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 MARCH 31, 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)
NOT APPLICABLE
(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 [ ] No [X]
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 MAY 25, 2004
-------------- ----------------------------------
Common Stock $0.01 Par Value 31,620,591 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 March 31, 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 March 31, 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 May 27, 2004, the filing date of our
original Quarterly Report on Form 10-Q for the year ended March 31, 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 May
27, 2004.
PER-SE TECHNOLOGIES, INC.
FORM 10-Q/A
FOR THE FISCAL QUARTER ENDED MARCH 31, 2004
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1.
Financial Statements
2
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003.......................................
3
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (Unaudited)...................
4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (Unaudited)...................
5
Notes to Consolidated Financial Statements..................
Item 2. 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
Item 3. 25
Quantitative and Qualitative Disclosures About Market
Risk........................................................
Item 4. 26
Controls and Procedures.....................................
PART II: OTHER INFORMATION
Item 1. 28
Legal Proceedings...........................................
Item 6. 28
Exhibits and Reports on Form 8-K............................
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,502 $ 25,271
Restricted cash........................................... 77 66
--------- ---------
Total cash and cash equivalents........................ 20,579 25,337
Accounts receivable, billed (less allowances of $4,538 and
$4,267 as of March 31, 2004 and December 31, 2003,
respectively).......................................... 47,772 46,335
Accounts receivable, unbilled (less allowances of $528 as
of March 31, 2004 and December 31, 2003)............... 1,760 1,613
Lloyd's receivable........................................ 18,277 17,405
Other..................................................... 6,852 6,183
--------- ---------
Total current assets................................... 95,240 96,873
Property and equipment, net of accumulated depreciation..... 15,937 16,434
Goodwill, net of accumulated amortization................... 32,549 32,549
Other intangible assets, net of accumulated amortization.... 19,129 19,787
Other....................................................... 5,651 5,881
Assets of discontinued operations, net...................... -- 129
--------- ---------
Total assets........................................... $ 168,506 $ 171,653
========= =========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,157 $ 6,587
Accrued compensation...................................... 16,386 18,102
Accrued expenses.......................................... 19,064 19,037
Current portion of long-term debt......................... 12,500 12,500
--------- ---------
54,107 56,226
Deferred revenue.......................................... 20,238 20,334
--------- ---------
Total current liabilities.............................. 74,345 76,560
Long-term debt.............................................. 106,250 109,375
Other obligations........................................... 1,995 2,908
Liabilities of discontinued operations...................... -- 422
--------- ---------
Total liabilities...................................... 182,590 189,265
--------- ---------
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
31,621 and 31,322 issued and outstanding as of March
31, 2004, and December 31, 2003, respectively.......... 316 313
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 788,823 786,297
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (804,259) (805,286)
Treasury stock at cost, 131 and 122 as of March 31, 2004
and December 31, 2003, respectively.................... (1,376) (1,303)
Deferred stock unit plan obligation....................... 1,376 1,303
Accumulated other comprehensive loss...................... (459) (431)
--------- ---------
Total stockholders' deficit............................ (14,084) (17,612)
--------- ---------
Total liabilities and stockholders' deficit............ $ 168,506 $ 171,653
========= =========
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenue..................................................... $84,601 $81,998
------- -------
Salaries and wages.......................................... 49,684 47,613
Other operating expenses.................................... 23,201 22,094
Depreciation................................................ 2,101 2,498
Amortization................................................ 1,793 1,793
Other expenses.............................................. 3,961 --
------- -------
Operating income.......................................... 3,861 8,000
Interest expense............................................ 2,074 4,482
Interest income............................................. (52) (108)
Loss on extinguishment of debt.............................. -- 221
------- -------
Income before income taxes................................ 1,839 3,405
Income tax expense.......................................... 232 284
------- -------
Income from continuing operations......................... 1,607 3,121
------- -------
Discontinued operations (see Note 7)
Loss from discontinued operations, net of
tax -- Patient1....................................... (18) (509)
Loss on sale of Patient1, net of tax................... (66) --
Loss from discontinued operations, net of
tax -- Business1...................................... (303) (764)
Loss on sale of Business1, net of tax.................. (130) --
Loss from discontinued operations, net of
tax -- Other.......................................... (63) (11)
------- -------
(580) (1,284)
------- -------
Net income........................................... $ 1,027 $ 1,837
======= =======
Net income per common share -- basic:
Income from continuing operations......................... $ 0.05 $ 0.10
Loss from discontinued operations, net of
tax -- Patient1....................................... -- (0.02)
Loss on sale of Patient1, net of tax................... -- --
Loss from discontinued operations, net of
tax -- Business1...................................... (0.01) (0.02)
Loss on sale of Business1, net of tax.................. (0.01) --
Loss from discontinued operations, net of
