
Income from continuing operations per common
share -- basic......................................... 0.07 0.09
Income from continuing operations per common
share -- diluted....................................... 0.07 0.08
Net income per common share -- basic...................... 0.04 0.06
Net income per common share -- diluted.................... 0.04 0.05
FOR THE THREE MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Revenue................................................... $ 81,657 $ 81,607
Income from continuing operations......................... 2,298 2,120
Net income................................................ 2,022 1,846
Income from continuing operations per common
share -- basic......................................... 0.08 0.07
Income from continuing operations per common
share -- diluted....................................... 0.07 0.07
Net income per common share -- basic...................... 0.07 0.06
Net income per common share -- diluted.................... 0.06 0.06
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
Revenue................................................... $ 82,842 $ 83,048
Income from continuing operations......................... 2,474 2,820
Net income................................................ 1,287 1,682
Income from continuing operations per common
share -- basic......................................... 0.08 0.09
Income from continuing operations per common
share -- diluted....................................... 0.08 0.09
Net income per common share -- basic...................... 0.04 0.05
Net income per common share -- diluted.................... 0.04 0.05
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002 (UNAUDITED)
Revenue................................................... $ 82,069 $ 81,913
Income from continuing operations......................... 3,598 3,825
Net income................................................ 3,332 3,669
Income from continuing operations per common
share -- basic......................................... 0.12 0.13
Income from continuing operations per common
share -- diluted....................................... 0.11 0.12
Net income per common share -- basic...................... 0.11 0.13
Net income per common share -- diluted.................... 0.11 0.12
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenue................................................... $ 325,701 $ 325,564
Income from continuing operations......................... 10,704 11,490
Net income................................................ 7,940 8,989
Income from continuing operations per common
share -- basic......................................... 0.35 0.38
Income from continuing operations per common
share -- diluted....................................... 0.33 0.36
Net income per common share -- basic...................... 0.26 0.30
Net income per common share -- diluted.................... 0.25 0.28
F-16
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS PREVIOUSLY
REPORTED(1) AS RESTATED
------------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
Revenue................................................... $ 81,903 $ 81,998
Income from continuing operations......................... 2,863 3,121
Net income................................................ 1,578 1,837
Income from continuing operations per common
share -- basic......................................... 0.10 0.10
Income from continuing operations per common
share -- diluted....................................... 0.09 0.10
Net income per common share -- basic...................... 0.06 0.06
Net income per common share -- diluted.................... 0.05 0.06
FOR THE THREE MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
Revenue................................................... $ 85,412 $ 85,456
Income from continuing operations......................... 4,882 5,013
Net income................................................ 2,950 3,081
Income from continuing operations per common
share -- basic......................................... 0.16 0.16
Income from continuing operations per common
share -- diluted....................................... 0.15 0.16
Net income per common share -- basic...................... 0.10 0.10
Net income per common share -- diluted.................... 0.09 0.10
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
Revenue................................................... $ 84,511 $ 84,523
Income from continuing operations......................... (191) (120)
Net income................................................ 74 506
Income from continuing operations per common
share -- basic......................................... (0.01) (0.00)
Income from continuing operations per common
share -- diluted....................................... (0.01) (0.00)
Net income per common share -- basic...................... -- 0.02
Net income per common share -- diluted.................... -- 0.02
AS OF DECEMBER 31, 2002
Current assets............................................ $ 98,233 $ 98,175
Total assets.............................................. 209,850 209,631
Current liabilities....................................... 79,024 77,573
Total liabilities......................................... 249,102 247,603
Accumulated deficit....................................... (818,553) (817,275)
Total stockholders' deficit............................... (39,252) (37,972)
---------------
(1) As Previously Reported has been presented to reflect Patient1 and Business1
as discontinued operations for all periods presented (see Note 4).
Certain amounts in the Company's Consolidated Statement of Cash Flows
related to Funds Due to Clients have been reclassified for the years ended
December 31, 2003, 2002, and 2001. The reclassification decreased net cash
provided by operating activities and increased net cash provided by financing
activities by approximately $0.2 million, $1.1 million, and $0.9 million in the
years ended December 31, 2003, 2002, and 2001, respectively. Additionally, for
the year ended December 31, 2003, the Company reclassified approximately $4.3
million related to its debt refinancing from cash flows from operating
activities to cash used for financing activities. The Company determined that
these reclassifications, when aggregated,
F-17
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required the Company to restate its Consolidated Statement of Cash Flows for the
year ended December 31, 2003, 2002, and 2001.
3. ACQUISITIONS
On April 27, 2001, the Company acquired all of the assets of Virtual
Information Systems, Inc. ("VIS") for consideration of $7.0 million in cash. The
purchase agreement also provided for a purchase price adjustment of up to $1.5
million payable in cash should VIS meet certain financial targets over the
twelve months following the date of acquisition. As of December 31, 2001, the
Company had recorded the purchase price adjustment of $1.5 million. During the
first quarter of 2002, VIS met the financial targets in the purchase agreement
and accordingly, on May 10, 2002, the payment for the purchase price adjustment
of $1.5 million was made. VIS' core product, Virtual Processing Systems, is an
automated remittance processing solution for hospitals, which ensures accurate
and efficient processing of cash collections and payment of denial management
codes.
Additionally, on April 27, 2001, the Company acquired all of the assets of
OfficeMed.com LLC ("OfficeMed") for consideration of $3.25 million in cash.
OfficeMed offers a Web-based ASP solution that gives healthcare and payer
organizations the ability to perform secure, real time benefits inquiries
against patients' insurance plans, ensuring eligibility at the point of care.
The Company recorded the VIS and OfficeMed acquisitions using the purchase
method of accounting and, accordingly, allocated the purchase price to the
assets acquired and the liabilities assumed based on their estimated fair market
value at the date of acquisition. Approximately $7.3 million of the purchase
price was allocated to goodwill and prior to adoption of SFAS No. 142 was being
amortized using the straight-line method over 20 years. In 2001, the Company
finalized the purchase price allocation of these acquisitions, and approximately
$5.3 million previously allocated to goodwill was reallocated to finite-lived
intangible assets with lives ranging from five to ten years. The operating
results of VIS and OfficeMed are included in the Company's Consolidated
Statements of Operations from the date of acquisition in the Hospital Services
division.
On February 9, 2000, the Company acquired the outstanding capital stock of
Knowledgeable Healthcare Solutions, Inc. ("KHS") for consideration of $3.1
million, consisting of $1.1 million cash and approximately 236,000 shares, or
$2.0 million, of the Company's Common Stock. In addition, the purchase agreement
provided for a purchase price adjustment of up to $6.0 million, which was
recorded in December 2000, payable in cash and the Company's Common Stock,
should KHS meet certain operational targets over the three years from the date
of acquisition. The Company was required under the purchase agreement to make a
purchase price adjustment in April 2001 totaling $0.1 million, 25% of which was
paid through the issuance of the Company's Common Stock.
