UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
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 OCTOBER 27, 2004
-------------- --------------------------------------
Common Stock $0.01 Par Value 30,154,598 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 September 30, 2004 in response to certain comments of the
staff of the Securities and Exchange Commission in connection with its review of
our Registration Statement on Form S-1 (File No. 333-119012) filed on September
15, 2004 and amended on November 23, 2004, January 7, 2005, February 10, 2005
and March 7, 2005. The revisions contained in this Form 10-Q/A do not include
the restatement of any financial information previously reported in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 except
that the Company's Consolidated Statement of Cash Flows for the nine months
ended September 30, 2004 has been restated as indicated therein.
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 November 5, 2004, the filing date of our
original Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
For more current information, readers should refer to the reports and other
documents we have filed with or furnished to the Commission subsequent to
November 5, 2004.
PER-SE TECHNOLOGIES, INC.
FORM 10-Q/A
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2004
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 (Unaudited)............................... 2
Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and 2003 (Unaudited)........ 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and 2003 (Unaudited)............... 4
Notes to Consolidated Financial Statements (Unaudited)...... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 29
Item 4. Controls and Procedures..................................... 29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 32
Item 6. Exhibits.................................................... 32
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 36,573 $ 25,271
Restricted cash........................................... 70 66
-------- --------
Total cash and cash equivalents........................ 36,643 25,337
Accounts receivable, billed (less allowances of $3,851 and
$4,267 as of September 30, 2004, and December 31, 2003,
respectively).......................................... 49,505 46,335
Accounts receivable, unbilled (less allowances of $432 and
$528 as of September 30, 2004, and December 31, 2003,
respectively).......................................... 1,356 1,613
Lloyd's receivable........................................ -- 17,405
Prepaid expenses.......................................... 3,189 2,676
Other..................................................... 4,074 3,507
-------- --------
Total current assets................................... 94,767 96,873
Property and equipment, net of accumulated depreciation..... 14,970 16,434
Goodwill, net of accumulated amortization................... 32,549 32,549
Other intangible assets, net of accumulated amortization.... 21,323 19,787
Other....................................................... 5,573 5,881
Assets of discontinued operations, net...................... -- 129
-------- --------
Total assets........................................... $169,182 $171,653
======== ========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,961 $ 6,587
Accrued compensation...................................... 15,662 18,102
Accrued expenses.......................................... 16,261 19,037
Current portion of long-term debt......................... -- 12,500
-------- --------
38,884 56,226
Deferred revenue.......................................... 25,261 20,334
-------- --------
Total current liabilities.............................. 64,145 76,560
Long-term debt.............................................. 125,000 109,375
Other obligations........................................... 4,683 2,908
Liabilities of discontinued operations...................... -- 422
-------- --------
Total liabilities...................................... 193,828 189,265
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
32,110 and 31,322 issued and outstanding as of
September 30, 2004, and December 31, 2003,
respectively........................................... 321 313
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 793,652 786,297
Warrants.................................................. -- 1,495
Accumulated deficit....................................... (793,155) (805,286)
Treasury stock at cost, 2,124 and 122 as of September 30,
2004, and December 31, 2003, respectively.............. (26,492) (1,303)
Deferred stock unit plan obligation....................... 1,443 1,303
Accumulated other comprehensive loss...................... (415) (431)
-------- --------
Total stockholders' deficit............................ (24,646) (17,612)
-------- --------
Total liabilities and stockholders' deficit............ $169,182 $171,653
======== ========
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.............................................. $90,641 $84,523 $263,383 $251,977
------- ------- -------- --------
Salaries and wages................................... 52,662 49,851 153,861 146,086
Other operating expenses............................. 24,361 20,572 71,511 65,792
Depreciation......................................... 1,889 2,289 5,979 7,154
Amortization......................................... 2,152 1,793 5,799 5,417
Other (income) expenses.............................. (654) 177 5,845 177
------- ------- -------- --------
Operating income................................... 10,231 9,841 20,388 27,351
Interest expense..................................... 1,410 3,863 5,483 12,524
Interest income...................................... (88) (79) (332) (245)
Loss on extinguishment of debt....................... -- 6,034 5,896 6,255
------- ------- -------- --------