tax -- Other.......................................... -- --
------- -------
Net income per common share -- basic................. $ 0.03 $ 0.06
======= =======
Weighted average shares used in computing basic earnings per
share..................................................... 31,531 30,172
======= =======
Net income per common share -- diluted:
Income from continuing operations......................... $ 0.05 $ 0.10
Loss from discontinued operations, net of
tax -- Patient1....................................... -- (0.02)
Loss on sale of Patient1, net of tax................... -- --
Loss from discontinued operations, net of
tax -- Business1...................................... (0.01) (0.02)
Loss on sale of Business1, net of tax.................. (0.01) --
Loss from discontinued operations, net of
tax -- Other.......................................... -- --
------- -------
Net income per common share -- diluted............... $ 0.03 $ 0.06
======= =======
Weighted average shares used in computing diluted earnings
per share................................................. 34,200 31,037
======= =======
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,027 $ 1,837
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization............................. 3,894 4,291
Loss from discontinued operations......................... 384 1,284
Loss on sale of discontinued operations and other......... 196 --
Amortization of deferred financing costs.................. 340 321
Loss on extinguishment of debt............................ -- 221
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ -- (138)
Accounts receivable, billed............................ (1,437) (1,404)
Accounts receivable, unbilled.......................... (147) (38)
Accounts payable....................................... (447) 1,768
Accrued compensation................................... (1,728) (3,786)
Accrued expenses....................................... (88) (6,337)
Deferred revenue....................................... (96) (1,897)
Other, net............................................. (2,594) (1,370)
------- --------
Net cash used for continuing operations.............. (696) (5,248)
Net cash used for discontinued operations............ (483) (3,013)
------- --------
Net cash used for operating activities............... (1,179) (8,261)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (1,629) (1,124)
Software development costs.................................. (1,135) (642)
Transaction costs on sale of discontinued operations........ (196) --
Proceeds from sale of property and equipment................ 3 1
Other....................................................... (20) (19)
------- --------
Net cash used for continuing operations.............. (2,977) (1,784)
Net cash used for discontinued operations............ -- (790)
------- --------
Net cash used for investing activities............... (2,977) (2,574)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options................. 2,529 70
Payments of debt............................................ (3,125) (15,014)
Other....................................................... (17) 72
------- --------
Net cash used for financing activities............... (613) (14,872)
------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (4,769) (25,707)
Balance at beginning of period.............................. 25,271 46,748
------- --------
Balance at end of period.................................... $20,502 $ 21,041
======= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 1,765 $ 8,537
Income taxes.............................................. 61 134
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 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 7 for additional information).
NOTE 2 -- STOCK-BASED COMPENSATION PLANS
At March 31, 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 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
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), to this stock-based compensation.
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income as reported...................................... $ 1,027 $ 1,837
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................ $ (934) $ (1,307)
------- --------
Pro forma net (loss) income................................. $ 93 $ 530
======= ========
Net income per common share:
Basic -- as reported...................................... $ 0.03 $ 0.06
======= ========
Basic -- pro forma........................................ $ -- $ 0.02
======= ========
Diluted -- as reported.................................... $ 0.03 $ 0.06
======= ========
Diluted -- pro forma...................................... $ -- $ 0.02
======= ========
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, which caused the March 31, 2004
Form 10-Q and 2003 Form 10-K filing delays, 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 operating costs related to the additional procedures
totaling approximately $3.9 million during the three months ended March 31,
2004, 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
During the three months ended March 31, 2004, the Physician Services
division signed an agreement ("the Agreement") 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-months ended March 31, 2004, and 2003:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income.................................................. $ 1,027 $ 1,837
Common shares outstanding:
Shares used in computing net income per common
share -- basic......................................... 31,531 30,172
Effect of potentially dilutive stock options and
warrants............................................... 2,669 865
------- -------
Shares used in computing net income per common
share -- diluted....................................... 34,200 31,037
======= =======
Net income per common share:
Basic..................................................... $ 0.03 $ 0.06
======= =======
Diluted................................................... $ 0.03 $ 0.06
======= =======
Options and warrants to purchase 0.9 million and 4.3 million shares of
Common Stock during the three months ended March 31, 2004, and 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-month periods ended March 31, 2004, and 2003, the only
component of other comprehensive loss was the net foreign currency translation.
THREE MONTHS
ENDED MARCH 31,
---------------
2004 2003
----- -----
(IN THOUSANDS)
Net foreign currency translation............................ $28 $106
NOTE 7 -- 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 plus interest of approximately $0.1 million, which is
expected to be received on June 1, 2004.
