UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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
incorporation or organization) Identification No.)
1145 SANCTUARY PARKWAY, SUITE 200 30004
ALPHARETTA, GEORGIA (Zip code)
(Address of principal executive offices)
(770) 237-4300
(Registrant's telephone number, including area code)
FORMER ADDRESS:
2840 MT. WILKINSON PARKWAY
ATLANTA, GEORGIA 30339
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS SHARES OUTSTANDING AT JULY 28, 2004
-------------- -----------------------------------
Common Stock $0.01 Par Value 30,062,465 shares
Non-voting Common Stock $0.01 Par Value 0 Shares
EXPLANATORY NOTE
Pursuant to Rule 12b-15 of the Securities Exchange Act of 1934, as amended,
Per-Se Technologies, Inc. hereby amends its Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004 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 and
March 7, 2005. The revisions contained in this Form 10-Q/A do not include the
restatement of any financial information previously reported in our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
For convenience and ease of reference, we are filing the amended Quarterly
Report in its entirety. Unless otherwise stated, all information contained in
this amended Quarterly Report is as of August 9, 2004, the filing date of our
original Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. For
more current information, readers should refer to the reports and other
documents we have filed with or furnished to the Commission subsequent to August
9, 2004.
PER-SE TECHNOLOGIES, INC.
FORM 10-Q/A
FOR THE FISCAL QUARTER ENDED JUNE 30, 2004
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (Unaudited)
and December 31, 2003....................................... 2
Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and 2003 (Unaudited)............. 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 (Unaudited).................... 4
Notes to Consolidated Financial Statements (Unaudited)...... 5
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 15
Quantitative and Qualitative Disclosures About Market
Item 3. Risk........................................................ 29
Item 4. Controls and Procedures..................................... 29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities and Use of Proceeds................... 31
Item 4. Submission of Matters to a Vote of Security Holders......... 31
Item 6. Exhibits and Reports on Form 8-K............................ 32
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,698 $ 25,271
Restricted cash........................................... 63 66
--------- ---------
Total cash and cash equivalents........................ 9,761 25,337
Accounts receivable, billed (less allowances of $3,399 and
$4,267 as of June 30, 2004, and December 31, 2003,
respectively).......................................... 51,485 46,335
Accounts receivable, unbilled (less allowances of $528 as
of June 30, 2004, and December 31, 2003)............... 1,294 1,613
Lloyd's receivable........................................ 14,650 17,405
Other..................................................... 5,604 6,183
--------- ---------
Total current assets................................... 82,794 96,873
Property and equipment, net of accumulated depreciation..... 15,448 16,434
Goodwill, net of accumulated amortization................... 32,549 32,549
Other intangible assets, net of accumulated amortization.... 20,543 19,787
Other....................................................... 5,415 5,881
Assets of discontinued operations, net...................... -- 129
--------- ---------
Total assets........................................... $ 156,749 $ 171,653
========= =========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,388 $ 6,587
Accrued compensation...................................... 18,764 18,102
Accrued expenses.......................................... 16,433 19,037
Current portion of long-term debt......................... -- 12,500
--------- ---------
39,585 56,226
Deferred revenue.......................................... 22,093 20,334
--------- ---------
Total current liabilities.............................. 61,678 76,560
Long-term debt.............................................. 125,000 109,375
Other obligations........................................... 3,993 2,908
Liabilities of discontinued operations...................... -- 422
--------- ---------
Total liabilities...................................... 190,671 189,265
--------- ---------
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
32,030 and 31,322 issued and outstanding as of June 30,
2004, and December 31, 2003, respectively.............. 320 313
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 791,563 786,297
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (801,855) (805,286)
Treasury stock at cost, 2,120 and 122 as of June 30, 2004,
and December 31, 2003, respectively.................... (26,417) (1,303)
Deferred stock unit plan obligation....................... 1,418 1,303
Accumulated other comprehensive loss...................... (446) (431)
--------- ---------
Total stockholders' deficit............................ (33,922) (17,612)
--------- ---------
Total liabilities and stockholders' deficit............ $ 156,749 $ 171,653
========= =========
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................................................... $88,141 $85,456 $172,742 $167,454
------- ------- -------- --------
Salaries and wages........................................ 51,515 48,622 101,199 96,235
Other operating expenses.................................. 23,949 23,126 47,150 45,220
Depreciation.............................................. 1,989 2,367 4,090 4,865
Amortization.............................................. 1,854 1,831 3,647 3,624
Other expenses............................................ 2,538 -- 6,499 --
------- ------- -------- --------
Operating income........................................ 6,296 9,510 10,157 17,510
Interest expense.......................................... 1,999 4,179 4,073 8,661
Interest income........................................... (192) (58) (244) (166)
Loss on extinguishment of debt............................ 5,896 -- 5,896 221
------- ------- -------- --------
(Loss) income before income taxes....................... (1,407) 5,389 432 8,794
Income tax (benefit) expense.............................. (20) 376 212 660
------- ------- -------- --------
(Loss) income from continuing operations................ (1,387) 5,013 220 8,134
------- ------- -------- --------
Discontinued operations (see Note 8)
Loss from discontinued operations, net of tax --
Patient1........................................... -- (599) (18) (1,108)
Gain on sale of Patient1, net of tax.................. 3,821 -- 3,755 --
Loss from discontinued operations, net of tax --
Business1.......................................... -- (1,110) (303) (1,874)
Loss on sale of Business1, net of tax................. -- -- (130) --
Loss from discontinued operations, net of tax --
Other.............................................. (30) (223) (93) (234)
------- ------- -------- --------
3,791 (1,932) 3,211 (3,216)
------- ------- -------- --------
Net income......................................... $ 2,404 $ 3,081 $ 3,431 $ 4,918
======= ======= ======== ========
Net income per common share -- basic:
(Loss) income from continuing operations.............. $ (0.04) $ 0.16 $ -- $ 0.26
Loss from discontinued operations, net of tax --
Patient1........................................... -- (0.02) -- (0.04)
Gain on sale of Patient1, net of tax.................. 0.12 -- 0.12 --
Loss from discontinued operations, net of tax --
Business1.......................................... -- (0.04) (0.01) (0.06)
Loss on sale of Business1, net of tax................. -- -- -- --
Loss from discontinued operations, net of tax --
Other.............................................. -- -- -- --
------- ------- -------- --------
Net income per common share -- basic............... $ 0.08 $ 0.10 $ 0.11 $ 0.16
======= ======= ======== ========
Weighted average shares used in computing basic earnings
per share............................................... 31,530 30,238 31,530 30,205
======= ======= ======== ========
Net income per common share -- diluted:
(Loss) income from continuing operations.............. $ (0.04) $ 0.16 $ -- $ 0.26
Loss from discontinued operations, net of tax --
Patient1........................................... -- (0.02) -- (0.04)
Gain on sale of Patient1, net of tax.................. 0.12 -- 0.11 --
Loss from discontinued operations, net of tax --
Business1.......................................... -- (0.04) (0.01) (0.06)
Loss on sale of Business1, net of tax................. -- -- -- --
Loss from discontinued operations, net of tax --
Other.............................................. -- -- -- --
------- ------- -------- --------
Net income per common share -- diluted............. $ 0.08 $ 0.10 $ 0.10 $ 0.16
======= ======= ======== ========
Weighted average shares used in computing diluted earnings
per share............................................... 31,530 31,866 33,831 31,452
======= ======= ======== ========
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2004 2003
--------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 3,431 $ 4,918
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 7,737 8,489
Loss from discontinued operations......................... 544 3,216
Gain on sale of discontinued operations and other......... (3,755) --
Amortization of deferred financing costs.................. 665 645
Loss on extinguishment of debt............................ 5,896 221
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ -- (143)
Accounts receivable, billed............................ (5,150) (4,931)
Accounts receivable, unbilled.......................... 319 682
Accounts payable....................................... (2,217) 1,592
Accrued compensation................................... 649 (2,229)
Accrued expenses....................................... 933 (1,541)
Deferred revenue....................................... 1,759 611
Other, net............................................. (345) (1,446)
--------- --------
Net cash provided by continuing operations........... 10,466 10,084
Net cash used for discontinued operations............ (512) (5,593)
--------- --------
Net cash provided by operating activities............ 9,954 4,491
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (3,000) (3,385)
Software development costs.................................. (2,529) (1,697)
Net proceeds from sale of Patient1 and Business1, net of
tax....................................................... 3,625 --
Proceeds from sale of property and equipment................ 6 1
Acquisition, net of cash acquired........................... (1,141) --
Other....................................................... (41) (38)
--------- --------
Net cash used for continuing operations.............. (3,080) (5,119)
Net cash used for discontinued operations............ -- (1,865)
--------- --------
Net cash used for investing activities............... (3,080) (6,984)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... 125,000 --
Treasury stock purchase..................................... (24,999) --
Proceeds from the exercise of stock options................. 5,258 1,139
Debt issuance costs......................................... (5,723) --
Payments of debt............................................ (121,875) (15,020)
Other....................................................... (108) 152
--------- --------
Net cash used for financing activities............... (22,447) (13,729)
--------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (15,573) (16,222)
Balance at beginning of period.............................. 25,271 46,748
--------- --------
Balance at end of period.................................... $ 9,698 $ 30,526
========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 3,494 $ 8,585
Income taxes.............................................. 194 228
See notes to consolidated financial statements.
