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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-19480
PER-SE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2840 MT. WILKINSON PARKWAY 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)
(770) 444-5300
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 [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
TITLE OF CLASS SHARES OUTSTANDING AT MAY 5, 2003
-------------- ---------------------------------
Common Stock $0.01 Par Value 30,181,441 shares
Non-voting Common Stock $0.01 Par Value 0 Shares
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PER-SE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2003
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002........................................... 2
Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002............................... 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002............................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
Item 4. Controls and Procedures..................................... 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 21,041 $ 46,748
Restricted cash........................................... 4,445 4,296
-------- --------
Total cash and cash equivalents................... 25,486 51,044
Accounts receivable, billed (less allowances of $4,393 and
$4,600, respectively).................................. 49,910 46,234
Accounts receivable, unbilled (less allowances of $1,153
and $884, respectively)................................ 10,057 8,880
Other..................................................... 12,441 11,478
-------- --------
Total current assets.............................. 97,894 117,636
Property and equipment, net of accumulated depreciation..... 20,045 21,607
Other intangible assets, net of accumulated amortization.... 32,834 34,194
Goodwill, net of accumulated amortization................... 32,549 32,549
Other....................................................... 3,097 3,485
-------- --------
Total assets...................................... $186,419 $209,471
======== ========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,355 $ 3,572
Accrued compensation...................................... 18,955 23,018
Accrued expenses.......................................... 17,063 23,203
Current portion of long-term debt......................... 110 15,124
-------- --------
42,483 64,917
Deferred revenue.......................................... 18,895 20,873
-------- --------
Total current liabilities......................... 61,378 85,790
Long-term debt.............................................. 160,750 160,792
Other obligations........................................... 2,003 2,141
-------- --------
Total liabilities................................. 224,131 248,723
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
30,181 and 30,163 issued and outstanding as of March
31, 2003, and December 31, 2002, respectively.......... 302 302
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 778,091 778,021
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (816,976) (818,553)
Treasury stock at cost, 94 shares as of March 31, 2003,
and 90 as of December 31, 2002......................... (1,070) (1,045)
Deferred stock unit plan obligation....................... 1,070 1,045
Accumulated other comprehensive loss...................... (624) (517)
-------- --------
Total stockholders' deficit....................... (37,712) (39,252)
-------- --------
Total liabilities and stockholders' deficit....... $186,419 $209,471
======== ========
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
Revenue..................................................... $88,523 $85,436
------- -------
Salaries and wages.......................................... 52,264 49,727
Other operating expenses.................................... 24,283 23,780
Depreciation................................................ 2,668 2,969
Amortization................................................ 2,759 2,847
Interest expense............................................ 4,765 4,600
Interest income............................................. (108) (139)
------- -------
Total expenses.................................... 86,631 83,784
------- -------
Income before income taxes.................................. 1,892 1,652
Income tax expense.......................................... 304 252
------- -------
Income from continuing operations........................... 1,588 1,400
------- -------
Loss from discontinued operations, net of tax............... (11) (101)
------- -------
Net income........................................ $ 1,577 $ 1,299
======= =======
Net income per common share -- basic:
Income from continuing operations......................... $ 0.05 $ 0.04
Loss from discontinued operations, net of tax............. -- --
------- -------
Net income per common share -- basic.............. $ 0.05 $ 0.04
======= =======
Shares used in computing net income per common
share -- basic............................................ 30,172 29,990
======= =======
Net income per common share -- diluted:
Income from continuing operations......................... $ 0.05 $ 0.04
Loss from discontinued operations, net of tax............. -- --
------- -------
Net income per common share -- diluted............ $ 0.05 $ 0.04
======= =======
Shares used in computing net income per common
share -- diluted.......................................... 31,037 32,527
======= =======
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,577 $ 1,299
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization............................. 5,427 5,816
Discontinued operations................................... 11 101
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ (147) (19)
Accounts receivable, billed............................ (3,676) (4,037)
Accounts receivable, unbilled.......................... (1,177) (1,952)
Accounts payable....................................... 2,783 (1,031)
Accrued compensation................................... (4,063) (1,994)
Accrued expenses....................................... (6,204) (2,985)
Deferred revenue....................................... (1,978) (451)
Other, net............................................. (731) (2,729)
-------- --------
Net cash used for continuing operations.............. (8,178) (7,982)
Net cash used for discontinued operations............ (11) (101)
-------- --------
Net cash used for operating activities............... (8,189) (8,083)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (1,157) (2,295)
Software development costs.................................. (1,399) (1,957)
Proceeds from sale of property and equipment................ 1 4
Acquisitions, net of cash acquired.......................... (19) (20)
-------- --------
Net cash used for investing activities............... (2,574) (4,268)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options................. 70 353
Repayments of debt.......................................... (15,014) (17)
-------- --------
Net cash (used for) provided by financing
activities.......................................... (14,944) 336
-------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (25,707) (12,015)
Balance at beginning of period.............................. 46,748 36,493
-------- --------
Balance at end of period.................................... $ 21,041 $ 24,478
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 8,523 $ 8,362
Income taxes.............................................. 134 215
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 unaudited condensed consolidated financial statements of
Per-Se Technologies, Inc. ("Per-Se" or the "Company") are presented in
accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X.