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
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
Summarized operating results for the discontinued operations are as
follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue................................................. $ -- $ 106 $ 106 $6,467 $ 154 $ 6,621
==== ===== ===== ====== ===== =======
Loss from discontinued operations before income taxes... $(18) $(303) $(321) $ (489) $(764) $(1,253)
Income tax expense...................................... -- -- -- 20 -- 20
---- ----- ----- ------ ----- -------
Loss from discontinued operations, net of tax........... $(18) $(303) $(321) $ (509) $(764) $(1,273)
==== ===== ===== ====== ===== =======
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF
----------------------------------
MARCH 31, 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 three months ended March 31, 2004 and 2003, the Company incurred
expenses of approximately $63,000 and $11,000, 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.
NOTE 8 -- 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
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 $20 million settlement with the
Company's former insurance carrier, Certain Underwriters at Lloyd's of London
(collectively "Lloyd's").
The settlement entails a $20 million cash payment that is payable by
Lloyd's 60 days from the settlement date or by July 9, 2004. Lloyd's will, at
their expense, defend, settle or otherwise resolve the two remaining pending
claims under the errors and omissions ("E&O") policies issued to the Company by
Lloyd's. In exchange, Per-Se will provide Lloyd's with a full release of all E&O
and directors and officers and company reimbursement ("D&O") policies. The
California Superior Court will retain jurisdiction to enforce any aspect of the
settlement agreement.
At March 31, 2004, and at the time of settlement, the Company's Lloyd's
receivable was $18.3 million, which includes costs associated with the interim
funding of legal costs and litigation settlements related to E&O claims that
were incurred by the Company in excess of the Lloyd's E&O policies' deductible
that are expected to be recovered from Lloyd's. This $18.3 million balance
includes $13.5 million that was paid during 2002, 2003 and 2004, and additional
obligations to be paid of approximately $4.8 million. The additional obligations
of approximately $4.8 million are scheduled to be paid as follows: $0.6 million
during the first half of 2004, $1.1 million in January 2005 and $3.1 million
upon receipt of the cash settlement from Lloyd's.
NOTE 9 -- 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 incurred a write-off of approximately $0.2 million of deferred debt
issuance costs associated with the original issuance of the Notes related to
this repurchase, which is included in loss on extinguishment of debt in the
Company's Consolidated Statements of Operations.
On August 12, 2003, the Company commenced a cash tender offer for its
then-outstanding $160 million of Notes (the "Tender Offer"). On September 11,
2003, the Company repurchased $143.6 million of the Notes that were tendered at
the redemption price of 102.625% of the principal amount, as required under the
Indenture governing the Notes, and paid accrued interest of approximately $1.0
million. The remaining $16.4 million of the Notes were retired on September 18,
2003, through a call initiated by the Company on August 12, 2003, at the
redemption price of 102.375% of the principal amount plus accrued interest of
approximately $10,000 (the "Call").
On April 16, 2001, the Company entered into a $50 million credit facility
(the "2001 Credit Facility"). The Company did not incur any borrowings under the
2001 Credit Facility, and on September 11, 2003, the Company terminated the 2001
Credit Facility.
On September 11, 2003, concurrent with termination of the 2001 Credit
Facility, the Company entered into a $175 million Credit Agreement (the "Credit
Agreement"). The Credit Agreement consists of a $125 million Term Loan B (the
"Term Loan B") and a $50 million revolving credit facility (the "Revolving
Credit Facility").
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company had approximately $118.8 million outstanding under the Term Loan B
as of March 31, 2004, under a LIBOR-based interest contract, bearing interest at
5.36%. The Company has made all required principal payments through March 31,
2004. The Company has had no borrowings outstanding under the Revolving Credit
Facility since its inception.
All obligations under the Credit Agreement are fully and unconditionally
guaranteed, on a senior secured basis, jointly and severally by all of the
Company's present and future domestic and material foreign subsidiaries (the
"Subsidiary Guarantors"). The financial statements of the Subsidiary Guarantors
have not been presented as all subsidiaries, except for certain minor foreign
subsidiaries, have provided guarantees and the parent company does not have any
significant operations or assets, separate from its investment in 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.
Under the Credit Agreement, the Company has certain reporting requirements
for the submission of its financial statements to the Lenders, as defined in the
Credit Agreement. On April 30, 2004, the Company was granted an extension of the
May 15, 2004, submission deadline for its results for the period ended March 31,
2004. The Company has until the extended deadline of May 28, 2004, to submit its
first quarter 2004 financial statements to the Lenders.