4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements (interim
financial statements) include the accounts of Per-Se Technologies, Inc. and its
subsidiaries ("Per-Se" or the "Company"). Intercompany accounts and transactions
have been eliminated.
These interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information, the rules and regulations of the
Securities and Exchange Commission for interim financial statements and
accounting policies consistent, in all material respects, with those applied in
preparing the Company's audited consolidated financial statements included in
the Company's Annual Report on Form 10-K/A for the fiscal year ended December
31, 2003, filed with the Securities and Exchange Commission ("SEC") on March 7,
2005 ("2003 Form 10-K/A"). These interim financial statements are unaudited but
reflect all adjustments (consisting of normal recurring adjustments) management
considers necessary for a fair presentation of the Company's financial position,
operating results and cash flows for the interim periods presented. The
information included in this report should be read in conjunction with the 2003
Form 10-K/A.
The consolidated financial statements of the Company have been presented to
reflect the former 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 effective July
28, 2003, and Business1 was sold effective January 31, 2004. Additionally, the
activity related to the Company's former 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 (refer to Note 8 for additional information).
NOTE 2 -- STOCK-BASED COMPENSATION PLANS
At June 30, 2004, the Company has four stock-based compensation plans. The
Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). No significant stock-based compensation cost is
reflected in the Company's Statements 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 and net income per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to
this stock-based compensation.
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2004 2003 2004 2003
-------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported.......................... $ 2,404 $ 3,081 $ 3,431 $ 4,918
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... $(1,037) $(1,201) $(1,971) $(2,507)
------- ------- ------- -------
Pro forma net income............................ $ 1,367 $ 1,880 $ 1,460 $ 2,411
======= ======= ======= =======
Net income per common share:
Basic -- as reported.......................... $ 0.08 $ 0.10 $ 0.11 $ 0.16
======= ======= ======= =======
Basic -- pro forma............................ $ 0.04 $ 0.06 $ 0.05 $ 0.08
======= ======= ======= =======
Diluted -- as reported........................ $ 0.08 $ 0.10 $ 0.10 $ 0.16
======= ======= ======= =======
Diluted -- pro forma.......................... $ 0.04 $ 0.06 $ 0.04 $ 0.08
======= ======= ======= =======
NOTE 3 -- ADDITIONAL PROCEDURES
As a result of allegations of improprieties made during 2003 and 2004, the
Company's independent auditors 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 were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit
("SAS No. 99"), which 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 Company recorded costs related to the additional procedures totaling
approximately $2.5 million and $6.5 million during the three and six months
ended June 30, 2004, respectively, and included these costs in other expenses in
the Company's Consolidated Statements of Operations. In segment reporting, these
expenses are classified in the Corporate segment.
NOTE 4 -- REVENUE RECOGNITION
The Physician Services division signed an agreement ("the Agreement") in
2004 with a customer to provide physician practice management services. Under
the Agreement, Physician Services and the customer agreed to certain performance
goals. The performance goals will be measured on an interim basis through
February 28, 2009. At each interim measurement period, Physician Services will
determine if the performance goals for that period have been achieved.
If Physician Services achieves the performance goal for an interim
measurement period, Physician Services will recognize revenue as a percentage of
the customer's net collections pursuant to its standard revenue recognition
practice. If the Physician Services division does not achieve the performance
goal for an interim measurement period, revenue will not be recognized to the
extent the goal is not achieved.
NOTE 5 -- EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
period. Diluted EPS reflects the potential dilution that could
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
occur from common shares issuable through stock options and warrants. The
following sets forth the computation of basic and diluted net income per share
for the three-and six months ended June 30, 2004, and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2004 2003 2004 2003
------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income...................................... $2,404 $3,081 $3,431 $4,918
Common shares outstanding:
Shares used in computing net income per common
share -- basic............................. 31,530 30,238 31,530 30,205
Effect of potentially dilutive stock options
and warrants............................... -- 1,628 2,301 1,247
------ ------ ------ ------
Shares used in computing net income per common
share -- diluted........................... 31,530 31,866 33,831 31,452
====== ====== ====== ======
Net income per common share:
Basic......................................... $ 0.08 $ 0.10 $ 0.11 $ 0.16
Diluted....................................... $ 0.08 $ 0.10 $ 0.10 $ 0.16
Options and warrants to purchase 7.0 million shares of Common Stock
outstanding during the three months ended June 30, 2004, 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. The
conditions required for conversion of the Company's Convertible Subordinated
Debentures (see Note 10) have not been met, therefore, the Company did not
assume conversion of the Debentures in calculating diluted EPS for the six
months ended June 30, 2004.
Options and warrants to purchase 1.7 million shares of Common Stock
outstanding during the six months ended June 30, 2004, were excluded from the
computation of diluted earnings per share because the exercise prices of the
options and warrants were greater than the average market price of the common
shares, and therefore, the effect would have been antidilutive.
Options and warrants to purchase 3.6 and 4.0 million shares of Common Stock
outstanding during the three and six months ended June 30, 2003, respectively,
were excluded from the computation of diluted earnings per share because the
exercise prices of the options and warrants were greater than the average market
price of the common shares, and therefore, the effect would have been
antidilutive.