For further information, the reader of this Form 10-Q may wish to refer to the
audited consolidated financial statements of the Company for the fiscal year
ended December 31, 2002, included in the Company's Annual Report on Form 10-K,
filed on March 27, 2003, with the Securities and Exchange Commission.
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Activity related to the Medaphis Services Corporation ("Hospital Services")
and Impact Innovations Group ("Impact") businesses, which were sold in 1998 and
1999, respectively, has been presented as discontinued operations for all
periods presented.
NOTE 2 -- STOCK-BASED COMPENSATION PLANS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for
Stock-Based Compensation -- Transition and Disclosure ("SFAS No. 148"). SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002, and for interim periods beginning after December 15, 2002.
The Company adopted the disclosure requirements of SFAS No. 148 on December 31,
2002.
At March 31, 2003, 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 Statement of Operations, as all options granted under those plans had
an exercise price equal to the market value of the underlying Common Stock on
the date of grant. The following table illustrates the
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
effect on net income and net income per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based compensation.
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income as reported...................................... $ 1,577 $ 1,299
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................ (1,307) (1,239)
------- -------
Pro forma net income........................................ $ 270 $ 60
======= =======
Net income per common share:
Basic -- as reported...................................... $ 0.05 $ 0.04
======= =======
Basic -- pro forma........................................ $ 0.01 $ 0.00
======= =======
Diluted -- as reported.................................... $ 0.05 $ 0.04
======= =======
Diluted -- pro forma...................................... $ 0.01 $ 0.00
======= =======
NOTE 3 -- 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 occur from common
shares issuable through stock options and warrants. The following sets forth the
computation of basic and diluted earnings per share for the three-month periods
ended March 31, 2003 and 2002 (in thousands, except per share data):
THREE MONTHS
ENDED
MARCH 31,
---------------
2003 2002
------ ------
Net income.................................................. $1,577 $1,299
====== ======
Common shares outstanding:
Shares used in computing net income per common
share -- basic......................................... 30,172 29,990
Effect of potentially dilutive stock options and
warrants............................................... 865 2,537
------ ------
Shares used in computing net income per common
share -- diluted....................................... 31,037 32,527
====== ======
Earnings per common share:
Basic..................................................... $ 0.05 $ 0.04
====== ======
Diluted................................................... $ 0.05 $ 0.04
====== ======
Options and warrants to purchase 4.3 million and 2.8 million shares of
Common Stock outstanding during the three months ended March 31, 2003 and 2002,
respectively, were excluded from the computation of diluted earnings per share
because the exercise prices were greater than the average market price of the
common shares, and therefore, the effect would have been antidilutive.
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 4 -- RESTRICTED CASH
At March 31, 2003, restricted cash primarily represents restrictions on the
Company's cash as security for letters of credit.
NOTE 5 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)
The functional currency of the Company's operations outside of the United
States is the local country's currency. Consequently, assets and liabilities of
operations outside the United States are translated into dollars using exchange
rates at the end of each reporting period. Revenue and expenses are translated
at the average exchange rates prevailing during the period. Cumulative
translation gains and losses are reported in accumulated other comprehensive
income (loss). In the three months ended March 31, 2003 and 2002, the only
component of other comprehensive loss was the net foreign currency translation,
which was $0.1 million and $37,000, respectively.
NOTE 6 -- ACQUISITIONS
On February 9, 2000, the Company acquired the outstanding capital stock of
Knowledgeable Healthcare Solutions, Inc. ("KHS") for consideration of $3.1
million, consisting of $1.1 million cash and approximately 236,000 shares, or
$2.0 million, of the Company's Common Stock. In addition, the purchase agreement
provided for a purchase price adjustment of up to $6.0 million, which was
recorded in December 2000, payable in cash and the Company's Common Stock,
should KHS meet certain operational targets over the three years from the date
of acquisition.
The KHS acquisition was recorded using the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
the liabilities assumed based on their estimated fair market value at the date
of acquisition. Approximately $8.9 million of the purchase price was allocated
to goodwill and, prior to the Company's adoption of SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS No. 142"), on January 1, 2002, was being
amortized using the straight-line method over five years. In April 2001, KHS met
certain of its purchase agreement operational targets and the Company paid
approximately $0.1 million (25% through the issuance of the Company's Common
Stock) of the $6.0 million purchase price adjustment. In February 2003, the
Company determined that KHS would not meet its remaining purchase agreement
operational targets and reduced the purchase price allocation to goodwill by
approximately $5.9 million. This adjustment is reflected in the Company's
December 31, 2002, Consolidated Balance Sheet. The operating results of KHS are
included in the Company's Consolidated Statements of Operations from the date of
acquisition in the e-Health Solutions segment.