The Credit Agreement contains financial and other restrictive covenants,
including, without limitation, those restricting additional indebtedness, lien
creation, dividend payments, asset sales and stock offerings, and those
requiring a minimum net worth, maximum leverage and minimum fixed charge
coverage, each as defined in the Credit Agreement. The Company was in compliance
with all applicable covenants as of March 31, 2004.
The initial term of the Revolving Credit Facility is three years. The
Company and the Lenders can mutually agree to extend this term by up to two
years. The Company intends to use the Revolving Credit Facility, as needed, for
future investments in its operations, including capital expenditures, strategic
acquisitions, to secure its letters of credit, as needed, and other general
corporate purposes.
NOTE 10 -- INCOME TAXES
Income tax expense, which was primarily related to state and local income
taxes, was approximately $0.2 million and $0.3 million for the three months
ended March 31, 2004, and 2003, respectively. The Company's estimated federal
income tax expense for the three months ended March 31, 2004, is offset by the
release of an equal amount of the Company's valuation allowance. As of March 31,
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 11 -- RESTRUCTURING EXPENSES
The amount of lease termination costs associated with a 1995 restructuring
applied against the reserve in the three months ended March 31, 2004, is as
follows:
RESERVE BALANCE COSTS APPLIED RESERVE BALANCE
DECEMBER 31, 2003 AGAINST RESERVE MARCH 31, 2004
----------------- --------------- ---------------
(IN THOUSANDS)
Lease termination costs................. $1,430 $(59) $1,371
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
During the three months ended March 31, 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 12 -- 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.
The Hospital Services division provides Connective Healthcare solutions
that increase revenue and decrease expenses for hospitals, with a focus on
revenue cycle management and resource management. The division's revenue cycle
management solutions enable a hospital's central billing office to improve its
revenue cycle. The division has one of the largest 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.
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company's segment information from continuing operations is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Revenue:
Physician Services........................................ $63,183 $62,069
Hospital Services......................................... 24,771 23,166
Eliminations.............................................. (3,353) (3,237)
------- -------
$84,601 $81,998
======= =======
Segment operating expenses:
Physician Services........................................ $57,230 $54,734
Hospital Services......................................... 18,969 18,596
Corporate................................................. 7,894 3,905
Eliminations.............................................. (3,353) (3,237)
------- -------
$80,740 $73,998
======= =======
Segment operating income:
Physician Services........................................ $ 5,953 $ 7,335
Hospital Services......................................... 5,802 4,570
Corporate................................................. (7,894) (3,905)
------- -------
$ 3,861 $ 8,000
======= =======
Interest expense............................................ $ 2,074 $ 4,482
======= =======
Interest income............................................. $ (52) $ (108)
======= =======
Loss on extinguishment of debt.............................. $ -- $ 221
======= =======
Income before income taxes.................................. $ 1,839 $ 3,405
======= =======
Depreciation and amortization:
Physician Services........................................ $ 2,424 $ 2,714
Hospital Services......................................... 1,320 1,328
Corporate................................................. 150 249
------- -------
$ 3,894 $ 4,291
======= =======
Capital expenditures and capitalized software development
costs:
Physician Services........................................ $ 1,610 $ 921
Hospital Services......................................... 1,150 827
Corporate................................................. 4 18
------- -------
$ 2,764 $ 1,766
======= =======
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
AS OF
------------------------
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services........................................ $ 64,918 $ 63,222
Hospital Services......................................... 56,602 58,021
Corporate................................................. 46,986 50,281
Discontinued operations................................... -- 129
-------- --------
$168,506 $171,653
======== ========
13
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- 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 March 31, 2004, increased
approximately 3% as compared to the same period of 2003 primarily due to an
increase in software maintenance revenue in the Hospital Services division.
Consolidated operating margins declined from 9.8% in the first quarter of 2003
to 4.6% in the first quarter of 2004 primarily due to the costs associated with
the additional procedures as part of the year-end 2003 audit. Excluding these
costs, operating profit generated from the business was stable, except for the
expected
14
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 first quarter of 2004 by $2.4 million compared to
the prior year period. This decrease in interest expense contributed to the
reduction in net cash used for continuing operations during the first quarter of
2004. Net cash used for continuing operations decreased by $4.5 million compared
to the prior year period. The Company historically experiences a use of cash
from continuing operations during the first quarter of the year due to
seasonality.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004, AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2003
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $63,183 $62,069
Hospital Services........................................... 24,771 23,166
Eliminations................................................ (3,353) (3,237)
------- -------
$84,601 $81,998
======= =======
Revenue for the Physician Services division increased approximately 2% in
the three months ended March 31, 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 of $12 million during the first quarter of 2004 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 first quarter of 2004 compared to the prior year
period. Net backlog at March 31, 2004, was approximately $5 million, compared to
the negative backlog of approximately $2 million at December 31, 2003. The
increase in net backlog is a result of the record level of net new business sold
during the three months ended March 31, 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 7% for
the three months ended March 31, 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 in the division is related 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 6% 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.