NOTE 6 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME
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
loss. In the three and six month periods ended June 30, 2004 and 2003, the only
component of other comprehensive loss was the net foreign currency translation.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ -------------
2004 2003 2004 2003
---- ---- ---- -----
(IN THOUSANDS)
Net foreign currency translation....................... $13 $(30) $(15) $(139)
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 7 -- ACQUISITIONS
On May 28, 2004, the Company entered into a five-year contract to provide
print and mail services for a new customer. As part of the transaction, the
Company purchased substantially all of the production assets and personnel of
that customer's hospital and physician patient statement and paper claims print
and mail business for cash consideration of approximately $1.1 million. In
addition, the Company recorded acquisition liabilities of approximately $1.0
million associated with the transaction.
The Company recorded the acquisition using the purchase method of
accounting and, accordingly, has preliminarily allocated the purchase price to
the assets acquired and liabilities assumed based on their estimated fair market
value at the date of acquisition. Approximately $1.9 million of the purchase
price was allocated to a finite-lived intangible asset with a five-year life.
The remaining $0.2 million of the purchase price was allocated to tangible
assets acquired. The operating results of the acquisition are included in the
Company's Consolidated Statements of Operations from the date of acquisition in
the Hospital Services division. The Company has not yet obtained all the
information related to acquisition liabilities required to finalize the purchase
price allocation.
The pro-forma impact of this acquisition is immaterial to the financial
statements of the Company and therefore has not been presented.
NOTE 8 -- 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 allowed
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 $0.5
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 and Misys entered into binding arbitration regarding the final closing
adjustments and on May 21, 2004, the arbitrator awarded the Company
approximately $4.3 million. On June 1, 2004, the Company received payment of
approximately $4.5 million, which included interest of approximately $0.2
million. The Company recognized an additional gain on sale of approximately $3.8
million, net of taxes of approximately $0.2 million, when the cash payment was
received.
In September 2003, the Company initiated a process to sell 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 during 2003. 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. Patient1 and Business1 were formerly
reported as part of the Hospital Services division.
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Summarized operating results for the discontinued operations are as
follows:
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------
2004 2003
----------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ------ -------- --------- -------
(IN THOUSANDS)
Revenue................................................. $ -- $ -- $ -- $6,613 $ 16 $ 6,629
====== ====== ====== ====== ======= =======
Income (loss) from discontinued operations before income
taxes................................................. $ -- $ -- $ -- $ (577) $(1,110) $(1,687)
Income tax expense...................................... -- -- -- 22 -- 22
------ ------ ------ ------ ------- -------
Income (loss) from discontinued operations, net of
tax................................................... $ -- $ -- $ -- $ (599) $(1,110) $(1,709)
====== ====== ====== ====== ======= =======
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue................................................ $ -- $ 106 $ 106 $13,080 $ 170 $13,250
==== ===== ===== ======= ======= =======
Loss from discontinued operations before income
taxes................................................ $(18) $(303) $(321) $(1,066) $(1,874) $(2,940)
Income tax expense..................................... -- -- -- 42 -- 42
---- ----- ----- ------- ------- -------
Loss from discontinued operations, net of tax.......... $(18) $(303) $(321) $(1,108) $(1,874) $(2,982)
==== ===== ===== ======= ======= =======
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF
---------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
BUSINESS1 BUSINESS1
--------- ---------
(IN THOUSANDS)
Current assets.......................................... $ -- $129
Property and equipment.................................. -- --
Other long-term assets.................................. -- --
------ ----
Assets of discontinued operations..................... $ -- $129
====== ====
Current liabilities..................................... $ -- $422
Deferred revenue........................................ -- --
Other long-term liabilities............................. -- --
------ ----
Liabilities of discontinued operations................ $ -- $422
====== ====
On November 30, 1998, the Company completed the sale of its MSC business.
In 1999, the Company completed the sale of both divisions of its Impact
business.
During the six months ended June 30, 2004, and 2003, the Company incurred
expenses of approximately $0.1 million and $0.2 million, respectively, which
were primarily legal costs, associated with MSC and Impact. Pursuant to APB
Opinion 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 ("APB No. 30"), the consolidated financial
statements of the Company are presented to reflect the activity associated with
MSC and Impact as discontinued operations for all periods presented.
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9 -- 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
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). 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 covered under the errors and
omissions ("E&O") policies issued to the Company by Lloyd's. In exchange, the
Company provided Lloyd's with a full release of all E&O and directors and
officers and company reimbursement ("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 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 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 settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
receivable from Lloyd's by $3.8 million. On July 7, 2004, pursuant to the
settlement, as amended, Lloyd's paid the Company $16.2 million in cash. As of
the payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and will recognize a gain of approximately $1.5 million on the
settlement in the third quarter of 2004. The Company previously anticipated
recognizing a gain of approximately $1.7 million. The actual gain of
approximately $1.5 million reflects additional legal expenses of approximately
$0.2 million incurred prior to the payment date associated with prior E&O
claims.
NOTE 10 -- LONG-TERM DEBT
On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due 2005 (the "Notes"). 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 wrote off 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. On September 11, 2003, the Company
repurchased $143.6 million of the Notes that were tendered at the redemption
price of 102.625% of the principal amount, as required under the Indenture
governing the Notes, and accrued interest of approximately $1.0 million. The
remaining $16.4 million of the Notes were retired on
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
On September 11, 2003, the Company entered into a $175 million Credit
Agreement (the "Credit Agreement"), consisting of a $125 million Term Loan B
(the "Term Loan B") and a $50 million revolving credit facility (the "Revolving
Credit Facility"). The Company had approximately $118.8 million outstanding
under the Term Loan B as of June 30, 2004, under a LIBOR-based interest contract
bearing interest at 5.36%. The Company has had no borrowings outstanding under
the Revolving Credit Facility since its inception.
On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A of the Securities Act of
1933, as amended. The Debentures are convertible into shares of the Company's
Common Stock at an initial conversion rate of 56.0243 shares per $1,000
principal amount (a conversion price of approximately $17.85) once the Company's
Common Stock share price reaches 130% of the conversion price, or a share price
of approximately $23.20. The Debentures mature on June 30, 2024, and are
unsecured. Interest on the Debentures is payable semiannually at the rate of
3.25% per annum on June 30 and December 30 of each year, beginning on December
30, 2004. The Company may redeem the Debentures either in whole or in part
beginning July 6, 2009. The holders may require the Company to repurchase the
Debentures on June 30, 2009, 2014, and 2019 or upon a fundamental change as
defined in the indenture. The Company used the proceeds from issuance of the
Debentures, together with cash on hand, to retire the $118.8 million outstanding
under the Term Loan B as well as to repurchase, for approximately $25 million,
an aggregate of approximately 2.0 million shares of the Company's outstanding
common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. In addition, the Company
incurred expenses associated with the retirement of the Term Loan B of
approximately $5.9 million, which included the write-off of approximately $3.5
million of deferred debt issuance costs, which are included in loss on
extinguishment of debt in the Company's Consolidated Statements of Operations.
In connection with the sale of the Debentures, the Company agreed to file
with the SEC within 90 days after the original issuance of the Debentures, and
to use its commercially reasonable efforts to cause to become effective within
210 days after the original issuance of the Debentures, a shelf registration
statement with respect to the resale of the Debentures and the common stock
issuable upon conversion of the Debentures. If the Company does not fulfill
certain of its obligations under the registration rights agreement including the
timely filing and effective date of the shelf registration statement, it will be
required to pay additional interest to holders of Debentures until the shelf
registration statement is effective.