The Company recorded the KHS acquisition using the purchase method of
accounting and, accordingly, allocated the purchase price to the assets acquired
and the liabilities assumed based on their estimated fair market value at the
date of acquisition. Approximately $8.9 million of the purchase price was
allocated to goodwill and prior to adoption of SFAS No. 142, a portion of which
was being amortized using the straight-line method over five years. In February
2003, the Company determined that KHS would not meet its purchase agreement
operational targets and reduced the purchase price allocation to goodwill by
approximately $5.9 million. This adjustment is reflected in the Company's
December 31, 2002, Consolidated Balance Sheet. The operating results of KHS are
included in the Company's Consolidated Statements of Operations from the date of
acquisition.
The pro-forma impact of these acquisitions was immaterial to the financial
statements of the Company and therefore has not been presented.
F-18
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DISCONTINUED OPERATIONS AND DIVESTITURES
In June 2003, the Company announced that it agreed to sell Patient1 to
Misys Healthcare Systems, a division of Misys plc ("Misys") for $30 million in
cash. Patient1 was the Company's only clinical product line and its sale allows
the Company to better focus on optimizing reimbursement and improving
administrative efficiencies for physician practices and hospitals. The sale was
completed on July 28, 2003. The Company recognized a gain on the sale of
Patient1 of approximately $10.4 million, net of taxes of approximately $.5
million, subject to closing adjustments, in 2003. Net proceeds on the sale of
Patient1 were approximately $27.9 million, subject to closing adjustments. The
Company is currently in arbitration with Misys regarding the final closing
adjustments, which would represent additional purchase price payments to the
Company. The Company expects the arbitration process to be completed by the end
of the second quarter of 2004.
In September 2003, the Company initiated a process to sell Business1. As
with the sale of Patient1, the discontinuance of Business1 will allow the
Company to focus resources on solutions that provide meaningful, strategic
returns for the Company, its customers and its shareholders. Pursuant to SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"), the Company wrote down the net assets of Business1 to fair market
value less costs to sell and incurred an $8.5 million expense. The Company
completed the sale of Business1 effective January 31, 2004, to a privately held
company for $0.6 million, which will be received in three payments through June
2006. No cash consideration was received at closing.
Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Summarized operating results for the
discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------ ---------------------------------- ----------------------------------
(AS RESTATED) (AS RESTATED)
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ------- -------- ------------- ------- -------- ------------- -------
(IN THOUSANDS)
Revenue.............. $15,247 $ 474 $15,721 $25,855 $ 2,498 $28,353 $19,905 $ 2,272 $22,177
======= ======= ======= ======= ======= ======= ======= ======= =======
(Loss) income from
discontinued
operations before
income taxes....... $(1,270) $(3,589) $(4,859) $ 888 $(1,921) $(1,033) $(2,167) $(1,554) $(3,721)
Income tax expense... 46 -- 46 443 -- 443 2 -- 2
------- ------- ------- ------- ------- ------- ------- ------- -------
(Loss) income from
discontinued
operations, net of
tax................ $(1,316) $(3,589) $(4,905) $ 445 $(1,921) $(1,476) $(2,169) $(1,554) $(3,723)
======= ======= ======= ======= ======= ======= ======= ======= =======
F-19
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF AS OF
DECEMBER 31, DECEMBER 31, 2002
2003 ----------------------------------
-------------- (AS RESTATED)
BUSINESS1 PATIENT1 BUSINESS1 TOTAL
-------------- -------- ------------- -------
(IN THOUSANDS) (IN THOUSANDS)
Current assets.......................... $129 $10,385 $2,395 $12,780
Property and equipment.................. -- 1,889 226 2,115
Other long-term assets.................. -- 4,723 6,461 11,184
---- ------- ------ -------
Assets of discontinued operations..... $129 $16,997 $9,082 $26,079
==== ======= ====== =======
Current liabilities..................... $422 $ 3,316 $ 532 $ 3,848
Deferred revenue........................ -- 3,237 13 3,250
Other long-term liabilities............. -- 792 -- 792
---- ------- ------ -------
Liabilities of discontinued
operations......................... $422 $ 7,345 $ 545 $ 7,890
==== ======= ====== =======
On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment.
In October of 2001, the Company received $1.0 million in cash from the
buyer of the government division of Impact when the term of the purchase
agreement escrow expired. This amount was recognized through discontinued
operations. In May of 2001, the Company received an insurance settlement related
to a matter filed against the commercial division of Impact of approximately
$3.0 million, which was recognized through discontinued operations. The Company
continues to pursue claims against a former vendor of this division for damages
incurred in this matter.
For the year ended December 31, 2002, the Company expensed $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO Group, Inc. ("NCO"), the buyer of the Company's MSC
division. When NCO bought MSC, the Company agreed to indemnify NCO for limited
periods of time in the event NCO incurred certain damages related to MSC. NCO
incurred such damages in connection with an alleged environmental liability of
MSC, and the Company agreed to reimburse NCO for a portion of those damages, in
satisfaction of the Company's indemnification obligation. The Company paid $0.3
million to NCO on September 16, 2002. The Company intends to pay the remaining
balance of $0.4 million, plus interest at the then-current prime rate, in equal
payments to NCO, on the second and third anniversaries of that date.
The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to MSC have passed without the assertion by NCO
of any other significant claims. These limitations do not apply to a small
number of other types of potential claims to which statutory limitations apply,
such as those involving title to shares, taxes and billing and coding under
Medicare and Medicaid; however, management believes that such other types of
claims are unlikely to occur.
During the years ended December 31, 2003 and 2002, the Company also
incurred expenses of approximately $0.9 million and $0.3 million, respectively,
which were primarily legal costs, associated with MSC and Impact. Pursuant to
SFAS No. 144, the consolidated financial statements of the Company have been
presented to reflect the activity associated with MSC and Impact as discontinued
operations for all periods presented.
The net operating results of these segments have been reported in the
Consolidated Statements of Operations as "(Loss) income from discontinued
operations, net of tax -- Other" and the net cash flows
F-20
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have been reported in the Consolidated Statements of Cash Flows as "Net cash
(used for) provided by discontinued operations."
5. RESTRUCTURING AND OTHER EXPENSES
Components of other expenses are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
----- ----- -----
(IN THOUSANDS)
Severance costs............................................. $504 $-- $593
Other....................................................... 326 -- --
---- --- ----
$830 $-- $593
==== === ====
Severance Costs. In 2003, the Company recorded net expenses of $0.5
million for severance costs related to the realignment of the Company into the
Physician Services and Hospital Services divisions. In 2001, the Company
recorded net expenses of $0.6 million for severance costs associated with former
executive management.