Segment Operating Income. Segment operating income is segment revenue less
segment operating expenses, which include salaries and wages expense, other
operating expenses, additional procedures and
15
restructuring expenses, depreciation and amortization. Segment operating income,
classified by the Company's divisions, is as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------- -------
(IN THOUSANDS)
Physician Services.......................................... $ 5,953 $ 7,335
Hospital Services........................................... 5,802 4,570
Corporate................................................... (7,894) (3,905)
------- -------
$ 3,861 $ 8,000
======= =======
Physician Services' segment operating income decreased approximately 19% in
the three months ended March 31, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 9.4% in the three months ended
March 31, 2004, versus approximately 11.8% 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
quarter of approximately $12 million. Historically, new business is
progressively implemented over a period of six to nine months before it reaches
its annualized revenue run-rate and full profitability.
Hospital Services' segment operating income increased approximately 27% in
the three months ended March 31, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 23.4% versus approximately 19.7%
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 $4.0 million or approximately
102% in the three months ended March 31, 2004, compared to the same period in
2003. The increase is attributable primarily to expenses incurred to perform the
additional procedures discussed below.
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, which caused
the March 31, 2004 Form 10-Q and 2003 Form 10-K filing delays, 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 operating costs related to the additional procedures
totaling approximately $3.9 million during the three months ended March 31,
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.
Additionally, during the three months ended March 31, 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.
Interest. Interest expense was approximately $2.1 million for the three
months ended March 31, 2004, as compared to $4.5 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 payment of $3.1 million of long-term
debt during the fourth quarter of 2003 and entering into a new Credit Agreement
in September 2003 at substantially lower interest rates (fixed 9.5% rate in the
first quarter of 2003 compared to a LIBOR plus 4.25% rate, or approximately
5.42%, in the first quarter of 2004). Interest income was $0.1 million for the
three-month periods ended March 31, 2004, and 2003.
16
Loss on Extinguishment of Debt. During the three months ended March 31,
2003, in connection with the retirement of $15 million of the Company's
then-outstanding 9 1/2 % Senior Notes due 2005 ("Notes"), the Company incurred a
write-off of approximately $0.2 million of deferred debt issuance costs
associated with the original issuance of the Notes.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was approximately $0.2 million and $0.3 million for the
three months ended March 31, 2004 and 2003, respectively. The Company's
estimated federal income tax expense for the three months ended March 31, 2004,
is offset by the release of an equal amount of the Company's valuation
allowance. As of March 31, 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 plus interest of approximately
$0.1 million, which is expected to be received on June 1, 2004.
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 MARCH 31,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue........................ $ -- $ 106 $ 106 $6,467 $ 154 $ 6,621
==== ===== ===== ====== ===== =======
Loss from discontinued
operations before income
taxes........................ $(18) $(303) $(321) $ (489) $(764) $(1,253)
Income tax expense............. -- -- -- 20 -- 20
---- ----- ----- ------ ----- -------
Loss from discontinued
operations, net of tax....... $(18) $(303) $(321) $ (509) $(764) $(1,273)
==== ===== ===== ====== ===== =======
17
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF
----------------------------------
MARCH 31, 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 three months ended March 31, 2004, and 2003, the Company
incurred expenses of approximately $63,000 and $11,000, 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 March
31, 2004, and December 31, 2003, and cash flows from continuing operations for
the three months ended March 31, 2004, and 2003, (in thousands):
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Unrestricted cash and cash equivalents................. $20,502 $25,271
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------- --------
Cash used for continuing operations......................... $ (696) $ (5,248)
Cash used for investing activities from continuing
operations................................................ $(2,977) $ (1,784)
Cash used for financing activities from continuing
operations................................................ $ (613) $(14,872)
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 approximately $0.1 million at March 31, 2004 and
December 31, 2003, represent 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 three months ended March 31, 2004, the Company used
approximately $0.7 million in cash for continuing operations, which includes
cash generated from normal operations offset by cash payments related to
additional procedures necessary under SAS No. 99 totaling approximately $2.4
million (refer to "Note 3 -- Additional Procedures" in the Company's Notes to
Consolidated Financial Statements for more information), the payment of
approximately $3.4 million in expenses and legal settlements related to the
matter with Lloyd's of London (refer to "Note 8 -- Legal Matters" in the
Company's Notes to Consolidated Financial Statements for more information) and
quarterly interest payments of approximately $1.7 million.