On June 30, 2004, the Company also amended the Revolving Credit Facility to
increase its capacity from $50 million to $75 million, to extend its maturity to
three years, and to lower the interest rate from LIBOR plus amounts ranging from
3.0% to 3.5% to LIBOR plus amounts ranging from 2.5% to 3.0%. The Company did
not incur any borrowings under the Revolving Credit Facility in connection with
the retirement of the Term Loan B or the share repurchase.
All obligations under the Revolving Credit Facility 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 those subsidiaries. Any non-guarantor subsidiaries are minor
individually and in the aggregate to the Company's consolidated financial
statements. There are no restrictions on the Subsidiary Guarantors that would
prohibit the transfer of funds or assets to the parent company by dividend or
loan.
The Revolving Credit Facility 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,
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
each as defined in the Revolving Credit Facility. The Company was in compliance
with all applicable covenants as of June 30, 2004.
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, and other general corporate
purposes.
NOTE 11 -- INCOME TAXES
Income tax (benefit) expense, which was primarily related to state and
local income taxes, was approximately ($20,000) and $0.2 million for the three
and six months ended June 30, 2004, respectively, as compared to income tax
expense of approximately $0.4 million and $0.7 million for the same periods in
2003. The Company's estimated federal income tax expense for the three and six
month periods ended June 30, 2004, is offset by the release of an equal amount
of the Company's valuation allowance. As of June 30, 2004, the Company's
remaining net deferred tax asset was fully offset by a valuation allowance.
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. The Company will adjust this valuation reserve
accordingly if, during future periods, management believes the Company will
generate sufficient taxable income to realize the net deferred tax asset.
NOTE 12 -- RESTRUCTURING EXPENSES
The amount of lease termination costs associated with a 1995 restructuring
applied against the reserve in the six months ended June 30, 2004, is as
follows:
RESERVE BALANCE COSTS APPLIED RESERVE BALANCE
DECEMBER 31, 2003 AGAINST RESERVE JUNE 30, 2004
----------------- --------------- ---------------
(IN THOUSANDS)
Lease termination costs................. $1,430 $(141) $1,289
During the six months ended June 30, 2004, the Company incurred
approximately $47,000 of restructuring expenses related to the realignment of
the Company into the Physician Services and Hospital Services divisions.
NOTE 13 -- 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.
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 revenue as a percentage of the
physician group's cash collections for the services performed. Since this is an
outsourced service delivered on the Company's proprietary technology, license
fees or maintenance fees are not required to be paid by the division's
hospital-affiliated physician groups. The division also sells a physician
practice management ("PPM") solution that is delivered via an ASP model. The PPM
solution collects a monthly usage fee from the office-based 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.
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Hospital Services division provides Connective Healthcare solutions
designed to 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 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 efficiently to 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
Physician Services................................. $66,075 $64,083 $129,258 $126,152
Hospital Services.................................. 25,446 24,750 50,217 47,916
Eliminations....................................... (3,380) (3,377) (6,733) (6,614)
------- ------- -------- --------
$88,141 $85,456 $172,742 $167,454
======= ======= ======== ========
Segment operating expenses:
Physician Services................................. $58,958 $56,320 $116,188 $111,054
Hospital Services.................................. 19,078 18,847 38,047 37,443
Corporate.......................................... 7,189 4,156 15,083 8,061
Eliminations....................................... (3,380) (3,377) (6,733) (6,614)
------- ------- -------- --------
$81,845 $75,946 $162,585 $149,944
======= ======= ======== ========
13
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Segment operating income:
Physician Services................................. $ 7,117 $ 7,763 $ 13,070 $ 15,098
Hospital Services.................................. 6,368 5,903 12,170 10,473
Corporate.......................................... (7,189) (4,156) (15,083) (8,061)
------- ------- -------- --------
$ 6,296 $ 9,510 $ 10,157 $ 17,510
======= ======= ======== ========
Interest expense..................................... $ 1,999 $ 4,179 $ 4,073 $ 8,661
======= ======= ======== ========
Interest income...................................... $ (192) $ (58) $ (244) $ (166)
======= ======= ======== ========
Loss on extinguishment of debt....................... $ 5,896 $ -- $ 5,896 $ 221
======= ======= ======== ========
(Loss) income before income taxes.................... $(1,407) $ 5,389 $ 432 $ 8,794
======= ======= ======== ========
Depreciation and amortization:
Physician Services................................. $ 2,341 $ 2,658 $ 4,765 $ 5,372
Hospital Services.................................. 1,380 1,361 2,700 2,689
Corporate.......................................... 122 179 272 428
------- ------- -------- --------
$ 3,843 $ 4,198 $ 7,737 $ 8,489
======= ======= ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services................................. $ 1,080 $ 1,322 $ 2,690 $ 2,243
Hospital Services.................................. 1,387 1,869 2,537 2,696
Corporate.......................................... 298 125 302 143
------- ------- -------- --------
$ 2,765 $ 3,316 $ 5,529 $ 5,082
======= ======= ======== ========
AS OF
-----------------------
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services........................................ $ 65,499 $ 63,222
Hospital Services......................................... 60,383 58,021
Corporate................................................. 30,867 50,281
Discontinued operations................................... -- 129
-------- --------
$156,749 $171,653
======== ========
NOTE 14 -- SUBSEQUENT EVENTS
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, GA. The Company entered into a noncancelable operating lease for
that office space in February 2004 which will expire in June 2014. The new
landlord will assume the payments for the lease of the Company's former office
space; however, the Company will record a one-time non-cash expense of
approximately $1.0 million upon its exit of the former office facility.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, provides integrated
business management outsourcing services, Internet-enabled connectivity and
administrative software for the healthcare industry. Per-Se delivers 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 application service provider ("ASP")-based physician practice
management ("PPM") solution, which was transferred to the Physician Services
division.
The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. The division provides a
complete outsourcing service, therefore, allowing physician groups to avoid the
infrastructure investment in their own in-house billing office. Services include
clinical data collection, data input, medical coding, billing, contract
management, cash collections and accounts receivable management. These services
are designed to assist healthcare providers with the business management
functions associated with the delivery of healthcare services, allowing
physicians to focus on providing quality patient care. These services also
assist physicians in improving cash flows and reducing administrative costs and
burdens. The division's offerings have historically focused on the back-end
processes required to ensure physicians are properly reimbursed for care
delivery. The addition of the ASP-based physician practice management solution,
named MedAxxis, as part of the realignment not only provides operational
leverage but also enables the Company to offer front-end solutions for both
hospital-based and office-based physician groups. These large physician groups
require both front-office functionality for scheduling and back-end services for
accounts receivable management. By combining front-office and back-end solutions
and services, the Company will be able to sell its solutions and services to a
new segment of the physician market.
To better serve the hospital marketplace, the Company has formed the
Hospital Services division through the combination of the former e-Health
Solutions and Application Software divisions. The products of both groups focus
on optimizing the revenue cycle and improving administrative efficiencies for
hospitals. Combining these offerings allows the Company to better leverage its
solutions and provides an organizational structure through which to broaden the
Company's offerings to hospitals. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing as well as patient and staff scheduling
systems.
Per-Se 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").
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 business excluding non-
operational items that may be incurred.
Consolidated revenue for the three months ended June 30, 2004, increased
approximately 3% as compared to the same period of 2003 primarily due to the
implementation of the record level of net new business sold in the Physician
Services division during the first quarter of 2004. Consolidated operating
margins declined from 11.1% in 2003 to 7.1% in 2004 primarily due to the
expenses of $6.5 million associated with the additional procedures as part of
the year-end 2003 audit. Excluding these expenses, operating profit generated
from the business was
15
stable, except for the expected short-term impact of the implementation costs
for the significant amount of net new business that was sold in the Physician
Services division in the first quarter of 2004 (a 366% increase over the first
quarter of 2003).