NOTE 7 -- DISCONTINUED OPERATIONS AND DIVESTITURES
On November 30, 1998, the Company completed the sale of its Hospital
Services business segment. In 1999, the Company completed the sale of both
divisions of its Impact business segment.
During the three months ended March 31, 2003 and 2002, the Company incurred
expenses of approximately $11,000 and $0.1 million, respectively, which were
primarily legal costs, associated with Hospital Services 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 Hospital Services and Impact as discontinued operations for all
periods presented.
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 8 -- LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not yet 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 programs.
In February 2002, the Company settled claims for alleged breach of contract
arising out of a 1997 contract for billing services provided by the Physician
Services division to a former client. The Company and its insurance carrier at
the time, Certain Underwriters at Lloyd's of London (collectively "Lloyd's"),
each paid the plaintiff $2.0 million in cash in exchange for a release of all
claims asserted against the Company. Under the terms of its insurance policy
with Lloyd's, the Company is seeking reimbursement from Lloyd's for the $2.0
million it paid in this settlement.
On May 30, 2002, the Company received a letter on behalf of Lloyd's
purporting to rescind various managed healthcare professional liability, or
errors and omissions ("E&O"), insurance policies and directors and officers and
company reimbursement ("D&O") insurance policies (collectively the "Policies")
issued to the Company by Lloyd's. The E&O policies were for the term of December
31, 1998, through June 30, 2002, and the D&O policies were for the term of July
1, 2000, through June 30, 2002. The purported rescission was based on
allegations that the Company had failed to advise Lloyd's about the existence of
several lawsuits that were alleged to be related to the risk covered under the
policies, including the lawsuit settled in February 2002 in which the Company
and Lloyd's each paid the plaintiff $2.0 million.
On May 31, 2002, Lloyd's filed a lawsuit against the Company seeking
rescission of the E&O and D&O policies based on the allegations in its letter,
dated May 30, 2002, or a declaration that coverage is unavailable for the claim
related to the February 2002 settlement under the policies issued by Lloyd's,
and restitution of the $2.0 million paid by Lloyd's on behalf of the Company in
that settlement. On June 5, 2002, the Company filed a lawsuit against Lloyd's
seeking damages for breach of contract and breach of obligations of good faith
and fair dealing, including punitive damages. The Company also seeks a
declaratory judgment to enforce the E&O and D&O policies according to their
terms.
Lloyd's lawsuit, filed in the Circuit Court for Kent County, Michigan, was
dismissed during December 2002 with the Michigan court citing that California
was a more suitable forum in which to hear the litigation. The Company's
lawsuit, filed in the Superior Court of the State of California for the County
of Los Angeles, is pending.
The Company believes that Lloyd's attempt to rescind the policies is
without merit, and the Company is prosecuting the matter vigorously and
asserting all appropriate claims against Lloyd's.
The Company's insurance coverage for both the E&O and D&O policies were
scheduled to be renewed as of June 30, 2002, and the Company was in the process
of actively pursuing new coverage with insurance carriers, including Lloyd's,
when the attempted rescission notice was received from Lloyd's. Due to the
attempted rescission, the Company expedited its insurance proposal process and
in mid-June 2002 the Company secured new insurance coverage with a policy period
of 12 months. The Company believes it experienced a significant increase in
insurance premiums and deductibles with its new policies as a result of Lloyd's
actions and is seeking reimbursement for a portion of the increased premium
costs and increased deductibles in its lawsuit against Lloyd's. The Company has
expensed approximately $1.3 million for the three months ended March 31, 2003,
of increased insurance premiums and the costs of pursuing litigation against
Lloyd's in the Company's Consolidated Statements of Operations in the Corporate
segment.
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company has not received any D&O insurance claims since 1996. The
Company did receive E&O insurance claims during the term of the Lloyd's E&O
insurance policies in the ordinary course of business. Over the last five years,
the majority of E&O claims received by the Company were resolved with nominal or
no settlement.
Pending the outcome of the litigation with Lloyd's, the Company will
continue to vigorously defend and will be required to fund the legal costs and
any litigation settlements related to E&O claims covered by the Lloyd's E&O
policies. The Company expects to recover these costs from Lloyd's in accordance
with the obligations of Lloyd's under the E&O policies and, as such, has
recorded and will record the amounts as Other Current Assets on the Company's
Consolidated Balance Sheets.
At March 31, 2003, the Company's Other Current Assets include $7.2 million
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
$7.2 million balance includes $6.8 million paid through March 31, 2003, and
additional obligations to be paid of approximately $0.4 million.