A description of the amount of severance costs recorded and subsequently
incurred is as follows:
ACCRUED ADDITION ACCRUED ACCRUED ADDITION
SEVERANCE TO COSTS SEVERANCE COSTS SEVERANCE TO
LIABILITY ACCRUED PAID OR LIABILITY PAID OR LIABILITY ACCRUED
JANUARY 1, SEVERANCE OTHERWISE DECEMBER 31, OTHERWISE DECEMBER 31, SEVERANCE
2001 LIABILITY SETTLED 2001 SETTLED 2002 LIABILITY
---------- --------- --------- ------------ --------- ------------ ---------
(IN THOUSANDS)
Severance costs...... $1,387 $593 $(845) $1,135 $(822) $313 $504
ACCRUED
COSTS SEVERANCE
PAID OR LIABILITY
OTHERWISE DECEMBER 31,
SETTLED 2003
--------- ------------
(IN THOUSANDS)
Severance costs...... $(299) $518
Other. In 2003, the Company incurred approximately $0.3 million of
restructuring expenses related to the realignment of the Company into the
Physician Services and Hospital Services divisions.
Restructuring Expenses. Under SFAS No. 146, the Company discloses certain
information related to restructuring expenses.
In early 1995, the Company initiated a reengineering program focused upon
its billing and accounts receivable management operations (the "Reengineering
Project"). As part of the Physician Services Restructuring Plan, the Company
recorded restructuring reserves in 1995 through 1996. In 1996, the Company
abandoned its Reengineering Project. The Company periodically reevaluates the
adequacy of the reserves established for the Physician Services Restructuring
Plan. In 1997 and 1999 the Company recorded an additional expense of $1.7
million and $0.3 million, respectively, for lease termination costs.
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for the restructurings discussed above
is as follows:
RESERVE COSTS RESERVE COSTS RESERVE COSTS RESERVE
BALANCE PAID OR BALANCE PAID OR BALANCE PAID OR BALANCE
JANUARY 1, OTHERWISE DECEMBER 31, OTHERWISE DECEMBER 31, OTHERWISE DECEMBER 31,
2001 SETTLED 2001 SETTLED 2002 SETTLED 2003
---------- --------- ------------ --------- ------------ --------- ------------
(IN THOUSANDS)
Lease termination costs........... $2,873 $(535) $2,338 $(358) $1,980 $(550) $1,430
The terminated leases have various expiration dates through 2011. The
estimated lease termination costs to be incurred within the next 12 months are
classified in Accrued expenses in the Company's Consolidated Balance Sheets. The
estimated lease termination costs to be incurred beyond the next 12 months are
classified in Other obligations in the Company's Consolidated Balance Sheets.
F-21
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROCESS IMPROVEMENT PROJECT
The Company incurred approximately $3.4 million of expense in 2001,
associated with the implementation of a process improvement project within the
Physician Services division (the "Project"). The Project installed a formalized
set of productivity and quality measures, workflow processes and a management
operating system in certain of the Company's major processing centers. The
Project focused on productivity improvements that resulted in both improved
client service and improved profitability for the division.
The Company completed the first phase of the Project, which involved
implementation in twelve of the division's larger processing centers, in the
third quarter of 2001 with all costs for this phase incurred as of September 30,
2001. In 2001, the costs associated with the Project primarily consisted of
professional fees paid to outside consultants retained exclusively for
implementation of the Project.
The Company completed the second phase of the Project, which began in the
first quarter of 2002, as of September 30, 2002, with implementation into an
additional fifteen processing centers. The Company implemented the second phase
with internal resources, and therefore the Company did not incur any external
project costs.
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2003 2002
--------- -------------
(AS RESTATED)
(IN THOUSANDS)
Land........................................................ $ 590 $ 590
Buildings................................................... 2,751 2,751
Furniture and fixtures...................................... 15,886 15,380
Equipment................................................... 110,443 114,150
Leasehold improvements...................................... 6,101 5,355
--------- ---------
135,771 138,226
Less accumulated depreciation............................... (119,337) (118,677)
--------- ---------
$ 16,434 $ 19,549
========= =========
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
2003 2002
-------- -------------
(AS RESTATED)
(IN THOUSANDS)
Goodwill.................................................... $ 39,057 $ 39,057
Client lists................................................ 44,308 44,308
Developed technology........................................ 4,616 4,616
Trademarks.................................................. 1,316 1,316
Software development costs.................................. 19,112 15,136
-------- --------
108,409 104,433
Less accumulated amortization............................... (56,073) (48,939)
-------- --------
$ 52,336 $ 55,494
======== ========
F-22
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with Accounting Principles Board Opinion No. 16, Business
Combinations, as of December 31, 2001, the Company finalized the purchase price
allocation of its most recent acquisitions, with a portion of the amount
previously allocated to goodwill being reallocated to finite-lived intangible
assets. The amounts reallocated to finite-lived intangible assets totaled
approximately $9.2 million. The amortization period of the amounts allocated to
client lists ranges from five to ten years. The amortization period of the
amounts allocated to developed technology is five years.
In February 2003, the Company determined that its KHS acquisition would not
meet its purchase agreement operational targets and reduced the purchase price
allocation to goodwill by approximately $5.9 million. This adjustment is
reflected in the Company's December 31, 2002, Consolidated Balance Sheet.
Expenditures on capitalized software development costs were approximately
$4.0 million, $3.4 million and $2.4 million in 2003, 2002 and 2001,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $2.1 million, $2.0 million (as restated) and $1.9 million (as
restated) in 2003, 2002 and 2001, respectively. The unamortized balance of
software development costs at December 31, 2003 and 2002 was $6.9 million and
$5.1 million (as restated), respectively. The Company amortizes software
development costs using the straight-line method over the estimated useful lives
of the assets, which are generally three to five years.
The acquired intangible asset amortization expense estimated as of December
31, 2003, for the five years following 2003 and thereafter is as follows (in
thousands):
2004........................................................ $ 4,942
2005........................................................ 4,159
2006........................................................ 869
2007........................................................ 404
2008........................................................ 404
Thereafter.................................................. 773
-------
$11,551
=======
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
2003 2002
------- -------------
(AS RESTATED)
(IN THOUSANDS)
Interest.................................................... $ 44 $ 6,270
Accrued restructuring and severance costs, current.......... 357 793
Accrued legal costs......................................... 3,548 3,460
Accrued legal settlements -- Lloyd's related................ 5,200 1,666
Accrued taxes............................................... 1,869 862
Funds due clients........................................... 3,026 2,888
Accrued costs of businesses acquired........................ 159 237
Other....................................................... 4,834 4,739
------- -------
$19,037 $20,915
======= =======
F-23
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT
Long-term debt consists of the following:
2003 2002
-------- --------
(IN THOUSANDS)
9 1/2% Senior Notes due February 15, 2005 (the "Notes")..... $ -- $175,000
Term Loan B due September 11, 2008, weighted average
interest rate of 5.73% in 2003............................ 121,875 --
Capital lease obligations, weighted average effective
interest rate of 0.5% in 2002............................. -- 20
-------- --------
121,875 175,020
Less current portion........................................ (12,500) (15,020)
-------- --------
$109,375 $160,000
======== ========
On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due 2005 (the "Notes"). Under the Indenture that governed the Notes, the
balance of net proceeds, as defined, from the sale of any assets having a fair
value in excess of $1.0 million was required to be invested in the Company's
business within 360 days of receipt of proceeds related to the sale or they
would become "excess proceeds," as defined. If the aggregate of excess proceeds
became greater than $10.0 million, the Company was required to offer to
repurchase the Notes at par with such excess proceeds. In February 2003, the
Company reduced its unpaid portion of the purchase price allocation for the
Company's 2000 acquisition of KHS (refer to Note 3 for more information). Due to
the reduction of the KHS purchase price allocation, excess proceeds exceeded
$10.0 million. Therefore, on March 17, 2003, the Company repurchased $15.0
million of the Notes at par plus accrued interest of approximately $0.1 million.