Income before income taxes......................... 8,909 23 9,341 8,817
Income tax expense................................... 102 143 314 803
------- ------- -------- --------
Income (loss) from continuing operations........... 8,807 (120) 9,027 8,014
------- ------- -------- --------
Discontinued operations (see Note 8)
Loss from discontinued operations, net of
tax -- Patient1............................... -- (228) (18) (1,336)
(Loss) gain on sale of Patient1, net of tax..... (106) 9,797 3,649 9,797
Loss from discontinued operations, net of tax --
Business1..................................... -- (977) (303) (2,851)
Loss on sale of Business1, net of tax........... -- (7,708) (130) (7,708)
Loss from discontinued operations, net of
tax -- Other.................................. (1) (258) (94) (492)
------- ------- -------- --------
(107) 626 3,104 (2,590)
------- ------- -------- --------
Net income.................................... $ 8,700 $ 506 $ 12,131 $ 5,424
======= ======= ======== ========
Net income per common share -- basic:
Income from continuing operations............... $ 0.29 $ -- $ 0.29 $ 0.26
Loss from discontinued operations, net of
tax -- Patient1............................... -- (0.01) -- (0.04)
Gain on sale of Patient1, net of tax............ -- 0.32 0.11 0.32
Loss from discontinued operations, net of tax --
Business1..................................... -- (0.03) (0.01) (0.09)
Loss on sale of Business1, net of tax........... -- (0.25) -- (0.25)
Loss from discontinued operations, net of
tax -- Other.................................. -- (0.01) -- (0.02)
------- ------- -------- --------
Net income per common share -- basic.......... $ 0.29 $ 0.02 $ 0.39 $ 0.18
======= ======= ======== ========
Weighted average shares used in computing basic
earnings per share................................. 30,088 30,677 31,046 30,364
======= ======= ======== ========
Net income per common share -- diluted:
Income from continuing operations............... $ 0.27 $ -- $ 0.27 $ 0.25
Loss from discontinued operations, net of
tax -- Patient1............................... -- (0.01) -- (0.04)
Gain on sale of Patient1, net of tax............ -- 0.32 0.10 0.30
Loss from discontinued operations, net of tax --
Business1..................................... -- (0.03) (0.01) (0.09)
Loss on sale of Business1, net of tax........... -- (0.25) -- (0.24)
Loss from discontinued operations, net of
tax -- Other.................................. -- (0.01) -- (0.01)
------- ------- -------- --------
Net income per common share -- diluted........ $ 0.27 $ 0.02 $ 0.36 $ 0.17
======= ======= ======== ========
Weighted average shares used in computing diluted
earnings per share................................. 32,168 30,677 33,273 32,199
======= ======= ======== ========
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
--------- -------------
(AS RESTATED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 12,131 $ 5,424
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 11,778 12,571
Loss from discontinued operations......................... 545 12,387
Gain on sale of Patient1.................................. (3,649) (9,797)
Amortization of deferred financing costs.................. 963 932
Loss on extinguishment of debt............................ 5,896 6,255
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ -- 4,162
Accounts receivable, billed............................ (3,170) (5,413)
Accounts receivable, unbilled.......................... 257 342
Accounts payable....................................... 357 1,868
Accrued compensation................................... (2,453) (4,171)
Accrued expenses....................................... 731 (5,836)
Deferred revenue....................................... 4,927 1,447
Other, net............................................. 13,075 (3,407)
--------- ---------
Net cash provided by continuing operations........... 41,388 16,764
Net cash used for discontinued operations............ (514) (9,672)
--------- ---------
Net cash provided by operating activities............ 40,874 7,092
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,624) (4,850)
Software development costs.................................. (5,334) (2,821)
Net proceeds from sale of Patient1 and Business1, net of
tax....................................................... 3,520 27,092
Acquisition, net of cash acquired........................... (1,141) --
Other....................................................... (66) (54)
--------- ---------
Net cash (used for) provided by continuing
operations.......................................... (7,645) 19,367
Net cash used for discontinued operations............ -- (2,289)
--------- ---------
Net cash (used for) provided by investing
activities.......................................... (7,645) 17,078
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... 125,000 125,000
Treasury stock purchase..................................... (24,999) --
Proceeds from the exercise of stock options................. 5,853 7,012
Debt issuance costs......................................... (6,013) (9,737)
Payments of debt............................................ (121,875) (175,020)
Other....................................................... 107 308
--------- ---------
Net cash used for financing activities............... (21,927) (52,437)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net change.................................................. 11,302 (28,267)
Balance at beginning of period.............................. 25,271 46,748
--------- ---------
Balance at end of period.................................... $ 36,573 $ 18,481
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 3,587 $ 16,565
Extinguishment of debt.................................... 2,375 5,412
Income taxes.............................................. 342 421
See notes to consolidated financial statements.