The Company believes that it has meritorious defenses to the Lloyd's claims
and that a favorable outcome is probable. The Company's insurance is on a
"claims-made" basis, which means insurance coverage is in place based on the
date the claim is made, not the date(s) the services were provided and/or the
products were sold. In the event that the Company is unsuccessful in the
litigation with Lloyd's, certain claims presently pending against the Company
would become the sole responsibility of the Company. Although the Company
believes it will be successful in its litigation with Lloyd's, if it is not and
uninsured claims do exist, such claims, including the $7.2 million balance in
Other Current Assets related to the interim funding of legal costs and
litigation settlements, could have a material adverse effect on the Company's
financial condition and results of operations. Regardless of the outcome of the
litigation with Lloyd's, the Company's new insurance coverage will not be
affected.
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.
NOTE 9 -- LONG-TERM DEBT
Under the Indenture governing the $175 million of 9 1/2% Senior Notes due
2005 (the "Notes"), the balance of net proceeds, as defined by the Indenture
governing the Notes, from the sale of any assets having a fair value in excess
of $1.0 million must be invested in the Company's business within 360 days of
receipt of proceeds related to the sale or they become "excess proceeds." If the
aggregate of excess proceeds is greater than $10.0 million, the Company is
required to offer to repurchase the Notes at par with such excess proceeds.
In February 2000, the Company acquired KHS. A portion of the purchase price
was deferred based on KHS's performance during the three years following the
acquisition date. The Company recorded a liability for the unpaid purchase price
based on KHS's performance estimates (see Note 6 -- Acquisitions for further
discussion on KHS's total purchase price).
In February 2003, the Company determined that KHS would not meet the
post-acquisition operational targets set in the KHS purchase agreement, and the
Company reduced the portion of the KHS purchase price allocated to goodwill by
approximately $5.9 million. This adjustment is reflected in the Company's
December 31, 2002, Consolidated Balance Sheet. Because of this adjustment,
excess proceeds (as defined by the Indenture) exceeded $10.0 million. On
February 13, 2003, the Company initiated an offer to purchase up to $15 million
of the Notes at par plus accrued interest, including $13.2 million to satisfy
the requirements under the Indenture for the reinvestment of excess proceeds.
The Company's offer to repurchase the Notes
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
was accepted in full, and on March 17, 2003, the Company repurchased $15 million
of the Notes at par plus accrued interest of approximately $0.1 million. The
Company used a portion of its available cash to fund the repurchase. In
addition, the Company incurred a write-off of approximately $0.2 million during
the three months ended March 31, 2003, of deferred debt issuance costs
associated with the original issuance of the Notes. As of March 31, 2003, the
Company's balance of net proceeds and excess proceeds (as defined by the
Indenture governing the Notes) was zero.
The Company entered into a $50 million credit facility (the "Credit
Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a borrowing base calculated based on eligible billed accounts
receivable of the Company's Physician Services and e-Health Solutions divisions,
as defined in the Credit Facility. The Company has the option of entering into
LIBOR based loans or index-rate loans, each as defined in the Credit Facility.
LIBOR based loans bear interest at LIBOR plus amounts ranging from 1.85% to
2.65% based on the Company's leverage ratio, as defined in the Credit Facility.
Index rate loans bear interest at rates approximating Prime plus amounts ranging
from 0.35% to 1.15% based on the Company's leverage ratio, as defined in the
Credit Facility. In addition, the Company pays a quarterly commitment fee on the
unused portion of the Credit Facility of 0.375% per annum.
The Credit Facility contains financial, collateral and other restrictive
covenants, including, without limitation, those restricting additional
indebtedness, lien creation, dividend payments, asset sales, stock offerings,
capital expenditures, cash velocity, maximum days sales outstanding and the
prepayment of the Notes; those requiring a minimum EBITDA (as defined)
maintenance, fixed charge coverage and cash velocity; and limiting days sales
outstanding in billed accounts receivable, each as defined in the Credit
Facility. The Company was in compliance with all applicable covenants as of
March 31, 2003.
The initial term of the Credit Facility is 42 months, expiring on October
6, 2004. The Company and the Lender can mutually agree to extend this term by 18
months if certain conditions have been met. The Company intends to use the
Credit Facility, as needed, for future investments in its operations, including
capital expenditures, strategic acquisitions and other general corporate
purposes. The Company has not incurred any borrowings under the Credit Facility
as of March 31, 2003.
NOTE 10 -- INCOME TAXES
Income tax expense, which was primarily related to state and local income
taxes, was $0.3 million for the three months ended March 31, 2003 and 2002. The
Company's estimated federal income tax expense for the three months ended March
31, 2003, is offset by the release of an equal amount of the Company's valuation
allowance. As of March 31, 2003, 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 -- 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
three operating divisions: Physician Services, e-Health Solutions and
Application Software.