The Company incurred a write-off of approximately $0.2 million of deferred debt
issuance costs associated with the original issuance of the Notes related to
this repurchase, which is included in loss on extinguishment of debt in the
Company's Consolidated Statements of Operations.
On August 12, 2003, the Company commenced a cash tender offer for its
then-outstanding $160 million of Notes (the "Tender Offer"). On September 11,
2003, the Company repurchased $143.6 million of the Notes that were tendered at
the redemption price of 102.375% of the principal amount, as required under the
Indenture governing the Notes, and accrued interest of approximately $1.0
million. The Notes tendered by August 25, 2003 included a premium of 0.25% of
the principal amount in addition to the redemption price of 102.375% of the
principal amount. The remaining $16.4 million of the Notes were retired on
September 18, 2003, through a call initiated by the Company on August 12, 2003,
at the redemption price of 102.375% of the principal amount plus accrued
interest of approximately $10,000 (the "Call"). The Company incurred a write-off
of approximately $1.4 million of deferred issuance costs associated with the
original issuance of the Notes related to their retirement through the Tender
Offer and the Call, which are included in loss on extinguishment of debt in the
Company's Consolidated Statements of Operations. In addition, the Company
incurred expenses associated with the retirement of the Notes of approximately
$4.7 million, including the Tender Offer premium and the Call premium which are
also included in loss on extinguishment of debt in the Company's Consolidated
Statements of Operations.
On April 16, 2001, the Company entered into a $50 million credit facility
(the "2001 Credit Facility"). The Company did not incur any borrowings under the
2001 Credit Facility, and, on September 11, 2003, the Company terminated the
2001 Credit Facility.
On September 11, 2003, the Company entered into a $175 million Credit
Agreement (the "Credit Agreement"). The Credit Agreement consists of a $125
million Term Loan B (the "Term Loan B") and
F-24
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a $50 million revolving credit facility (the "Revolving Credit Facility"). Under
the Credit Agreement, the Company has the option of entering into LIBOR-based
loans or base rate loans, each as defined in the Credit Agreement. The Company
had approximately $121.9 million outstanding under the Term Loan B as of
December 31, 2003, under a LIBOR-based interest contract, bearing interest at
5.39%. The Term Loan B bears interest at a rate of either LIBOR plus 4.25% or
the base rate, which approximates prime, plus 2.75%, and matures in five years.
The Term Loan B includes mandatory quarterly principal payments based on annual
amortization of 10% for the first two years, 15% for years three and four and
50% in year five. LIBOR-based loans under the Revolving Credit Facility bear
interest at LIBOR plus amounts ranging from 3.0% to 3.5% based on the Company's
leverage ratio, as defined in the Credit Agreement. Base-rate loans under the
Revolving Credit Facility bear interest at the Base Rate, which approximates
prime, plus amounts ranging from 1.50% to 2.00% based on the Company's leverage
ratio, as defined in the Credit Agreement. In addition, the Company pays a
quarterly commitment fee on the unused portion of the Revolving Credit Facility
of 0.50% per annum.
Proceeds from the Term Loan B, proceeds from the sale of Patient1 and cash
on hand were used to fund the Tender Offer. The Company used cash on hand to
fund the Call. During 2003, the Company capitalized expenses related to the
refinancing transactions of approximately $5.5 million, including legal and
other professional fees related to the Credit Agreement, which are included in
the Company's Other Long-term Assets on the Consolidated Balance Sheets. The
Company will amortize these costs over the term of the Revolving Credit Facility
and the Term Loan B agreements, for three and five years, respectively, and
include them in interest expense.
All obligations under the Credit Agreement are fully and unconditionally
guaranteed, on a senior secured basis, jointly and severally by all of the
Company's present and future domestic and material foreign subsidiaries (the
"Subsidiary Guarantors"). The financial statements of the Subsidiary Guarantors
have not been presented as all subsidiaries, except for certain minor foreign
subsidiaries, have provided guarantees and the parent company does not have any
significant operations or assets, separate from its investment in subsidiaries.
Any non-guarantor subsidiaries are minor individually and in the aggregate to
the Company's consolidated financial statements.
The Credit Agreement contains financial and other restrictive covenants,
including, without limitation, those restricting additional indebtedness, lien
creation, dividend payments, asset sales and stock offerings, and those
requiring a minimum net worth, maximum leverage and minimum fixed charge
coverage, each as defined in the Credit Agreement. The Company was in compliance
with all applicable covenants as of December 31, 2003.
Under the $175 million Credit Agreement, the Company has certain reporting
requirements for the submission of its financial statements to the Lenders, as
defined in the Credit Agreement. On April 30, 2004, the Company was granted an
extension of the May 15, 2004, submission deadline for its results for the
period ended March 31, 2004. The Company has until the extended deadline of May
28, 2004, to submit its first quarter 2004 financial statements to the Lenders.
The initial term of the Revolving Credit Facility is three years. The
Company and the Lender can mutually agree to extend this term by up to two
years. The Company intends to use the Revolving Credit Facility, as needed, for
future investments in its operations, including capital expenditures, strategic
acquisitions, to secure its letters of credit, as needed, and other general
corporate purposes. The Company has not incurred any borrowings under the
Revolving Credit Facility as of December 31, 2003.
The Company's policy is to amortize debt issuance costs using the
straight-line method over the life of the debt agreement. Amortization expense
related to debt issuance costs on the Notes, the 2001 Credit Facility and the
Credit Agreement for the years ended 2003, 2002, and 2001 were $1.5 million,
$1.4 million and $1.3 million, respectively.
F-25
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt are as follows (in thousands):
2004........................................................ $ 12,500
2005........................................................ 14,063
2006........................................................ 18,750
2007........................................................ 29,687
2008........................................................ 46,875
--------
$121,875
========
The Company's capital leases consisted principally of leases for equipment.