Improvements in the Company's capital structure during 2003 decreased
interest expense during the second quarter of 2004 by $2.2 million compared to
the prior year period. This decrease in interest expense contributed positively
to cash provided by continuing operations during the first six months of 2004.
Net cash provided by continuing operations was $10.5 million in the current year
compared to $10.1 million in the prior year period. Current year cash flow
includes the $6.0 million use of cash on a year-to-date basis related to the
additional procedures as part of the year-end 2003 audit.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004, AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2003
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $66,075 $64,083
Hospital Services........................................... 25,446 24,750
Eliminations................................................ (3,380) (3,377)
------- -------
$88,141 $85,456
======= =======
Revenue for the Physician Services division increased approximately 3% in
the three months ended June 30, 2004, as compared to the same period in 2003.
Pricing for the division's services and products was stable compared to the
prior year period. The revenue increase is due to the implementation of net new
business sold during the first quarter of 2004 as well as in prior periods. Net
new business sold includes 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 at June 30, 2004, was approximately $3 million,
compared to approximately $5 million at March 31, 2004. The decrease in net
backlog is a result of the volume of new business implementations during the
three months ended June 30, 2004. Net backlog represents 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 and the customer has yet to be phased out. 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 3% for
the three months ended June 30, 2004, as compared to the same period in 2003.
Pricing for the division's services and products was stable compared to the
prior year period. Revenue growth for the division's revenue cycle management
products was approximately 4% during the current year quarter compared to the
prior year period, primarily due to a five-year contract the division signed
during the quarter to provide print and mail services for a new customer, which
positively impacted revenue in the quarter. As part of the transaction, the
Company acquired substantially all of the production assets and personnel of
that customer's hospital and physician patient statement and paper claims print
and mail business. Revenue growth in the division's resource management products
was approximately 1% primarily due to previously unbilled maintenance for
certain software customers that is being recognized upon receipt of payment.
Medical transaction volume increased approximately 9% for the period over the
same period of 2003. Revenue growth does not necessarily correlate directly to
transaction volume due to the mix of services and 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 in
Eliminations to reconcile to total consolidated revenue.
16
Segment Operating Income. Segment operating income is segment revenue less
segment operating expenses, which include salaries and wages expense, other
operating expenses, depreciation, amortization and other expenses. Segment
operating income, classified by the Company's divisions, is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 7,117 $ 7,763
Hospital Services........................................... 6,368 5,903
Corporate................................................... (7,189) (4,156)
------- -------
$ 6,296 $ 9,510
======= =======
Physician Services' segment operating income decreased approximately 8% in
the three months ended June 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 10.8% in the three months ended
June 30, 2004, versus approximately 12.1% in the same period in 2003. Margins
for the current year period were negatively impacted by costs associated with
the implementation of the record level of net new business sold during the first
quarter of 2004 of approximately $12 million.
Hospital Services' segment operating income increased approximately 8% in
the three months ended June 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 25.0% versus approximately 23.9%
in the prior year period. The operating margin improvement is attributable to
the previously unbilled maintenance revenue for certain software customers that
is being recognized upon receipt of payment.
Corporate overhead expenses, which include certain executive and
administrative functions, increased approximately 73% or approximately $3.0
million in the three months ended June 30, 2004, compared to the same period in
2003. The increase is attributable to approximately $2.5 million of expenses
incurred in 2004 to perform the additional procedures discussed below and
increased litigation expenses of approximately $0.5 million in 2004 related to
the attempt by the Company's former underwriter's, Lloyd's of London, to rescind
certain insurance policies (refer to Note 9 of Notes to Financial Statements for
additional information).
Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's independent auditors 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 were required
due to Statement of Auditing Standards No. 99, Consideration of Fraud in a
Financial Statement Audit, ("SAS No. 99"), which 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 Company recorded costs related to the additional procedures totaling
approximately $2.5 million during the three months ended June 30, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Operations. In segment reporting these costs are classified in the Corporate
segment.
Interest. Interest expense was approximately $2.0 million for the three
months ended June 30, 2004, as compared to $4.2 million for the same period in
2003. The decrease is attributable to the retirement of $50 million of long-term
debt in the first nine months of 2003, the repayment of $3.1 million of
long-term debt during the fourth quarter of 2003, the repayment of $3.1 million
of long-term debt during the first quarter of 2004 and entering into a new
Credit Agreement in September 2003 at substantially lower interest rates (fixed
9.5% rate in the second quarter of 2003 compared to a LIBOR plus 4.25% rate, or
approximately 5.34%, in the second quarter of 2004). Interest income was $0.2
million for the three-months ended June 30, 2004 as compared to $0.1 million for
the same period in 2003.
Loss on Extinguishment of Debt. During the three months ended June 30,
2004, in connection with the retirement of the Company's then-outstanding $118.8
million under the Term Loan B component of the Credit Agreement (the "Term Loan
B"), the Company wrote off approximately $3.5 million of deferred debt issuance
17
costs associated with the Term Loan B. Additionally, the Company incurred a
prepayment penalty of approximately $2.4 million due to the early retirement of
the Term Loan B.
Income Taxes. Income tax (benefit) expense, which was primarily related to
state and local income taxes, was approximately ($20,000) and $0.4 million for
the three months ended June 30, 2004, and 2003, respectively. The Company's
estimated federal income tax expense for the three months ended June 30, 2004,
is offset by the release of an equal amount of the Company's valuation
allowance. As of June 30, 2004, the Company's net deferred tax asset was fully
offset by a valuation allowance. 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. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.
Discontinued Operations. 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 allowed 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 $0.5 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 and Misys entered into binding arbitration
regarding the final closing adjustments and on May 21, 2004, the arbitrator
awarded the Company approximately $4.3 million. On June 1, 2004, the Company
received payment of approximately $4.5 million, which included interest of
approximately $0.2 million. The Company recognized an additional gain on sale of
approximately $3.8 million, net of taxes of approximately $0.2 million, when the
cash payment was received.
In September 2003, the Company initiated a process to sell 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. 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. Patient1 and Business1 were formerly
reported as part of the Hospital Services division.
Summarized operating results for the discontinued operations are as
follows:
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue...................................... $-- $-- $-- $6,613 $ 16 $ 6,629
=== === === ====== ======= =======
Loss from discontinued operations before
income taxes............................... $-- $-- $-- $ (577) $(1,110) $(1,687)
Income tax expense........................... -- -- -- 22 -- 22
--- --- --- ------ ------- -------
Loss from discontinued operations, net of
tax........................................ $-- $-- $-- $ (599) $(1,110) $(1,709)
=== === === ====== ======= =======
18
SIX MONTHS ENDED JUNE 30, 2004, AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
SIX MONTHS ENDED
JUNE 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $129,258 $126,152
Hospital Services........................................... 50,217 47,916
Eliminations................................................ (6,733) (6,614)
-------- --------
$172,742 $167,454
======== ========
Revenue for the Physician Services division increased approximately 2% in
the six months ended June 30, 2004, as compared to the same period in 2003.