The Physician Services segment provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services include accounts
receivable management, clinical data collection, data input, medical coding,
billing, contract management and cash collections. These services are designed
to assist healthcare providers with the business management functions associated
with the delivery of healthcare services, allowing physicians to
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
focus on providing quality patient care. These services also assist physicians
in improving cash flows and reducing administrative costs and burdens. The
business of the Physician Services division is conducted by PST Services, Inc. a
Georgia corporation doing business as "Per-Se Technologies," which is a wholly
owned subsidiary of the Company.
The e-Health Solutions segment provides healthcare providers and payers
with connectivity and business intelligence solutions that help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice management software as an application
service provider ("ASP") to physician practices and managed care solutions to
payers in ASP, turnkey or outsourced formats. The business of the e-Health
Solutions division is conducted by the following four wholly owned subsidiaries
of the Company: Per-Se Transaction Services, Inc., an Indiana corporation;
Health Data Services, Inc., an Ohio corporation; Patient Account Management
Services, Inc., an Ohio corporation; and Knowledgeable Healthcare Solutions,
Inc., an Alabama corporation. All of these subsidiaries do business under the
name "Per-Se Technologies."
The Application Software segment provides enterprise-wide financial,
clinical and administrative software to acute care healthcare organizations,
including patient financial management software, clinical information software
and patient and staff scheduling systems. These applications enable healthcare
organizations to optimize the quality of care delivered and the profitability of
business operations. The business of the Application Software division is
conducted by PST Products, LLC, a California limited liability company doing
business as "Per-Se Technologies," which is wholly owned by the Company.
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 expense, other operating expenses,
depreciation and amortization.
The e-Health Solutions segment revenue includes intersegment revenue for
services provided to the Physician Services segment, which are shown as
Eliminations to reconcile to total consolidated revenue.
Information concerning the Company's reportable operating segments is as
follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Revenue:
Physician Services........................................ $58,959 $56,505
e-Health Solutions........................................ 16,949 15,785
Application Software...................................... 15,852 16,008
Eliminations.............................................. (3,237) (2,862)
------- -------
$88,523 $85,436
======= =======
Segment operating expenses:
Physician Services........................................ $51,617 $51,922
e-Health Solutions........................................ 15,599 13,553
Application Software...................................... 14,116 13,730
Corporate................................................. 3,879 2,980
Eliminations.............................................. (3,237) (2,862)
------- -------
$81,974 $79,323
======= =======
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Segment operating profit:
Physician Services........................................ $ 7,342 $ 4,583
e-Health Solutions........................................ 1,350 2,232
Application Software...................................... 1,736 2,278
Corporate................................................. (3,879) (2,980)
------- -------
$ 6,549 $ 6,113
======= =======
Interest expense............................................ $ 4,765 $ 4,600
======= =======
Interest income............................................. $ (108) $ (139)
======= =======
Income before income taxes.................................. $ 1,892 $ 1,652
======= =======
Depreciation and amortization:
Physician Services........................................ $ 2,304 $ 2,700
e-Health Solutions........................................ 1,444 1,255
Application Software...................................... 1,428 1,636
Corporate................................................. 251 225
------- -------
$ 5,427 $ 5,816
======= =======
Capital expenditures and capitalized software development
costs:
Physician Services........................................ $ 659 $ 1,069
e-Health Solutions........................................ 886 1,625
Application Software...................................... 993 1,359
Corporate................................................. 18 199
------- -------
$ 2,556 $ 4,252
======= =======
AS OF
------------------------
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services........................................ $ 51,865 $ 50,700
e-Health Solutions........................................ 58,892 60,248
Application Software...................................... 38,261 36,014
Corporate................................................. 37,401 62,509
-------- --------
$186,419 $209,471
======== ========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is a provider of
integrated business management outsourcing services, Internet-enabled
connectivity and application software for the healthcare industry. Per-Se
delivers its services and products through its three operating divisions:
Physician Services, e-Health Solutions and Application Software.
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. Services focus on revenue
cycle management and include accounts receivable management, clinical data
collection, data input, medical coding, billing, contract management and cash
collections. 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 e-Health Solutions division provides connectivity and revenue cycle
management solutions to healthcare providers and payers, which help reduce
administrative costs and enhance cash flows. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing. In addition, e-Health Solutions offers
physician practice management software as an application service provider
("ASP") to physician practices and offers managed care solutions to payers in
ASP, turnkey or outsourced formats.
The Application Software division provides enterprise-wide financial,
clinical and administrative software to acute care healthcare organizations,
including clinical information software, patient financial management software
and patient and staff scheduling systems. These applications enable healthcare
organizations to optimize the quality of care delivered and the profitability of
business operations.
Per-Se markets its products and services to constituents of the healthcare
industry, primarily to hospital-affiliated physician practices, hospitals and
integrated healthcare delivery networks ("IDNs").