As of December 31, 2002, the net book value of equipment subject to capital
leases totaled $0.01 million.
11. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, which expire at various dates through 2011. Rent expense was $14.4
million, $14.8 million and $14.8 million for the years ended December 31, 2003,
2002 and 2001, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
2004........................................................ $12,635
2005........................................................ 8,682
2006........................................................ 5,263
2007........................................................ 3,450
2008........................................................ 2,197
Thereafter.................................................. 3,308
-------
$35,535
=======
12. LEGAL MATTERS
PENDING LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not resulted in legal
action. Within the Company's industry, federal and state civil and criminal laws
govern medical billing and collection activities. These laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from federal and state healthcare payer programs.
The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters; however, there can be no
assurance that such matters or any future legal matters will not have an adverse
effect on the Company. Amounts of awards or losses, if any, in pending legal
matters have not been reflected in the financial statements unless probable and
reasonably estimable.
SETTLED LEGAL MATTERS
In February 2002, the Company settled claims for alleged breach of contract
arising out of a 1997 contract for billing services provided by the Physician
Services division to a former client. The Company and its insurance carrier at
the time, Certain Underwriters at Lloyd's of London (collectively "Lloyd's"),
each paid the plaintiff $2.0 million in cash in exchange for a release of all
claims asserted against the
F-26
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company. Under the terms of its insurance policy with Lloyd's, the Company is
seeking reimbursement from Lloyd's for the $2.0 million it paid in this
settlement.
On May 30, 2002, the Company received a letter from Lloyd's purporting to
rescind various managed healthcare professional liability, or errors and
omissions ("E&O") and directors and officers and company reimbursement ("D&O")
insurance policies (collectively the "Policies") issued to the Company by
Lloyd's. The E&O policies were for the term of December 31, 1998, through June
30, 2002, and the D&O policies were for the term of July 1, 2000, through June
30, 2002. The purported rescission was based on allegations that the Company had
failed to advise Lloyd's about the existence of several lawsuits that were
alleged to be related to the risk covered under the Policies.
On May 31, 2002, Lloyd's filed a lawsuit in the Circuit Court for Kent
County, Michigan, against the Company seeking rescission of the E&O and D&O
policies based on the allegations in its letter, dated May 30, 2002, or a
declaration that coverage is unavailable for the claim related to the February
2002 settlement (discussed above) under the policies issued by Lloyd's. Lloyd's
also claimed restitution of the $2.0 million paid by Lloyd's on behalf of the
Company in that settlement. On June 5, 2002, the Company filed a lawsuit in the
Superior Court of the State of California for the County of Los Angeles against
Lloyd's seeking damages for breach of contract and breach of obligations of good
faith and fair dealing, including punitive damages. The Company also seeks a
declaratory judgment to enforce the E&O and D&O policies according to their
terms.
The lawsuit filed by Lloyd's was dismissed during December 2002 with the
Michigan court citing California as a more suitable forum in which to hear the
litigation. During June 2003, the California Superior Court ordered the Company
and Lloyd's to engage in nonbinding mediation to be completed by October 30,
2003.
The Company's insurance coverage for both the E&O and D&O policies was
scheduled to be renewed as of June 30, 2002, and the Company was in the process
of actively pursuing new coverage with insurance carriers, including Lloyd's,
when the attempted rescission notice was received from Lloyd's. Due to the
attempted rescission, the Company expedited its insurance proposal process, and
in mid-June 2002, the Company secured insurance coverage with a policy period of
12 months. The Company experienced a significant, above-market increase in
insurance premiums and deductibles with its June 2002 policies as a result of
the actions of Lloyd's and is seeking reimbursement for a portion of the
increased premium costs and increased deductibles in its lawsuit against
Lloyd's. During June 2003, the Company secured new insurance policies in the
ordinary course of business, at substantially reduced premiums compared to the
previous twelve-month policies. For the years 2003 and 2002, the Company
incurred approximately $2.8 million and $3.0 million, respectively, in expenses
related to its litigation with Lloyd's and increased insurance premiums. These
costs are reflected in the Company's Corporate segment. In the Company's
Consolidated Statements of Operations, these costs are included in Other
operating expenses.
On May 10, 2004, the Company reached a $20 million settlement with Lloyd's.
The settlement entails a $20 million cash payment that is payable by Lloyd's 60
days from the settlement date or by July 9, 2004. Lloyd's will, at their
expense, defend, settle or otherwise resolve the two remaining pending claims
under the E&O policies. (There were no D&O claims against the Company under the
Lloyd's policies.) In exchange, Per-Se will provide Lloyd's with a full release
of all E&O and D&O policies. The California Superior Court will retain
jurisdiction to enforce any aspect of the settlement agreement.
During the course of the litigation, the Company was required to fund the
legal costs and any litigation settlements related to E&O claims covered by the
Lloyd's E&O policies. At December 31, 2003, the Company's receivable from
Lloyd's was $17.4 million associated with legal and settlement costs in excess
of the Lloyd's E&O deductible. This $17.4 million balance includes $10.6 million
that was paid during 2002 and 2003, and additional obligations to be paid of
approximately $6.8 million. The additional
F-27
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligations of approximately $6.8 million have been paid or are scheduled to be
paid as follows: $2.0 million was paid in February 2004, an additional $0.6
million will be paid during the first half of 2004, $1.1 million will be paid in
January 2005 and $3.1 million will be paid upon a favorable outcome with
Lloyd's. As of the settlement date, the Company had an $18.3 million receivable
from Lloyd's, of which approximately $5 million has not been paid. The Company
expects to record a gain of approximately $1.5 million on settlement when the
cash is received.
13. STOCKHOLDERS' RIGHTS PLAN
On January 21, 1999, the Board approved a stockholders' rights plan (the
"Rights Plan"). Pursuant to the Rights Plan, the Company declared a dividend of
one right for each outstanding share of Common Stock to stockholders of record
at the close of business on February 16, 1999. Each right entitles the
registered holder to purchase from the Company a unit (a "Unit") consisting of
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
without par value, at a purchase price of $75 per Unit.
Initially, the rights are deemed to be attached to certificates
representing all outstanding shares of Common Stock, and they are not
represented by separate rights certificates. Subject to certain exceptions
specified in the Rights Plan, the rights will separate from the Common Stock and
become exercisable upon the earlier to occur of (i) 10 business days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) 10 business days following the commencement of
a tender offer for the Common Stock.
In the event that a person becomes an Acquiring Person, except pursuant to
an offer for all outstanding shares of Common Stock that the independent
directors of the Company determine to be fair and otherwise in the best
interests of the Company and its stockholders (after receiving advice from one
or more investment banking firms), each holder of a right will thereafter have
the right to receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value equal to two
times the exercise price of the right (i.e., $150 per Unit).
Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the rights become
exercisable for Common Stock (or other consideration) of the Company, or for
common stock of the acquiring company, or in the event of the redemption of the
rights as set forth above. As of December 31, 2003 and 2002, no rights have
become exercisable under this plan.
On May 4, 2000, the Company amended the Rights Plan to provide that the
meaning of the term "Acquiring Person" shall not include Basil P. Regan and
Regan Partners, L.P. (collectively, "Regan Fund Management"), so long as Regan
Fund Management does not become the beneficial owner of 20% or more of the
outstanding shares of Common Stock. Effective March 6, 2002, the Company amended
the Rights Plan to rescind the May 4, 2000, amendment, thereby making Regan Fund
Management subject to the 15% beneficial ownership threshold described above. On
March 10, 2003, the Company amended the Rights Plan to provide that the term
"Acquiring Person" shall not include ValueAct Capital Partners, L.P. ("ValueAct
Partners"), ValueAct Capital Partners II, L.P. ("ValueAct Partners II"),
ValueAct Capital International, Ltd. ("ValueAct International"), VA Partners,
L.L.C. ("VA Partners"), Jeffrey W. Ubben, George F. Hamel, Jr., and Peter H.
Kamin (ValueAct Partners, ValueAct Partners II, ValueAct International, VA
Partners and Messrs. Ubben, Hamel and Kamin, and their affiliates, collectively
"ValueAct"), so long as ValueAct does not become the Beneficial Owner of 20% or
more of the then
F-28
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding shares of Common Stock. As of December 31, 2003, ValueAct Partners
was the beneficial owner of approximately 17.1% of the outstanding shares of
Common Stock.
14. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies and a Non-Qualified Stock Option Plan for Non-Executive Employees.
Options expire ten to eleven years after the date of grant and generally vest
over a three-to-five year period. The total number of options available for
future grant under these stock option plans was approximately 1.7 million at
December 31, 2003.
The Company also has a Non-Qualified Non-Employee Director Stock Option
Plan (the "Director Plan") for non-employees who serve on the Company's Board of
Directors. The Director Plan provides for an initial grant of 10,000 options at
a strike price equal to the average of the fair market values for the five
trading days prior to the date of the grant. Additionally, each non-employee
director receives an annual grant of 10,000 options at each subsequent annual
meeting in which the non-employee director is a member of the Board of
Directors. All options granted under the Director Plan originally vested over a
five-year period and expired eleven years from the date of grant. On April 1,
1999, the Director Plan was amended so that all future options granted under the
Director Plan fully vest as of the date of grant but are not exercisable until
one year after the date of grant. As of December 31, 2003, the Company had
228,543 options available for future grant under this plan.
The Company's Senior Executive Non-Qualified Stock Option Plan permitted
certain former Company executive officers to purchase shares of the Company's
Common Stock. All options under this plan expired on January 16, 2001.
In June of 1999, in connection with the settlement with the former
shareholders of MMS, the Company issued warrants to purchase 166,667 shares of
Common Stock. These warrants are currently exercisable at an exercise price of
$15.94 per share and will expire on June 25, 2004. The Company has reserved
166,667 shares for future issuance for these warrants outstanding.
Activity related to all stock option plans is summarized as follows (shares
in thousands):
2003 2002 2001
-------------------------- ------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------ ---------------- ------- ----------------
Options outstanding as
of January 1........ 7,319 $ 8.36 6,934 $8.07 4,449 $10.90
Granted............... 685 11.66 890 9.97 4,250 6.77
Exercised............. (1,159) 6.87 (194) 5.53 (62) 4.80
Canceled.............. (210) 8.84 (311) 8.35 (1,703) 11.73
------- ------ -------
Options outstanding as
of December 31...... 6,635 $ 8.94 7,319 $8.36 6,934 $ 8.07
======= ====== =======
Options exercisable as
of December 31...... 3,838 $ 9.31 3,057 $9.76 1,831 $12.00
======= ====== =======
Weighted-average fair
value of options
granted during the
year................ $ 5.25 $ 4.44 $ 3.10
======= ====== =======
F-29
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2003 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2003 LIFE PRICE 2003 PRICE
------------------------ -------------- ----------- --------- -------------- ---------
$2.25 to $6.00............. 1,455 7.99 $ 5.32 922 $ 4.93
$6.02 to $9.06............. 3,566 8.04 7.57 1,865 7.50
$10.00 to $13.05........... 460 7.80 11.64 281 11.62
$13.51 to $19.96........... 1,012 6.14 15.31 628 16.26
$21.19 to $22.31........... 81 4.15 21.30 81 21.30
$26.10 to $29.34........... 49 4.82 28.80 49 28.80
$30.00 to $135.00.......... 12 2.15 45.97 12 45.97
----- -----
$2.25 to $135.00........... 6,635 7.64 8.94 3,838 9.31
===== =====
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted to employees with an exercise price equal to the quoted market
price of the Common Stock on the date of grant and that vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the Company estimates the fair value of each option grant as of the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
2003 2002 2001
----- ----- -----
Expected life (years)....................................... 5.0 4.7 4.8
Risk-free interest rate..................................... 3.00% 3.55% 3.85%
Dividend rate............................................... 0.00% 0.00% 0.00%
Expected volatility......................................... 53.05% 54.65% 64.96%
Per-Se has never paid cash dividends on its Common Stock. The Credit
Agreement entered into on September 11, 2003, contains restrictions on the
Company's ability to declare or pay cash dividends on its Common Stock.
15. DEFERRED STOCK UNIT PLAN
Effective October 1, 2001, and approved by the stockholders at the annual
meeting held on May 2, 2002, the Board of Directors adopted the Per-Se
Technologies, Inc. Deferred Stock Unit Plan (the "Plan"). The purpose of the
Plan is to further align the interests of the Company's non-employee directors
and a select group of key employees of the Company (and its affiliates) with the
interests of stockholders by encouraging additional ownership of the Common
Stock. The Plan also provides the participants with an opportunity to defer
taxation of income in consideration of the valuable services that they provide
to the Company. Non-employee directors of the Company are automatically eligible
to participate in the Plan. The Compensation Committee of the Board of Directors
may select key employees of the Company from time to time as eligible
participants. Currently, five non-employee directors and six executives
(including two employee directors) are eligible to participate in the Plan.
Pursuant to the Plan, a non-employee director may elect to defer up to 100%
of his Board and committee meeting fees and his annual retainer each year.
Eligible employees may elect each year to defer
F-30
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
up to 50% of their annual incentive bonus and receive an enhancement bonus equal
to $0.25 for each dollar of compensation deferred. The Compensation Committee
may also from time to time in its sole discretion designate such other
enhancement bonus contributions as it deems appropriate. The cash amount of such
deferrals and, in the case of employee participants, the enhancement bonuses
will be converted to stock units, by dividing the amount to be deferred, plus
any enhancement bonus, by the fair market value of the Common Stock on the date
the amounts are credited to the participant's account.