Pricing for the division's services and products was stable compared to the
prior year period. The revenue increase is due to the implementation of net new
business sold during the first six months of 2004 of $15 million as well as in
prior periods. 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. Revenue also increased due to one
additional business day in the six months ended June 30, 2004, compared to the
prior year. Net backlog at June 30, 2004, was approximately $3 million, compared
to the negative backlog of approximately $2 million at December 31, 2003. The
increase in net backlog is a result of the level of net new business sold during
the six months ended June 30, 2004. Net backlog represents 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 and the customer has yet to be
phased out. 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% for
the six months ended June 30, 2004, as compared to the same period in 2003.
Pricing for the division's services and products was stable compared to the
prior year period. Revenue growth for the division's revenue cycle management
products was approximately 4% during the first six months of 2004 compared to
the prior year period, primarily due to a five-year contract the division signed
during the quarter to provide print and mail services for a new customer. As
part of the transaction, the Company acquired substantially all of the
production assets and personnel of that customer's hospital and physician
patient statement and paper claims print and mail business. Revenue growth in
the division's resource management products was approximately 6%, primarily due
to an increase in software maintenance revenue attributable to previously
unbilled maintenance for certain software customers that is being recognized
upon receipt of payment. Medical transaction volume increased approximately 7%
for the period over the same period of 2003. Revenue growth does not necessarily
correlate directly to transaction volume due to the mix of services and 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 in
Eliminations to reconcile to total consolidated revenue.
19
Segment Operating Income. Segment operating income is segment revenue less
segment operating expenses, which include salaries and wages expense, other
operating expenses, depreciation, amortization and other expenses. Segment
operating income, classified by the Company's divisions, is as follows:
SIX MONTHS ENDED
JUNE 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 13,070 $ 15,098
Hospital Services........................................... 12,170 10,473
Corporate................................................... (15,083) (8,061)
-------- --------
$ 10,157 $ 17,510
======== ========
Physician Services' segment operating income decreased approximately 13% in
the six months ended June 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 10.1% in the six months ended
June 30, 2004, versus approximately 12.0% in the same period in 2003. Margins
for the current year period were negatively impacted by costs associated with
the implementation of the net new business sold during the first quarter of 2004
of approximately $12 million, which included one significant contract with
transition costs that resulted in below target operating margins.
Hospital Services' segment operating income increased approximately 16% in
the six months ended June 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 24.2% in the six months ended
June 30, 2004, versus approximately 21.9% in the prior year period. The
operating margin improvement is attributable to the previously unbilled
maintenance revenue for certain software customers that is being recognized upon
receipt of payment.
Corporate overhead expenses, which include certain executive and
administrative functions, increased approximately 87% or approximately $7.0
million in the six months ended June 30, 2004, compared to the same period in
2003. The increase is attributable to approximately $6.5 million of expenses
incurred in 2004 to perform the additional procedures discussed below and
increased litigation and insurance expenses of approximately $0.7 million in
2004 related to the attempt by the Company's former underwriter's, Lloyd's of
London, to rescind certain insurance policies (refer to Note 9 of Notes to
Financial Statements for additional information) partially offset by $0.2
million of cost reductions.
Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's external auditors 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 were required
due to Statement of Auditing Standards No. 99, Consideration of Fraud in a
Financial Statement Audit, ("SAS No. 99"), which 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 Company recorded costs related to the additional procedures totaling
approximately $6.5 million during the six months ended June 30, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Operations. In segment reporting these costs are classified in the Corporate
segment.
Interest. Interest expense was approximately $4.1 million for the six
months ended June 30, 2004, as compared to $8.7 million for the same period in
2003. The decrease is attributable to the retirement of $50 million of long-term
debt in the first nine months of 2003, the repayment of $3.1 million of
long-term debt during the fourth quarter of 2003, the repayment of $3.1 million
of long-term debt during the first quarter of 2004 and entering into a new
Credit Agreement in September 2003 at substantially lower interest rates (fixed
9.5% rate in the first six months of 2003 compared to a LIBOR plus 4.25% rate,
or approximately 5.38%, in the first six months of 2004). Interest income was
$0.2 million for the six-month periods ended June 30, 2004 and 2003.
Loss on Extinguishment of Debt. During the six months ended June 30, 2004,
in connection with the retirement of the Company's then-outstanding $118.8
million under the Term Loan B, the Company wrote off
20
approximately $3.5 million of deferred debt issuance costs associated with the
Term Loan B. Additionally, the Company incurred a prepayment penalty of
approximately $2.4 million due to the early retirement of the Term Loan B.
During the six months ended June 30, 2003, the Company wrote off
approximately $0.2 million of deferred debt issuance costs associated with the
original issuance of the Notes (refer to Note 10 of Notes to Financial
Statements for additional information) related to the repurchase of $15.0
million of the Notes at par plus accrued interest of approximately $0.1 million,
which is included in loss on extinguishment of debt in the Company's
Consolidated Statements of Operations.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was approximately $0.2 million and $0.7 million for the six
months ended June 30, 2004, and 2003, respectively. The Company's estimated
federal income tax expense for the six months ended June 30, 2004, is offset by
the release of an equal amount of the Company's valuation allowance. As of June
30, 2004, the Company's net deferred tax asset was fully offset by a valuation
allowance. 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. The Company will adjust this valuation
reserve accordingly if, during future periods, management believes the Company
will generate sufficient taxable income to realize the net deferred tax asset.
Discontinued Operations. 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 allowed 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 $0.5 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 and Misys entered into binding arbitration
regarding the final closing adjustments and on May 21, 2004, the arbitrator
awarded the Company approximately $4.3. On June 1, 2004, the Company received
payment of approximately $4.5 million, which included interest of approximately
$0.2 million. The Company recognized an additional gain on sale of approximately
$3.8 million, net of taxes of approximately $0.2 million, when the cash payment
was received.
In September 2003, the Company initiated a process to sell 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. 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. Patient1 and Business1 were formerly
reported as part of the Hospital Services division.
Summarized operating results for the discontinued operations are as
follows:
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue................................................ $ -- $ 106 $ 106 $13,080 $ 170, $13,250
Loss from discontinued operations before income
taxes................................................ $(18) $(303) $(321) $(1,066) $(1,874) $(2,940)
Income tax expense..................................... -- -- -- 42 -- 42
---- ----- ----- ------- ------- -------
Loss from discontinued operations, net of tax.......... $(18) $(303) $(321) $(1,108) $(1,874) $(2,982)
==== ===== ===== ======= ======= =======
21
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF
---------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
BUSINESS1 BUSINESS1
------------- -----------------
(IN THOUSANDS)
Current assets.......................................... $ -- $129
Property and equipment.................................. -- --
Other long-term assets.................................. -- --
------ ----
Assets of discontinued operations..................... $ $129
====== ====
Current liabilities..................................... $ -- $422
Deferred revenue........................................ -- --
Other long-term liabilities............................. -- --
------ ----
Liabilities of discontinued operations................ $ -- $422
====== ====
On November 30, 1998, the Company completed the sale of its MSC business.
In 1999, the Company completed the sale of both divisions of its Impact
business.
During the six months ended June 30, 2004, and 2003, the Company incurred
expenses of approximately $0.1 million and $0.2 million, respectively, which
were primarily legal costs, associated with MSC and Impact. Pursuant to APB
Opinion 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 ("APB No. 30"), the consolidated financial
statements of the Company are presented to reflect the activity associated with
MSC and Impact as discontinued operations for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the Company's cash balances as of June
30, 2004, and December 31, 2003, and cash flows from continuing operations for
the six months ended June 30, 2004, and 2003, (in thousands):
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
Unrestricted cash and cash equivalents.................. $9,698 $25,271
SIX MONTHS ENDED
JUNE 30,
-------------------
2004 2003
-------- --------
Cash provided by continuing operations...................... $ 10,466 $ 10,084
Cash used for investing activities from continuing
operations................................................ $ (3,080) $ (5,119)
Cash used for financing activities from continuing
operations................................................ $(22,447) $(13,729)
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.