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003, AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2002
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $58,959 $56,505
e-Health Solutions.......................................... 16,949 15,785
Application Software........................................ 15,852 16,008
Eliminations................................................ (3,237) (2,862)
------- -------
$88,523 $85,436
======= =======
Revenue for the Physician Services division increased approximately 4% in
the three months ended March 31, 2003, as compared to the same period in 2002.
The revenue increase is due to new sales as well as growth in the existing
client base. The Company continued to experience client retention in the mid-90%
range during the three months ended March 31, 2003. Net backlog at March 31,
2003, was approximately $3 million, compared to approximately $4 million at
December 31, 2002. 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
13
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 e-Health Solutions division increased approximately 7% for
the three months ended March 31, 2003, as compared to the same period in 2002
despite the phasing out of a large print and mail customer, which began in the
second half of 2002. This customer's business was not related to medical claims.
Revenue growth in the division is a result of increased revenue in the physician
and hospital medical transaction processing business. This growth is evidenced
by the approximately 11% increase in transaction volume that the division
achieved in the three months ended March 31, 2003, over the prior year period.
Revenue growth does not necessarily correlate directly to transaction volume due
to the mix of products sold by e-Health Solutions. The Company believes
transaction volume is a useful indicator of future revenue growth as business is
implemented into the division's recurring revenue model.
Revenue for the Application Software division decreased slightly for the
three months ended March 31, 2003, as compared to the same period in 2002.
During the three months ended March 31, 2003, the division began implementation
work associated with an international contract. Due to the unique
characteristics of the contract, payments begin when the base system is
substantially delivered, rather than throughout the implementation period. As
such, the Company concluded that revenue under the contract should not be
recognized until payments commence in 2004, as opposed to revenue being
recognized as the implementation progresses. The division was unable to
recognize approximately $0.6 million in revenue in the three months ended March
31, 2003. Backlog at March 31, 2003, was approximately $54 million, compared to
approximately $52 million at December 31, 2002. The Company believes that
backlog is a useful indicator of future revenue growth for the division.
The e-Health Solutions 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 Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expense, other operating
expenses, depreciation and amortization. Segment operating profit, classified by
the Company's divisions, is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 7,342 $ 4,583
e-Health Solutions.......................................... 1,350 2,232
Application Software........................................ 1,736 2,278
Corporate................................................... (3,879) (2,980)
------- -------
$ 6,549 $ 6,113
======= =======
Physician Services' segment operating profit increased approximately 60% in
the three months ended March 31, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 12.5% in the three months ended
March 31, 2003, versus approximately 8.1% in the same period in 2002. The margin
expansion is attributable to the incremental margins achieved on increased
revenue in addition to labor and cost savings from productivity initiatives
completed in 2002.
e-Health Solutions' segment operating profit decreased approximately 40% in
the three months ended March 31, 2003, compared to the same period in 2002,
resulting in operating margins of 8.0% versus 14.1% in the prior year period. A
significant portion of the margin decrease is attributable to approximately $0.6
million of costs related to the conversion of the current ASP-based physician
practice management solution clients onto a new platform. The addition of staff
in the latter part of 2002 and early 2003, particularly in the sales and
marketing area, to support the division's growth and product initiatives, also
negatively impacted margins in the three months ended March 31, 2003, compared
to the same period in 2002.
14
Application Software's segment operating profit decreased approximately 24%
in the three months ended March 31, 2003, compared to the same period in 2002.
The decrease is attributable to the revenue decrease previously discussed.
The Company's corporate overhead expenses increased approximately $0.9
million in the three months ended March 31, 2003, compared to the same period in
2002. The increase is attributable to increased insurance premiums and legal
expenses of approximately $1.3 million related to Lloyd's attempt to rescind
certain insurance policies (refer to "Note 8 -- Legal Matters" in the Company's
Notes to Consolidated Financial Statements for more information).
Interest. Interest expense was approximately $4.8 million for the three
months ended March 31, 2003, as compared to $4.6 million for the same period in
2002. The increase is primarily attributable to the accelerated amortization of
the Company's deferred debt issuance costs of approximately $0.2 million related
to the acceptance of the Company's offer to repurchase $15 million of the
Company's $175 million 9 1/2% Senior Notes due 2005 (the "Notes"). Interest
income was $0.1 million for each of the three-month periods ended March 31, 2003
and 2002.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was $0.3 million for each of the three-month periods ended
March 31, 2003 and 2002. The Company's estimated federal income tax expense for
the three months ended March 31, 2003, is offset by the release of an equal
amount of the Company's valuation allowance. As of March 31, 2003, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had working capital of $36.5 million
compared to $31.8 million at December 31, 2002. The increase in working capital
is related to an increase in accounts receivable of approximately $4.9 million
related to the normal seasonality of collections and the timing of collections
on certain larger software implementations. Restricted cash totaled $4.4 million
as of March 31, 2003, and $4.3 million as of December 31, 2002. Restricted cash
primarily represents restrictions on the Company's cash as security for letters
of credit. Unrestricted cash and cash equivalents totaled $21.0 million at March
31, 2003, a decrease of $25.7 million compared to December 31, 2002.