Participants are always fully vested in the stock units converted from
deferrals of compensation. However, stock units that are converted from an
enhancement bonus credited to an employee participant, and any related dividend
equivalent stock units, will vest at the rate of 20% each year over a period of
five years from the date of deferral of the related compensation. If a
participant's employment is terminated for "cause" (as defined in the Plan) or
if he or she resigns without "good reason" (as defined in the Plan) before the
enhancement bonus stock units are vested, he or she will forfeit any such
unvested stock units.
For the years ended December 31, 2003 and 2002, the Plan purchased a total
of 31,842 shares and 89,857 shares, respectively, of the Company's Common Stock
at a total cost of approximately $0.3 million and $1.0 million, respectively. In
accordance with the FASB Emerging Task Force ("EITF") Issue 97-14, Accounting
for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested, these amounts and the Company's obligation are reflected as
treasury stock and deferred compensation obligation, respectively, in the
financial statements.
16. INCOME TAXES
Income tax expense attributable to continuing operations comprises the
following:
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Current:
Federal........................................ $ (701) $ -- $ --
State.......................................... 728 800 343
Deferred:
Federal........................................ 6,624 3,260 1,166
State.......................................... 10,869 (3,740) 146
Valuation allowance.............................. (17,493) 480 (1,312)
-------- ------- -------
Income tax expense attributable to continuing
operations..................................... $ 27 $ 800 $ 343
======== ======= =======
In 2003, the Company recognized the benefit of a federal income tax refund
of approximately $0.8 million related to the gain on the sale of Healthcare
Recoveries, Inc. ("HRI"). A tax law revision identified by the Company permitted
the Company to file for an automatic refund. The Company expects to receive the
refund in late 2004.
F-31
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to income (loss) before income taxes and income tax expense is as
follows:
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Income tax expense (benefit) at federal statutory
rate........................................... $ 5,315 $ 3,764 $(2,926)
State taxes, net of federal benefit.............. 480 528 226
Change in tax rates.............................. 10,869 (4,236) --
Nondeductible goodwill amortization.............. -- -- 208
Valuation allowance.............................. (17,493) 480 (1,312)
Other............................................ 856 264 4,147
-------- ------- -------
$ 27 $ 800 $ 343
======== ======= =======
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes at December 31, 2003 and 2002,
are as follows:
2003 2002
--------- -------------
(AS RESTATED)
(IN THOUSANDS)
CURRENT:
Accounts receivable, unbilled............................... $ (624) $ (823)
Accrued expenses............................................ 6,056 6,797
Valuation allowance......................................... (7,125) (7,301)
Other....................................................... 1,693 1,327
--------- ---------
$ -- $ --
========= =========
NONCURRENT:
Net operating loss carryforwards............................ $ 156,792 $ 163,444
Valuation allowance......................................... (178,430) (205,047)
Depreciation and amortization............................... 20,266 39,590
Other....................................................... 1,372 2,013
--------- ---------
$ -- $ --
========= =========
At December 31, 2003, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $406.9 million,
which consist of $344.8 million of consolidated NOLs and $62.1 million of
separate return limitation year NOLs. The NOLs will expire at various dates
between 2004 and 2022 as follows:
AMOUNTS
EXPIRING
-------------
(IN MILLIONS)
between 2004 and 2006....................................... $ 31.7
between 2007 and 2010....................................... 81.7
between 2011 and 2014....................................... 142.7
between 2015 and 2022....................................... 150.8
------
$406.9
======
F-32
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2003, the Company has a net deferred tax asset of $185.5
million, which is offset by a valuation allowance of $185.5 million. Realization
of the net deferred tax asset is dependent upon the Company generating
sufficient taxable income prior to the expiration of the NOLs. If, during future
periods, management believes the Company will generate sufficient taxable income
to realize the net deferred tax asset, the Company will adjust this valuation
reserve accordingly.
17. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans. The Company matches a percentage of the employee contributions. The
Company's contribution expense was $1.8 million, $1.6 million and $1.4 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
18. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities are as follows:
2003 2002 2001
------- ------- -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Additions to capital lease obligations................ $ -- $ -- $ 165
Liabilities assumed in acquisitions................... -- -- 311
KHS purchase price adjustment......................... -- (5,789) --
Common Stock issued in acquisition.................... -- -- 35
Cash paid for:
Interest.............................................. 18,375 16,829 16,731
Extinguishment of debt................................ 5,412 -- --
Income taxes.......................................... 565 807 189
19. SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its two
operating divisions: Physician Services and Hospital Services.
On July 1, 2003, the Company realigned its operations to better focus on
its core healthcare constituents -- physician practices and hospitals. The
Company created the Hospital Services division by combining the offerings of the
former e-Health Solutions and Application Software divisions, with the exception
of the Company's ASP-based physician practice management ("PPM") solution, which
was transferred to the Physician Services division.
The Physician Services division provides Connective Healthcare solutions
that manage the revenue cycle for physician groups. The division is the largest
provider of business management outsourced services that supplant all or most of
the administrative functions of a physician group. The target market is
primarily hospital-affiliated physician groups in the specialties of radiology,
anesthesiology, emergency medicine and pathology as well as physician groups
practicing in the academic setting and other large physician groups. The
division recognizes revenue primarily on a contingency fee basis, which aligns
the division's interests with the interests of the physician groups it services.
The outsourced services business recognizes a percentage of the physician
group's revenue for the services performed. Since this is an outsourced service
delivered on the Company's proprietary technology, license fees or maintenance
fees are
F-33
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not required to be paid by the division's hospital-affiliated physician groups.
The division also sells a PPM solution that is delivered via an ASP model. The
PPM solution collects a monthly usage fee from the physician practices using the
system. The division's revenue model is 100% recurring in nature due to the
transaction-based nature of its fee revenue in the outsourced services business
and the monthly usage fee in the PPM business. The business of the Physician
Services division is conducted by PST Services, Inc. a Georgia corporation d/b/a
"Per-Se Technologies," which is a wholly owned subsidiary of the Company.
The Hospital Services division provides Connective Healthcare solutions
that increase revenue and decrease expenses for hospitals, with a focus on
revenue cycle management and resource management. The division's revenue cycle
management solutions enable a hospital's central billing office to improve its
revenue cycle. The division has one of the largest electronic clearinghouses in
the medical industry, which provides an important infrastructure to support its
revenue cycle offering. The division also provides resource management solutions
that enable hospitals to efficiently manage resources, such as personnel and the
operating room, to reduce costs and improve their bottom line. The division
primarily recognizes revenue on a per-transaction basis for its revenue cycle
management solutions and primarily recognizes revenue on a
percentage-of-completion basis or upon software shipment for sales of its
resource management software solutions. Approximately 88% of the division's
revenue is recurring due to its transaction-based business and the maintenance
revenue from its substantial installed base for the resource management software
solutions. The business of the Hospital Services division is conducted by the
following wholly owned subsidiaries of the Company: Per-Se Transaction Services,
Inc., an Ohio corporation; Patient Account Management Services, Inc., an Ohio
corporation; PST Products, LLC, a California limited liability company; and
Knowledgeable Healthcare Solutions, Inc., an Alabama corporation. All of these
subsidiaries do business under the name "Per-Se Technologies."