18
During the three months ended March 31, 2003, the Company used
approximately $5.2 million in cash for continuing operations, which includes
cash used for normal operations offset by semi-annual interest payments of
approximately $8.3 million and the payment of approximately $2.8 million in
expenses and legal settlements related to the matter with Lloyd's of London
(refer to "Note 8 -- Legal Matters" in the Company's Notes to Consolidated
Financial Statements for more information).
During the three months ended March 31, 2004, the Company used
approximately $3.0 million in cash from investing activities from continuing
operations primarily for capital expenditures and investment in software
development costs.
During the three months ended March 31, 2003, the Company used
approximately $1.8 million in cash from investing activities from continuing
operations primarily for capital expenditures and software development costs.
During the three months ended March 31, 2004, the Company used
approximately $0.6 million in cash from financing activities. The Company used
$3.1 million for repayment of the Company's long-term debt in accordance with
the mandatory amortization schedule, which was offset by proceeds from the
exercise of stock options of $2.5 million.
During the three months ended March 31, 2003, the Company used
approximately $14.9 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.
For more information about the Company's long-term debt, refer to "Note
9 -- 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 $20 million settlement in its
litigation with Lloyd's.
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 three months ended March 31, 2004, was approximately $3.4 million,
which consisted of approximately $0.6 million related to the cost of pursuing
the litigation against Lloyd's and approximately $2.8 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
three months ended March 31, 2003, was approximately $2.8 million, which
consisted of approximately $1.3 million related to insurance premium increases
for new insurance coverage and the cost of pursuing the litigation against
Lloyd's and approximately $1.5 million related to the funding of legal costs and
litigation settlements covered by the Lloyd's E&O policies. As of March 31,
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 March 31, 2004, approximately $13.5 million of these costs have been paid by
the Company. The Company expects to record a gain of approximately $1.7 million
on settlement when the cash is received.
For the three months ended March 31, 2004, and 2003, the Company incurred
approximately $0.7 million and $1.3 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 $3.9 million, of which approximately $2.4 million was paid for the
quarter ended March 31, 2004. These operating costs are reflected in other
expenses in the Company's Consolidated Statements of Operations. As the
additional procedures were completed during early May 2004, the Company
anticipates incurring additional expense of $2.0 to $3.0 million in the second
quarter of 2004.
19
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
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 and
any costs associated with its litigation with Lloyd's.
On September 11, 2003, the Company entered into the Credit Agreement,
including the Revolving Credit Facility. Under the Credit Agreement, the Company
has the option of entering into LIBOR based loans or Base Rate loans, each as
defined in the Credit Agreement. LIBOR based loans under the Revolving Credit
Facility bear interest at LIBOR plus amounts ranging from 3.0% to 3.5% based on
the Company's leverage ratio, as defined in the Credit Agreement. Base Rate
loans under the Revolving Credit Facility bear interest at the Base Rate plus
amounts ranging from 1.50% to 2.00% based on the Company's leverage ratio, as
defined in the Credit Agreement. In addition, the Company pays a quarterly
commitment fee on the unused portion of the Revolving Credit Facility of 0.50%
per annum. The Company has not incurred any borrowing under the Revolving Credit
Facility and does not expect to incur any borrowings thereunder to fund its
working capital or ordinary investing needs.
Under the Credit Agreement, the Company has certain reporting requirements
for the submission of its financial statements to the Lenders, as defined in the
Credit Agreement. On April 30, 2004, the Company was granted an extension of the
May 15, 2004, submission deadline for its results for the period ended March 31,
2004. The Company has until the extended deadline of May 28, 2004, to submit its
first quarter 2004 financial statements to the Lenders.
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 7 -- Discontinued
Operations and Divestitures," "Note 8 -- Legal Matters," "Note 9 -- Long-Term
Debt," "Note 10 -- 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, gain on sale and net
proceeds related to the Patient1 product line divestiture, 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, 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
20
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.
IF A PENDING NASDAQ DELISTING PROCESS IS NOT VACATED, THE COMPANY'S COMMON
STOCK MAY BE DELISTED FROM THE NASDAQ STOCK MARKET, WHICH COULD HAVE AN
ADVERSE IMPACT ON THE MARKET AND TRADING PRICE FOR THE COMPANY'S COMMON STOCK.
On April 1, 2004, the Company received a noncompliance notification from
The Nasdaq Stock Market ("Nasdaq") due to the delay in filing the 2003 Form
10-K. On April 29, 2004, the Company had a hearing on the matter before a Nasdaq
Listing Qualifications Panel (the "Panel"). The Panel has not yet issued its
decision, but is expected to do so shortly. In addition, the Company did not
timely file its Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (this Form 10-Q), and on May 18, 2004, the Company received a noncompliance
notification from Nasdaq due to the delay in filing this Form 10-Q. Although the
Company believes that it will meet all Nasdaq listing standards upon the filing
of this Form 10-Q and that the Nasdaq delisting process will thereupon be
vacated, there can be no assurance that the delisting process will be vacated
and that the Company's common stock will continue to trade on the Nasdaq
National Market. If the Company's common stock is delisted from the Nasdaq
National Market, it could have an adverse impact on the market for the Company's
common stock.