4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements (interim
financial statements) include the accounts of Per-Se Technologies, Inc. and its
subsidiaries ("Per-Se" or the "Company"). Intercompany accounts and transactions
have been eliminated.
These interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information, the rules and regulations of the
Securities and Exchange Commission for interim financial statements, and
accounting policies consistent, in all material respects, with those applied in
preparing the Company's audited consolidated financial statements included in
the Company's Annual Report on Form 10-K/A for the fiscal year ended December
31, 2003, filed with the Securities and Exchange Commission ("SEC") on March 7,
2005, ("2003 Form 10-K/A"). These interim financial statements are unaudited but
reflect all adjustments management considers necessary for a fair presentation
of the Company's financial position, operating results and cash flows for the
interim periods presented. The information included in this report should be
read in conjunction with the 2003 Form 10-K/A.
The consolidated financial statements of the Company have been presented to
reflect the former operations of the Hospital Services division's Patient1
clinical product line ("Patient1") and Business1-PFM patient accounting product
line ("Business1") as discontinued operations. Patient1 was sold effective July
28, 2003, and Business1 was sold effective January 31, 2004. Additionally, the
activity related to the Company's former Medaphis Services Corporation ("MSC")
and Impact Innovations Group ("Impact") businesses, which were sold in 1998 and
1999, respectively, are also reflected as discontinued operations for all
periods presented (refer to Note 8 for additional information).
NOTE 2 -- STOCK-BASED COMPENSATION PLANS
At September 30, 2004, the Company has four stock-based compensation plans.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). No significant stock-based compensation cost is
reflected in the Company's Statements of Operations, as all options granted
under those plans had an exercise price equal to the market value of the
underlying Common Stock on the date of grant. The following table illustrates
the effect on net income and net income per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation("SFAS No. 123"), to
this stock-based compensation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2004 2003 2004 2003
-------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported.......................... $ 8,700 $ 506 $12,131 $ 5,424
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... $(1,182) $(2,063) $(3,153) $(4,570)
------- ------- ------- -------
Pro forma net income (loss)..................... $ 7,518 $(1,557) $ 8,978 $ 854
======= ======= ======= =======
Net income (loss) per common share:
Basic -- as reported.......................... $ 0.29 $ 0.02 $ 0.39 $ 0.18
======= ======= ======= =======
Basic -- pro forma............................ $ 0.25 $ (0.05) $ 0.29 $ 0.03
======= ======= ======= =======
Diluted -- as reported........................ $ 0.27 $ 0.02 $ 0.36 $ 0.17
======= ======= ======= =======
Diluted -- pro forma.......................... $ 0.23 $ (0.05) $ 0.27 $ 0.03
======= ======= ======= =======
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 3 -- OTHER EXPENSES
ADDITIONAL PROCEDURES
As a result of allegations of improprieties made during 2003 and 2004, the
Company's independent auditors advised the Company and the Audit Committee of
the Board of Directors that additional procedures should be performed related to
the allegations. These additional procedures were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit
("SAS No. 99"), which became effective for periods beginning on or after
December 15, 2002. Due to the volume and, in some cases, vague nature of many of
the allegations, the scope of the additional procedures was broad and extensive.
The Company recorded costs related to the additional procedures totaling
approximately $6.3 million during the nine months ended September 30, 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.
GAIN ON SETTLEMENT WITH LLOYD'S
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). On July 7, 2004, pursuant to the settlement, as amended, Lloyd's
paid the Company $16.2 million in cash. As of the payment date, the Company had
an approximately $14.7 million receivable from Lloyd's and recognized a gain of
approximately $1.5 million on the settlement in the three months ended September
30, 2004.
EXECUTIVE OFFICE RELOCATION
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable operating lease
for that office space commencing July 1, 2004, which will expire in June 2014.
While the new landlord will assume the payments for the lease of the Company's
former corporate office space, the Company recorded a non-cash expense related
to the lease expense of approximately $1.0 million upon its exit of the former
office facility. Amounts received from the landlord are considered incentives,
which are being amortized over the lease term.