The Company evaluates each segment's performance based on its segment
operating profit. Segment operating profit is revenue less segment operating
expenses, which include salaries and wages expenses, other operating expenses,
restructuring expenses, depreciation and amortization.
The Hospital Services segment revenue includes intersegment revenue for
services provided to the Physician Services segment, which are shown as
Eliminations to reconcile to total consolidated revenue.
The Company's segment information from continuing operations is as follows:
AS OF DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Revenue:
Physician Services............................. $251,251 $245,383 $236,627
Hospital Services.............................. 97,240 92,854 80,942
Eliminations................................... (13,322) (12,673) (11,747)
-------- -------- --------
$335,169 $325,564 $305,822
======== ======== ========
Segment operating expenses:
Physician Services............................. $221,895 $219,519 $226,101
Hospital Services.............................. 74,671 74,014 67,531
Corporate...................................... 15,417 14,816 12,980
Eliminations................................... (13,322) (12,673) (11,747)
-------- -------- --------
$298,661 $295,676 $294,865
======== ======== ========
F-34
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31,
----------------------------------------
2003 2002 2001
-------- ------------- -------------
(AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
Segment operating profit:
Physician Services............................. $ 29,356 $ 25,864 $ 10,526
Hospital Services.............................. 22,569 18,840 13,411
Corporate...................................... (15,417) (14,816) (12,980)
-------- -------- --------
$ 36,508 $ 29,888 $ 10,957
======== ======== ========
Interest expense................................. $ 14,646 $ 18,069 $ 18,009
======== ======== ========
Interest income.................................. $ (297) $ (471) $ (1,121)
======== ======== ========
Loss on extinguishment of debt................... $ 6,255 $ -- $ --
======== ======== ========
Income (loss) before income taxes................ $ 15,904 $ 12,290 $ (5,931)
======== ======== ========
Depreciation and amortization:
Physician Services............................. $ 10,475 $ 12,114 $ 13,249
Hospital Services.............................. 5,270 5,694 7,084
Corporate...................................... 764 936 1,119
-------- -------- --------
$ 16,509 $ 18,744 $ 21,452
======== ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services............................. $ 5,467 $ 5,718 $ 3,349
Hospital Services.............................. 4,655 3,809 3,385
Corporate...................................... 221 369 416
-------- -------- --------
$ 10,343 $ 9,896 $ 7,150
======== ======== ========
AS OF DECEMBER 31,
------------------------
2003 2002
-------- -------------
(AS RESTATED)
(IN THOUSANDS)
Identifiable Assets:
Physician Services(1)..................................... $ 63,222 $ 64,524
Hospital Services(1)...................................... 58,021 56,362
Corporate................................................. 50,281 62,666
Discontinued operations................................... 129 26,079
-------- --------
$171,653 $209,631
======== ========
---------------
(1) Identifiable assets in the Physician Services and Hospital Services
divisions include approximately $8,936 and $23,613 of goodwill,
respectively, for all periods presented.
F-35
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -----------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003
Revenue........................... $81,998 $85,456 $84,523 $83,192
Income (loss) from continuing
operations...................... 3,121 5,013 (120) 7,863
Discontinued operations, net of
tax............................. (1,284) (1,932) 626 (1,298)
Net income........................ 1,837 3,081 506 6,565
Net income (loss) per common
share -- basic from continuing
operations...................... 0.10 0.16 (0.00) 0.25
Discontinued operations, net of
tax, per common share........ (0.04) (0.06) 0.02 (0.04)
Net income per common share --
basic........................ 0.06 0.10 0.02 0.21
Shares used to compute net
income per common
share -- basic............... 30,172 30,238 30,677 31,276
Net income per common share --
diluted from continuing
operations...................... 0.10 0.16 (0.00) 0.23
Discontinued operations, net of
tax, per common share........ (0.04) (0.06) 0.02 (0.04)
Net income per common share --
diluted...................... 0.06 0.10 0.02 0.19
Shares used to compute net
income per common
share -- diluted............. 31,037 31,866 30,677 34,039
F-36
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002
Revenue.......................... $78,996 $81,607 $83,048 $81,913
Income from continuing
operations..................... 2,725 2,120 2,820 3,825
Discontinued operations, net of
tax............................ (933) (274) (1,138) (156)
Net income....................... 1,792 1,846 1,682 3,669
Net income per common share --
basic from continuing
operations..................... 0.09 0.07 0.09 0.13
Discontinued operations, net of
tax, per common share....... (0.03) (0.01) (0.04) 0.00
Net income per common share --
basic....................... 0.06 0.06 0.05 0.13
Shares used to compute net
income per common
share -- basic.............. 29,990 30,049 30,083 30,119
Net income per common share --
diluted from continuing
operations..................... 0.08 0.07 0.09 0.12
Discontinued operations, net of
tax, per common share....... (0.03) (0.01) (0.04) (0.00)
Net income per common share --
diluted..................... 0.05 0.06 0.05 0.12
Shares used to compute net
income per common
share -- diluted............ 32,527 32,491 31,258 31,585
21. SUBSEQUENT EVENTS
The Company's principal executive office is leased and is located in
Atlanta, Georgia. The lease for that office expires in February 2005. Effective
July 2004, the Company plans to relocate its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable operating lease
for that office space in February 2004 that will expire in June 2014. The new
landlord will assume the payments for the lease of the Company's current office
space. Future minimum lease payments through 2014 under the new lease are $13.4
million. The Company intends to meet this and its other contractual obligations
with cash from continuing operations.
22. COST OF ADDITIONAL PROCEDURES (UNAUDITED)
The Company expects to record costs totaling approximately $6 million to $7
million during 2004 for the additional procedures discussed in Note 2.
Approximately $4 million of costs associated with the additional procedures were
recorded for the three months ended March 31, 2004 with the remainder to be
recorded during the three months ended June 30, 2004.
F-37
PER-SE TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ---------- ---------- -------- ---------- -----------
YEAR ENDED DECEMBER 31, 2003
Allowance for doubtful accounts......... $4,288 $1,159 -- $ (652) $4,795
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts (As
Restated)............................ $4,759 $1,489 -- $(1,960) $4,288
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts (As
Restated)............................ $8,900 $2,712 -- $(6,853) $4,759
F-38