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 $119 million of long-term indebtedness and,
as a result, has obligations to make interest and principal payments on that
debt. If unable to make the required debt payments, the Company could be
required to reduce or delay capital expenditures, sell certain assets,
restructure or refinance its indebtedness, or seek additional equity capital.
The Company's ability to make payments on its debt obligations will depend on
future operating performance, which may be affected by conditions beyond the
Company's control.
Under the $175 million Credit Agreement, the Company has certain reporting
requirements for the submission of its financial statements to the Lenders, as
defined in the Credit Agreement. On April 30, 2004, the Company was granted an
extension of the May 15, 2004, submission deadline for its results for the
period ended March 31, 2004. The Company has until the extended deadline of May
28, 2004, to submit its first quarter 2004 financial statements to the Lenders.
In the event the Company cannot meet the extended deadline, it must request
21
an additional extension from the Lenders. There is no guarantee that the Lenders
will grant this request or that the Company will not be required to compensate
the Lenders in order to receive an additional extension.
IN THE EVENT THE SETTLEMENT AGREEMENT WITH LLOYD'S FALLS THROUGH AND THE
COMPANY IS UNSUCCESSFUL IN ITS LITIGATION AGAINST LLOYD'S, THE COMPANY WOULD
BE REQUIRED TO RECORD A WRITE-OFF OF THE THEN-CURRENT RECEIVABLE RELATED TO
LLOYD'S AND CERTAIN CLAIMS PRESENTLY PENDING AGAINST THE COMPANY WOULD BE
UNINSURED.
On May 10, 2004, the Company reached a $20 million settlement with Lloyd's.
The settlement entails a $20 million cash payment that is payable by Lloyd's 60
days from the settlement date or by July 9, 2004. Lloyd's also agreed to assume
responsibility for the two remaining pending claims under the original errors
and omissions ("E&O") policies. In the event the settlement agreement falls
through and the litigation against Lloyd's proceeds, certain claims presently
pending against the Company would not be covered by insurance (refer to "Note
8 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information). As of March 31, 2004, the Company had incurred
approximately $18.3 million of costs related to claims under Lloyd's that are
classified as Lloyd's receivable in the Company's Consolidated Balance Sheet. As
of March 31, 2004, approximately $13.5 million of these costs had been paid by
the Company. As of March 31, 2004, there are only two active remaining cases
that are covered under the Lloyd's E&O policies. In the event the settlement
agreement falls through and the litigation against Lloyd's proceeds, and if the
Company is then unsuccessful in such litigation, the Company would be required
to record a write-off of the then-current receivable related to Lloyd's. The
write-off would have a minimal cash flow impact as the majority of the claims
have been paid as incurred; however, any remaining claims which have not been
resolved would be uninsured.
THE COMPANY IS REGULARLY INVOLVED IN LITIGATION, WHICH MAY EXPOSE THE COMPANY
TO SIGNIFICANT LIABILITIES.
The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of our 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 which the
Company may become involved, its insurance coverage, errors and omissions
coverage or otherwise, 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 its business, results of operations or
financial condition.
THE PHYSICIAN MANAGEMENT OUTSOURCING BUSINESS IS HIGHLY COMPETITIVE AND THE
COMPANY'S INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY
AFFECT THE COMPANY.
The physician business management outsourcing business, especially for
revenue cycle management, is highly competitive. The Company competes with
regional and local physician reimbursement organizations as well as physician
groups that provide their own business management services in house. Successful
competition within this industry is dependent on numerous industry and market
conditions.
Potential industry and market changes that could adversely affect the
Company's ability to compete for business management outsourcing services
include an increase in the number of local, regional or national competitors
providing comparable services and new alliances between healthcare providers and
third-party payers in which healthcare providers are employed by such
third-party payers.
22
THE BUSINESS OF PROVIDING SERVICES AND SOLUTIONS TO HOSPITALS FOR BOTH REVENUE
CYCLE AND RESOURCE MANAGEMENT IS ALSO HIGHLY COMPETITIVE AND THE COMPANY'S
INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY AFFECT THE
COMPANY.