NOTE 4 -- REVENUE RECOGNITION
The Physician Services division signed an agreement ("the Agreement") in
2004 with a customer to provide physician practice management services. Under
the Agreement, Physician Services and the customer agreed to certain performance
goals. The performance goals will be measured on an interim basis through
February 28, 2009. At each interim measurement period, Physician Services will
determine if the performance goals for that period have been achieved.
If Physician Services achieves the performance goal for an interim
measurement period, Physician Services will recognize revenue as a percentage of
the customer's net collections pursuant to its standard revenue recognition
practice. If the Physician Services division does not achieve the performance
goal for an interim measurement period, revenue will not be recognized to the
extent the goal is not achieved.
NOTE 5 -- EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
period. Diluted EPS reflects the potential dilution that could
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
occur from common shares issuable through stock options and warrants. The
following sets forth the computation of basic and diluted net income per share
for the three-and nine months ended September 30, 2004, and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2004 2003 2004 2003
-------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income..................................... $ 8,700 $ 506 $12,131 $ 5,424
======= ======= ======= =======
Common shares outstanding:
Shares used in computing net income per
common share -- basic..................... 30,088 30,677 31,046 30,364
Effect of potentially dilutive stock options
and warrants.............................. 2,080 -- 2,227 1,835
------- ------- ------- -------
Shares used in computing net income per
common share -- diluted................... 32,168 30,677 33,273 32,199
======= ======= ======= =======
Net income per common share:
Basic........................................ $ 0.29 $ 0.02 $ 0.39 $ 0.18
======= ======= ======= =======
Diluted...................................... $ 0.27 $ 0.02 $ 0.36 $ 0.17
======= ======= ======= =======
Options and warrants to purchase 1.9 million and 1.8 million shares of
Common Stock outstanding during the three and nine months ended September 30,
2004, 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.
The conditions required for conversion of the Company's Convertible
Subordinated Debentures (see Note 10) have not been met. Therefore, the Company
did not assume conversion of the Debentures in calculating diluted EPS for the
nine months ended September 30, 2004.
In September 2004, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") reached a tentative conclusion on Issue
Number 04-08, The Effect of Contingently Convertible Debt on Diluted Earnings
per Share ("EITF No. 04-08"). The EITF concluded that contingently convertible
debt instruments should be included in diluted earnings per share computations
regardless of whether the market price trigger has been met. The effective date
is expected to be for periods ending after December 15, 2004. In November 2004,
the Company exercised its irrevocable option to pay the principal of its
Convertible Subordinated Debentures in cash. The Company will satisfy the amount
above the conversion trigger price of $17.85 through the issuance of stock. Any
stock appreciation above the conversion trigger price would be included in the
Company's dilutive shares for purposes of calculating diluted earnings per share
under EITF No. 04-08.
Options and warrants to purchase 6.9 million shares of Common Stock
outstanding during the three months ended September 30, 2003, were excluded from
the computation of diluted earnings per share due to their antidilutive effect
as a result of the Company's loss from continuing operations for the period.
Options and warrants to purchase 3.0 million shares of Common Stock
outstanding during the nine months ended September 30, 2003, 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.
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 6 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME
The functional currency of the Company's operations outside of the United
States is the local country's currency. Consequently, assets and liabilities of
operations outside the United States are translated into dollars using exchange
rates at the end of each reporting period. Revenue and expenses are translated
at the average exchange rates prevailing during the period. Cumulative
translation gains and losses are reported in accumulated other comprehensive
loss. In the three and nine month periods ended September 30, 2004, and 2003,
the only component of other comprehensive loss was the net foreign currency
translation.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
----- ----- ----- -----
(IN THOUSANDS)
Net foreign currency translation.......................... $31 $290 $16 $153
NOTE 7 -- ACQUISITION
On May 28, 2004, the Company entered into a five-year contract to provide
print and mail services for a new customer. As part of the transaction, the
Company purchased substantially all of the production assets and personnel of
that customer's hospital and physician patient statement and paper claims print
and mail business for cash consideration of approximately $1.1 million. In
addition, the Company recorded acquisition liabilities of approximately $1.0
million associated with the transaction.
The Company recorded the acquisition using the purchase method of
accounting and, accordingly, has preliminarily allocated the purchase price to
the assets acquired and liabilities assumed based on their estimated fair market
value at the date of acquisition. Approximately $1.9 million of the purchase
price was allocated to a finite-lived intangible asset with a five-year life.