Historically, the three months ended March 31 is a use of cash due to the
approximately $8.3 million semi-annual interest payment on the Company's Notes.
Also, during the three months ended March 31, 2003, the Company retired $15
million of the Notes at par plus accrued interest of approximately $0.1 million,
contributing to the decrease in cash from December 31, 2002 (see cash for
investing activities below).
Cash used for continuing operations was $8.2 million in the three months
ended March 31, 2003, compared to cash used for continuing operations in the
three months ended March 31, 2002, of $8.0 million.
The Company used $2.6 million in cash for investing activities during the
three months ended March 31, 2003, compared to cash used for investing
activities of $4.3 million during the same period in 2002. The decrease in cash
used for investing activities was primarily related to a decrease of capital
spending of $1.7 million during the three months ended March 31, 2003.
The Company used $14.9 million in cash for financing activities during the
three months ended March 31, 2003, compared to cash provided by financing
activities of $0.3 million during the same period in 2002. The increase in cash
used for financing activities was primarily related to the acceptance of the
Company's offer to repurchase up to $15 million of the Notes at par plus accrued
interest.
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.
15
The Company is in litigation with Certain Underwriters at Lloyd's of London
("Lloyd's") following an attempt by Lloyd's to rescind certain of the Company's
insurance policies (refer to "Note 8 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). For the three months
ended March 31, 2003, the Company incurred approximately $1.3 million of expense
related to insurance premium increases for its new insurance coverage and the
cost of pursuing litigation against Lloyd's. Accordingly, these costs have been
reflected in the Company's Consolidated Statements of Operations in the
Corporate segment.
In addition, pending the outcome of the litigation with Lloyd's, the
Company continues to fund the legal costs and any litigation settlements
associated with claims covered by the Lloyd's Errors and Omissions ("E&O")
policies. The Company expects to recover these costs from Lloyd's and has
reflected these amounts as Other Current Assets on the Company's Consolidated
Balance Sheets.
The negative impact of these items on the Company's 2003 full year cash
flow is projected to be approximately $8 million to $9 million, which consists
of approximately $5 million related to insurance premium increases for new
insurance coverage and the cost of pursuing litigation against Lloyd's and
approximately $3 million to $4 million related to the funding of legal costs and
litigation settlements covered by the Lloyd's E&O policies. As of March 31,
2003, the negative impact on quarterly cash flow 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 litigation against
Lloyd's and $1.5 million related to the funding of legal costs and litigation
settlements covered by the Lloyd's E&O policies.
16
FORWARD-LOOKING STATEMENTS
Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including but not limited to
certain statements set forth under the captions "Note 8 -- 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.
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, the impact of operational
improvement or cost reduction initiatives, projected cost savings from such
initiatives, operating margins, 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:
Competition with Business Management Outsourcing Services Companies and
In-house Providers
The business management outsourcing business, especially surrounding the
areas of billings and collections, is highly competitive. The Company competes
with regional physician reimbursement organizations and physician groups that
provide their own business management services. 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 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.
Competition with Information Technology Companies
The business of providing application software, information technology,
consulting services and connectivity services is also highly competitive. The
Company competes with national and regional companies in this regard. 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.
Major Client Projects
The Company's Application Software division involves projects designed to
reengineer customer operations through the strategic use of client/server and
other advanced technologies in conjunction with the implementation of software.
Failure to meet customers' expectations with respect to a major project could
have the following consequences: damage the Company's reputation and standing in
this marketplace; impair
17
its ability to attract new client/server information technology business; and
inhibit its ability to collect for services performed on a project.
Changes in the Healthcare Industry
The markets for the Company's software and e-Health products and services
as well as our business management outsourcing services 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 software, e-Health and
billing systems 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.
Consolidation in the Marketplace
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.
Government Regulations
The healthcare industry is highly regulated and is subject to changing
political, economic, and regulatory influences. Federal and state legislatures
have periodically considered programs, such as the Balanced Budget Act of 1997,
to reform or amend the U.S. healthcare system at both the federal and state
level and to change healthcare financing and reimbursement systems. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Current or future government
regulations or healthcare reform measures may affect the Company's business.
Healthcare industry participants may respond by reducing their investments or
postponing investment decisions, including investments in the Company's products
and services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid and/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 Information 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
18
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 subject the Company to civil and criminal penalties.