Restricted cash of $63,000 at June 30, 2004 and of $66,000 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 the six months ended June 30, 2004, the Company generated
approximately $10.5 million in cash from continuing operations, which includes
cash generated from normal operations offset by cash payments related to
additional procedures necessary under SAS No. 99 totaling approximately $6.0
million (refer to "Note 3 -- Additional Procedures" in the Company's Notes to
Consolidated Financial Statements for more information), the payment of
approximately $5.4 million in expenses and legal settlements related to the
matter with Lloyd's of London (refer to "Note 9 -- Legal Matters" in the
Company's Notes to Consolidated Financial Statements for more information) and
interest payments of approximately $3.5 million.
22
During the six months ended June 30, 2003, cash provided by continuing
operations was approximately $10.1 million, which includes cash provided by
normal operations offset by the payment of approximately $3.9 million in
expenses and legal settlements related to the matter with Lloyd's of London
(refer to "Note 9 -- Legal Matters" in the Company's Notes to Consolidated
Financial Statements for more information) and interest payments of
approximately $8.6 million.
During the six months ended June 30, 2004, the Company used approximately
$3.1 million in cash from investing activities from continuing operations
consisting primarily of approximately $5.5 million for capital expenditures and
investment in software development costs and approximately $1.1 million of cash
used for acquisitions, partially offset by approximately $3.6 million of net
proceeds related to the final closing adjustments from the sale of Patient1 to
Misys Healthcare Systems in July 2003.
During the six months ended June 30, 2003, the Company used approximately
$5.1 million in cash from investing activities from continuing operations
primarily for capital expenditures and software development costs.
During the six months ended June 30, 2004, the Company used approximately
$22.4 million in cash from financing activities. On June 30, 2004 the Company
raised $125 million from the sale of 3.25% Convertible Subordinated Debentures
due 2024 (the "Debentures") and retired the $118.8 million then outstanding
under the Term Loan B concurrently with the completion of the Convertible
Debenture offering. On June 30, 2004, the Company also completed an amendment to
the Revolving Credit Facility to increase its capacity and lower the Company's
borrowing rate. The Revolving Credit Facility's capacity was expanded from $50
million to $75 million and the facility's maturity was extended to three years.
The Company incurred a prepayment penalty on the early retirement of the Term
Loan B totaling $2.4 million in addition to financing costs of $3.3 million
related to the Debentures offering and amendment to the Revolving Credit
Facility. The Company also repurchased, for approximately $25 million, an
aggregate of approximately 2.0 million shares of the Company's outstanding
common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. The cost of the
refinancing and purchase of common stock is offset by proceeds from the exercise
of stock options of approximately $5.3 million.
During the six months ended June 30, 2003, the Company used approximately
$13.7 million in cash from financing activities primarily related to the
acceptance of the Company's offer to repurchase $15 million of the Company's
then-outstanding 9 1/2% Senior Notes due 2005, partially offset by proceeds from
the exercise of stock options of approximately $1.1 million.
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.
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.
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). 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 covered under the errors and
omissions ("E&O") policies issued to the Company by Lloyd's. In exchange, the
Company provided Lloyd's with a full release of all E&O and directors and
officers and company reimbursement ("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 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 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 settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
Lloyd's receivable by $3.8 million. On July 7, 2004, pursuant to the settlement
as amended, Lloyd's paid the Company $16.2 million in cash. As of the
23
payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and will recognize a gain of approximately $1.5 million on the
settlement in July 2004. The Company previously anticipated recognizing a gain
of approximately $1.7 million. The actual gain of approximately $1.5 million
reflects additional legal expenses of approximately $0.2 million incurred prior
to the payment date associated with prior E&O claims.
During the course of 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. The negative impact of these items on the Company's cash
flow for the six months ended June 30, 2004, was approximately $5.4 million,
which consisted of approximately $1.8 million related to the cost of pursuing
the litigation against Lloyd's and approximately $3.6 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 cash flow for the
six months ended June 30, 2003, was approximately $3.9 million, which consisted
of approximately $1.6 million related to insurance premium increases for new
insurance coverage and the cost of pursuing the litigation against Lloyd's and
approximately $2.3 million related to the funding of legal costs and litigation
settlements covered by the Lloyd's E&O policies. As of June 30, 2004, and as of
the settlement date, the Company had incurred approximately $18.3 million of
costs related to claims under Lloyd's policies that are classified as Lloyd's
receivable in the Company's Consolidated Balance Sheet. As of June 30, 2004,
approximately $14.2 million of these costs have been paid by the Company.
For the six months ended June 30, 2004 and 2003, the Company incurred
approximately $1.5 million and $2.2 million, respectively, of expenses related
to the cost of pursuing the litigation against Lloyd's in each period and, in
2003, significantly increased insurance premiums. 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.
As mentioned previously, the cost to perform the additional procedures
associated with preparing the year-end 2003 financial statements was
approximately $6.5 million and was recorded during the six months ended June 30,
2004. These costs are reflected in other expenses in the Company's Consolidated
Statements of Operations.
With the exception of the Lloyd's receivable and payments made for the
additional procedures associated with the 2003 year-end audit, the Company has
not experienced material changes in the underlying components of cash generated
by operating activities 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.
FORWARD-LOOKING STATEMENTS
Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including but not limited to
certain statements set forth under the captions "Note 8 -- Discontinued
Operations and Divestitures," "Note 9 -- Legal Matters," "Note 10 -- Long-Term
Debt," "Note 11 -- Income Taxes," "Results of Operations" and "Liquidity and
Capital Resources," 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, the effect of industry and regulatory changes on the Company's customer
base, the impact of revenue backlog on future revenue, fair market value less
costs to sell of Business1, overall profitability and the availability of
capital. 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 below under the caption "Factors That May Affect Future
Results of Operations,
24
Financial Condition or Business" and "Quantitative and Qualitative Disclosures
about Market Risk." The Company disclaims any responsibility to update any
forward-looking statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
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 led to the restatements of 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 auditors determined
that a material weakness related to the Company's internal controls exists. The
Company's auditors reported to the Company that the errors that resulted in the
restatements 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 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 auditors 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 auditors
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.
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 $125 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 the Company's indebtedness, or seek additional equity
capital. The Company's ability to make payments on the Company's debt
obligations will depend on future operating performance, which may be affected
by conditions beyond the Company's control.
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 successfully to 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
25
which the Company may become involved, the Company's insurance 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 successful claim brought against the Company,
which is uninsured or under-insured, could materially harm the Company's
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 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 the
Company's 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 the Company's 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
26
systems may result in a decrease in demand for the Company's business management
outsourcing services for particular physician practices.
THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE THE COMPANY'S
COSTS OF OPERATION.
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 and the
Medicare Modernization Act of 2003. 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 the Company 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 the Health Insurance Portability and Accountability Act of 1996
("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
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 affect on the Company's
business. The Company has made and expects to continue to make investments in
product enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require the Company to make investments in new
products or charge higher prices.