The remaining $0.2 million of the purchase price was allocated to tangible
assets acquired. The operating results of the acquisition are included in the
Company's Consolidated Statements of Operations from the date of acquisition in
the Hospital Services division. The Company has not yet obtained all the
information related to acquisition liabilities required to finalize the purchase
price allocation.
The pro-forma impact of this acquisition is immaterial to the financial
statements of the Company and therefore has not been presented.
NOTE 8 -- DISCONTINUED OPERATIONS AND DIVESTITURES
In June 2003, the Company announced that it agreed to sell Patient1 to
Misys Healthcare Systems, a division of Misys plc ("Misys") for $30 million in
cash. Patient1 was the Company's only clinical product line and its sale allowed
the Company to better focus on optimizing reimbursement and improving
administrative efficiencies for physician practices and hospitals. The sale was
completed on July 28, 2003, and 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. Net proceeds on the sale of Patient1
were approximately $27.9 million, subject to closing adjustments. The Company
and Misys entered into binding arbitration regarding the final closing
adjustments and on May 21, 2004, the arbitrator awarded the Company
approximately $4.3 million. On June 1, 2004, the Company received payment of
approximately $4.5 million, which included interest of approximately $0.2
million. The Company recognized an additional gain on sale of approximately $3.6
million, net of taxes of approximately $0.2 million, in 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 during 2003. The Company
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 SEPTEMBER 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue.......................................... $ -- $ -- $ -- $ 2,168 $ 160 $ 2,328
==== ===== ===== ======= ======= =======
Loss from discontinued operations before income
taxes.......................................... $ -- $ -- $ -- $ (224) $ (977) $(1,201)
Income tax expense............................... -- -- -- 4 -- 4
---- ----- ----- ------- ------- -------
Loss from discontinued operations, net of tax.... $ -- $ -- $ -- $ (228) $ (977) $(1,205)
==== ===== ===== ======= ======= =======
MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue.......................................... $ -- $ 106 $ 106 $15,247 $ 330 $15,577
==== ===== ===== ======= ======= =======
Loss from discontinued operations before income
taxes.......................................... $(18) $(303) $(321) $(1,291) $(2,851) $(4,142)
Income tax expense............................... -- -- -- 45 -- 45
---- ----- ----- ------- ------- -------
Loss from discontinued operations, net of tax.... $(18) $(303) $(321) $(1,336) $(2,851) $(4,187)
==== ===== ===== ======= ======= =======
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF
--------------------------------------
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
BUSINESS1 BUSINESS1
--------- ---------
(IN THOUSANDS)
Current assets...................................... $-- $129
Property and equipment.............................. -- --
Other long-term assets.............................. -- --
--- ----
Assets of discontinued operations................. $-- $129
=== ====
Current liabilities................................. $-- $422
Deferred revenue.................................... -- --
Other long-term liabilities......................... -- --
--- ----
Liabilities of discontinued operations............ $-- $422
=== ====
On November 30, 1998, the Company completed the sale of its MSC business.
In 1999, the Company completed the sale of both divisions of its Impact
business.
During the nine months ended September 30, 2004, and 2003, the Company
incurred expenses of approximately $0.1 million and $0.5 million, respectively,
which were primarily legal costs, associated with MSC and Impact. Pursuant to
APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 9 -- LEGAL MATTERS
PENDING LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not resulted in legal
action. Within the Company's industry, federal and state civil and criminal laws
govern medical billing and collection activities. These laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from federal and state healthcare payer programs.
The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters; however, there can be no
assurance that such matters or any future legal matters will not have an adverse
effect on the Company. Amounts of awards or losses, if any, in pending legal
matters have not been reflected in the financial statements unless probable and
reasonably estimable.
SETTLED LEGAL MATTERS
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). In the settlement, Lloyd's agreed to pay the Company $20 million in
cash by July 9, 2004. Lloyd's also agreed to defend, settle or otherwise resolve
at their expense the two remaining pending claims covered under the errors and
omissions ("E&O") policies issued to the Company by Lloyd's. In exchange, the
Company provided Lloyd's with a full release of all E&O and directors and
officers and company reimbursement ("D&O") policies. The California Superior
Court retained jurisdiction to enforce any aspect of the settlement agreement.