The business of providing services and solutions to hospitals for both
revenue cycle and resource management is also highly competitive. The Company
competes with traditional electronic data interface companies, outsourcing
companies and specialized software vendors with national, regional and local
bases. Some competitors have longer operating histories and greater financial,
technical and marketing resources than that of the Company. The Company's
successful competition within this industry is dependent on numerous industry
and market conditions.
THE MARKETS FOR THE COMPANY'S SERVICES AND SOLUTIONS ARE CHARACTERIZED BY
RAPIDLY CHANGING TECHNOLOGY, EVOLVING INDUSTRY STANDARDS AND FREQUENT NEW
PRODUCT INTRODUCTIONS AND THE COMPANY'S INABILITY TO KEEP PACE COULD ADVERSELY
AFFECT THE COMPANY.
The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including its
ability to enhance existing products and services; introduce new products and
services quickly and cost effectively; achieve market acceptance for new
products and services; and respond to emerging industry standards and other
technological changes.
Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing our technology going forward.
The costs associated with refining, enhancing and developing these systems may
increase significantly in the future. Existing software and technology may
become obsolete as a result of ongoing technological developments in the
marketplace.
THE HEALTHCARE MARKETPLACE IS CHARACTERIZED BY CONSOLIDATION, WHICH MAY RESULT
IN FEWER POTENTIAL CUSTOMERS FOR THE COMPANY'S SERVICES.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.
Consolidation of management and billing services through integrated
delivery systems may result in a decrease in demand for the Company's business
management outsourcing services for particular physician practices.
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. 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
23
have to be defended, private payers may file claims against the Company, and the
Company may be excluded from Medicare, Medicaid or other government-funded
healthcare programs.
In the past, the Company has been the subject of federal investigations,
and it may become the subject of false claims litigation or additional
investigations relating to its billing and collection activities. Any such
proceeding or investigation could have a material adverse effect on the
Company's business.
Under 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 is
anticipated. Failure to comply with such rules may have a material adverse
effect on the Company's business and may subject the Company to civil and
criminal penalties as well as loss of customers.
The Company relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA-compliant format. While the Company
believes it will be fully and properly prepared to process electronic medical
claims in a HIPAA-compliant format, there can be no assurance that third
parties, including healthcare providers and payers, will likewise be prepared to
supply all the data elements required to process electronic medical claims and
make electronic remittance under HIPAA's standards. If payers reject electronic
medical claims and such claims are processed manually rather than
electronically, there could be a material adverse 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 providers. The Company cannot predict whether the government will
enact new legislation and regulations, and, if enacted, whether such new
developments will affect its business.
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.
24
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 Term Loan B and the Revolving Credit Facility. As such, the
Company could experience fluctuations in the interest rates under the Term Loan
B, and, if the Company were to borrow amounts under the Revolving Credit
Facility, the Company could experience fluctuations in interest rates under the
Revolving Credit Facility. The Company had borrowings totaling $118.8 million
under the Term Loan B at March 31, 2004, and has not incurred any borrowings
under the Revolving Credit Facility.
The Company has a process in place to monitor fluctuations in interest
rates and could hedge against significant forecast changes in interest rates, if
necessary.
EXCHANGE RATE SENSITIVITY
The majority of the Company's 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 March 31, 2004,
and have concluded that these disclosure controls and procedures were operating
effectively at the reasonable assurance level at March 31, 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.
No change in the Company's internal control over financial reporting
occurred during the first 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 first
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
25
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.
26
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in "Note 8 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.
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 -- Settlement Agreement dated as of June 24, 1999, by and among
Lori T. Caudill, William J. DeZonia, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust, Paulanne H. Thacker Retained Annuity
Trust and Borrower (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.2 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- 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).
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.
27
(B) Reports on Form 8-K
The Company filed or furnished the following reports on Form 8-K during the
quarter ended March 31, 2004:
FINANCIAL
STATEMENTS DATE FILED OR
ITEM REPORTED FILED DATE OF REPORT FURNISHED
------------- ---------- ---------------- ----------------
Press release dated February 3, 2004, announcing
results of operations for the quarterly period
ended December 31, 2003....................... No February 3, 2004 February 3, 2004
Press release dated March 16, 2004, announcing
2003 Annual Report on Form 10-K cannot be
completed by the accelerated deadline of March
15, 2004...................................... No March 16, 2004 March 16, 2004
Press release dated March 29, 2004, announcing
2003 Annual Report on Form 10-K cannot be
completed by the extended deadline of March
30, 2004...................................... No March 29, 2004 March 29, 2004
28
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
(Principal Accounting Officer)
Date: March 4, 2005
29
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 -- Settlement Agreement dated as of June 24, 1999, by and among
Lori T. Caudill, William J. DeZonia, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust, Paulanne H. Thacker Retained Annuity
Trust and Borrower (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.2 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- 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).
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.