Numerous federal and state civil and criminal laws govern the collection,
use, storage and disclosure of health information for the purpose of
safeguarding the privacy and security of such 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
27
providers. The Company cannot predict whether the government will enact new
legislation and regulations, and, if enacted, whether such new developments will
affect the Company's business.
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 3. 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, any fluctuation in the prevailing
interest rates is not expected to have a material effect on the Company's
financial statements.
The Company has the option of entering into loans based on LIBOR or base
rates under the Revolving Credit Facility. As such, the Company could experience
fluctuations in the interest rates 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 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 revenue 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 business
denominated 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 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of June 30, 2004,
and have concluded that these disclosure controls and procedures were operating
effectively at the reasonable assurance level at June 30, 2004.
As a result of errors that led to the restatements of 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 auditors determined
that a material weakness related to the Company's internal controls and
procedures exists, which was reported to the Company in a letter from the
auditors dated May 12, 2004. The Company's auditors reported to the Company that
the errors that resulted in the restatements reflected in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the
Securities and Exchange Commission on May 13, 2004, 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.
28
No change in the Company's internal control over financial reporting
occurred during the second quarter of 2004 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 in connection with the preparation of its 2004 interim financial
statements to mitigate the effects of the material weakness and to ensure that
the financial statements in this quarterly report on Form 10-Q are presented in
accordance with generally accepted accounting principles. See "Note
3 -- Additional Procedures" in the Company's Notes to Consolidated Financial
Statements on page 6. These additional procedures were performed by external
accounting professionals, who were not associated with the Company's independent
registered public accounting firm. The Company considers these additional
procedures to be part of its disclosure controls and procedures for the second
quarter of 2004, but does not consider them to be changes to the Company's
internal control over financial reporting because they were being performed by
external advisors. 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(a) 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 necessarily prevent all errors and all fraud.
29
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in "Note 9 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures Due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933, as amended. The Debentures are convertible into the Company's common
stock at an initial conversion rate of 56.0243 shares per $1,000 principal
amount of Debentures. This conversion rate represents a share price of
approximately $17.85, a premium of 42% over the closing price of the common
stock on the date the offering of Debentures was priced. The Debentures will be
convertible when the share price reaches 130% of the conversion price, or a
share price of approximately $23.21, and in other circumstances to be set forth
in the Indenture relating to the Debentures. The Debentures mature on June 30,
2024, and are unsecured. Interest on the Debentures is payable semiannually at
the rate of 3.25% per annum on June 30 and December 30 of each year, beginning
on December 30, 2004. Beginning on July 6, 2009, the Company may redeem some or
all of the Debentures for cash. In addition, on June 30, 2009, 2014 and 2019, or
upon a fundamental change as defined in the Indenture, holders may require the
Company to repurchase their Debentures for cash. The Company used the proceeds
from issuance of the Debentures, together with cash on hand, to retire its
$118.8 million outstanding Term Loan B as well as to repurchase, for
approximately $25 million, an aggregate of approximately 2.0 million shares of
the Company's outstanding common stock that were sold short by purchasers of the
Debentures in negotiated transactions concurrently with the offering of the
Debentures. Banc of America Securities LLC, Wachovia Securities and Jeffries &
Co., Inc. acted as initial purchasers of the Debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 7, 2004. The
following directors were elected at such meeting:
NOMINEE BOARD TERM VOTES FOR VOTES WITHHELD
------- ---------- ---------- --------------
Stephen A. George, M.D. ........................ One Year 22,719,651 5,500,915
David R. Holbrooke, M.D......................... One Year 22,599,722 5,620,844
Craig Macnab.................................... One Year 22,599,692 5,620,874
David E. McDowell............................... One Year 22,719,649 5,500,917
Philip M. Pead.................................. One Year 22,719,594 5,500,972
John C. Pope.................................... One Year 22,524,972 5,695,594
C. Christopher Trower........................... One Year 22,599,678 5,620,888
Jeffrey W. Ubben................................ One Year 28,190,784 29,782
No other matters were voted upon at the meeting.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
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).
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).
4.1 -- 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).
4.2 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- Indenture dated as of June 30, 2004, between Registrant and
U.S. Bank National Association, as Trustee, relating to
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.5 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
4.6 -- Resale Registration Rights Agreement dated as of June 30,
2004, between Registrant and Banc of America Securities LLC,
as representative of the several initial purchasers of
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.6 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.1 -- First Amendment to Credit Agreement dated as of June 30,
2004, among Registrant, the Guarantors party thereto, the
Lenders party thereto and Bank of America, N.A., as
Administrative Agent (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
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.
31
(B) Reports on Form 8-K
The Company filed or furnished the following reports on Form 8-K during the
quarter ended June 30, 2004:
FINANCIAL
STATEMENTS DATE FILED OR
ITEM REPORTED FILED DATE OF REPORT FURNISHED
------------- ---------- -------------- --------------
Press Release dated April 5, 2004, announcing
Company's receipt of a noncompliance notification
from Nasdaq because of the delay in filing the
Company's 2003 Annual Report on Form 10-K with the
SEC............................................... No April 5, 2004 April 5, 2004
Press Release dated April 19, 2004, announcing an
operations update for the quarter ended March 31,
2004.............................................. No April 19, 2004 April 19, 2004
Press Release dated May 13, 2004, announcing that
the Company had filed its 2003 Annual Report on
Form 10-K with the SEC, as well as the settlement
the Company reached with Lloyd's of London........ No May 13, 2004 May 13, 2004
Press Release dated May 27, 2004, announcing the
Company's results of operations for the quarterly
period ended March 31, 2004....................... No May 27, 2004 May 27, 2004
Press Release dated June 22, 2004, announcing the
Company's intention to offer up to $125 million
aggregate principal amount of convertible
debentures, and its intention to effect a share
repurchase of up to $25 million in conjunction
with the offering................................. No June 22, 2004 June 23, 2004
Disclosure of certain information contained in the
offering memorandum for the Company's offering of
up to $125 million aggregate principal amount of
convertible subordinated debentures due 2024...... No June 22, 2004 June 23, 2004
Press Release dated June 24, 2004, announcing the
Company's pricing of its offering of up to $125
million aggregate principal amount of convertible
debentures, including information about its
repurchase of shares sold short by purchasers of
the debentures in negotiated transactions
concurrently with the offering.................... No June 24, 2004 June 24, 2004
Press Release dated June 30, 2004, announcing the
Company's completion of its sale of $125 million
aggregate principal amount of 3.25% convertible
subordinated debentures due 2024, and the
completion of an amendment to its senior revolving
credit facility................................... No June 30, 2004 July 1, 2004
32
SIGNATURES
Pursuant to the requirements 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
By: /s/ RICHARD A. FLYNT
--------------------------------------
Richard A. Flynt
Vice President and Controller
(Principal Accounting Officer)
Date: March 4, 2005
33
INDEX TO EXHIBITS
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).
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).
4.1 -- 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).
4.2 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- Indenture dated as of June 30, 2004, between Registrant and
U.S. Bank National Association, as Trustee, relating to
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.5 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
4.6 -- Resale Registration Rights Agreement dated as of June 30,
2004, between Registrant and Banc of America Securities LLC,
as representative of the several initial purchasers of
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.6 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.1 -- First Amendment to Credit Agreement dated as of June 30,
2004, among Registrant, the Guarantors party thereto, the
Lenders party thereto and Bank of America, N.A., as
Administrative Agent (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
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.