Currently in the area of privacy and security of health information,
numerous federal and state civil and criminal laws govern the collection, use,
storage and disclosure of health information. Penalties for noncompliance, both
criminal and civil, may be brought by federal or state governments. Persons who
believe their health information has been misused or disclosed improperly may
bring claims, and payers who believe privacy and security standards have been
violated 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 healthcare reform will continue to be widely debated. 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 new
legislation and regulations will be enacted and, if enacted, whether such new
developments will affect its business. However, the Company has invested and
expects to continue to invest in product enhancements to support customer
operations that are regulated by HIPAA. Responding to HIPAA's impact may require
the Company to invest in new products or charge higher prices.
Debt
The Company has a significant amount of long-term indebtedness and, as a
result, has obligations to make interest 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 certain conditions that may be beyond the Company's
control.
Litigation
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. Many
of the Company's software products provide data for use by healthcare providers
in providing care to patients. Although no claims have been brought against the
Company to date regarding injuries related to the use of its products, such
claims may be made in the future.
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, product liability 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. In the
event that the Company is unsuccessful in its ongoing litigation with Lloyd's,
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, 2003,
the Company had incurred approximately $7.2 million of costs related to claims
under Lloyd's that are reported as Other Current Assets on the Company's
Consolidated Balance Sheets. As of March 31, 2003, approximately $6.8 million of
these costs had been paid. If the Company is unsuccessful in its ongoing
litigation with Lloyd's, the Company would be required to record a write-off of
the then-current receivable related to Lloyd's. The write-off would have a
minimal cash flow impact as the majority of the claims have been paid as
incurred. A successful claim brought
19
against the Company, which is uninsured or under-insured, could materially harm
its business, results of operations or financial condition.
Stock Price Volatility
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 and high
technology companies in particular, has experienced volatility that often has
been unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of the
Company's Common Stock, regardless of actual operating performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, any fluctuation in the prevailing
interest rates is not expected to have a material effect on the Company's
financial statements.
The Company has the option of entering into loans based on LIBOR or index
rates under the Credit Facility. If the Company were to borrow amounts under the
Credit Facility, the Company could experience fluctuations in the interest
rates. The Company has not incurred any borrowings under the Credit Facility.
EXCHANGE RATE SENSITIVITY
The majority of the Company's sales and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains or losses to date. The Company conducts only limited 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 a date within
90 days of the filing date of this report and have concluded that these
disclosure controls and procedures operate effectively to support the
certifications required of such officers in this report.
There were no significant changes in internal controls or in other factors
that could significantly affect the Company's internal controls subsequent to
the date of the most recent evaluation of these internal controls.
20
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 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc. (incorporated by
reference to Exhibit 2.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions, Inc., E-Business Solutions.com,
Inc., Impact Innovations Holdings, Inc. and Registrant
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on May 5, 1999).
2.3 -- Stock Purchase Agreement dated as of November 4, 1999, among
J3 Technology Services Corp., Impact Innovations Holdings,
Inc., Impact Innovations Government Group, Inc. and
Registrant (incorporated by reference to Exhibit 2.3 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K")).
3.2 -- Restated By-laws of Registrant (incorporated by reference to
Exhibit 3.2 to the 1999 Form 10-K).
4.1 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on March 3,
1998).
4.2 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998).
4.3 -- 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).
4.4 -- 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).
4.5 -- 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).
4.6 -- 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).
4.7 -- 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).
21
EXHIBIT
NUMBER DOCUMENT
- ------- --------
99.1 -- 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.
99.2 -- 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.
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2003.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PER-SE TECHNOLOGIES, INC.
(Registrant)
By: /s/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
By: /s/ MARY C. CHISHOLM
------------------------------------
Mary C. Chisholm
Vice President and Controller
(Principal Accounting Officer)
Date: May 9, 2003
23
CERTIFICATIONS
I, Philip M. Pead, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Per-Se
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ PHILIP M. PEAD
--------------------------------------
Philip M. Pead
Chairman, President
and Chief Executive Officer
Date: May 9, 2003
24
CERTIFICATIONS
I, Chris E. Perkins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Per-Se
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ CHRIS E. PERKINS
--------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
Date: May 9, 2003
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT
- ------- --------
2.1 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc. (incorporated by
reference to Exhibit 2.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions, Inc., E-Business Solutions.com,
Inc., Impact Innovations Holdings, Inc. and Registrant
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on May 5, 1999).
2.3 -- Stock Purchase Agreement dated as of November 4, 1999, among
J3 Technology Services Corp., Impact Innovations Holdings,
Inc., Impact Innovations Government Group, Inc. and
Registrant (incorporated by reference to Exhibit 2.3 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K")).
3.2 -- Restated By-laws of Registrant (incorporated by reference to
Exhibit 3.2 to the 1999 Form 10-K).
4.1 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on March 3,
1998).
4.2 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998).
4.3 -- 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).
4.4 -- 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).
4.5 -- 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).
4.6 -- 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).
4.7 -- 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).
99.1 -- 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.
99.2 -- 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.
26