As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O settlements covered by Lloyd's. Effective
on May 12, 2004, as a result of negotiations among the Company, Lloyd's, and a
party to a prior E&O settlement with the Company, the Lloyd's settlement was
amended to reduce by $3.8 million the additional amounts to be paid by the
Company under the prior E&O settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
receivable from Lloyd's by $3.8 million. On July 7, 2004, pursuant to the
settlement, as amended, Lloyd's paid the Company $16.2 million in cash. As of
the payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and recognized a gain of approximately $1.5 million on the settlement in
the three months ended September 30, 2004.
NOTE 10 -- LONG-TERM DEBT
On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due 2005 (the "Notes"). On March 17, 2003, the Company repurchased $15.0
million of the Notes at par plus accrued interest of approximately $0.1 million.
The Company wrote off approximately $0.2 million of deferred debt issuance costs
associated with the original issuance of the Notes related to this repurchase,
which is included in loss on extinguishment of debt in the Company's
Consolidated Statements of Operations.
On August 12, 2003, the Company commenced a cash tender offer for its
then-outstanding $160 million of Notes. On September 11, 2003, the Company
repurchased $143.6 million of the Notes that were tendered at the redemption
price of 102.625% of the principal amount, as required under the Indenture
governing the Notes, and accrued interest of approximately $1.0 million. The
remaining $16.4 million of the Notes were retired on
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
September 18, 2003, through a call initiated by the Company on August 12, 2003,
at the redemption price of 102.375% of the principal amount plus accrued
interest of approximately $10,000.
On September 11, 2003, the Company entered into a $175 million Credit
Agreement (the "Credit Agreement"), consisting of a $125 million Term Loan B
(the "Term Loan B") and a $50 million revolving credit facility (the "Revolving
Credit Facility"). The Company had approximately $118.8 million outstanding
under the Term Loan B as of June 30, 2004, under a LIBOR-based interest contract
bearing interest at 5.36%. The Company has had no borrowings outstanding under
the Revolving Credit Facility since its inception.
On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A of the Securities Act of
1933, as amended. As originally issued, the Debentures were convertible into
shares of the Company's Common Stock at an initial conversion rate of 56.0243
shares per $1,000 principal amount (a conversion price of approximately $17.85)
once the Company's Common Stock share price reaches 130% of the conversion
price, or a share price of approximately $23.20. In November 2004, the Company
exercised its irrevocable option to pay the principal of Debentures submitted
for conversion in cash. The Company will satisfy any amount above the conversion
trigger price of $17.85 through the issuance of Common Stock. The Debentures
mature on June 30, 2024, and are unsecured. Interest on the Debentures is
payable semiannually at the rate of 3.25% per annum on June 30 and December 30
of each year, beginning on December 30, 2004. The Company may redeem the
Debentures either in whole or in part beginning July 6, 2009. The holders may
require the Company to repurchase the Debentures on June 30, 2009, 2014, and
2019, or upon a fundamental change as defined in the Indenture governing the
Debentures. The Company used the proceeds from issuance of the Debentures,
together with cash on hand, to retire the $118.8 million outstanding under the
Term Loan B as well as to repurchase, for approximately $25 million, an
aggregate of approximately 2.0 million shares of the Company's outstanding
common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. In addition, the Company
incurred expenses associated with the retirement of the Term Loan B of
approximately $5.9 million, which included the write-off of approximately $3.5
million of deferred debt issuance costs, and which is classified as loss on
extinguishment of debt in the Company's Consolidated Statements of Operations.
In connection with the sale of the Debentures, the Company agreed to file
with the SEC, within 90 days after the original issuance of the Debentures, a
shelf registration statement with respect to the resale of the Debentures and
the common stock issuable upon conversion of the Debentures. The Company agreed
to use commercially reasonable efforts to cause the shelf registration statement
to become effective within 210 days after the original issuance of the
Debentures. If the Company does not fulfill certain of its obligations under the
registration rights agreement, including the timely filing and effective date of
the shelf registration statement, it will be required to pay additional interest
to holders of the Debentures until the shelf registration statement is
effective. On September 15, 2004, the Company filed the shelf registration
statement with the SEC. The Company is currently addressing the SEC staff's
comments on the shelf registration.
On June 30, 2004, the Company also amended the Revolving Credit Facility to
increase its capacity from $50 million to $75 million, to extend its maturity to
three years, and to lower the interest rate from LIBOR plus amounts ranging from
3.0% to 3.5% to LIBOR plus amounts ranging from 2.5% to 3.0%. The Company did
not incur any borrowings under the Revolving Credit Facility in connection with
the retirement of the Term Loan B or the share repurchase.
All obligations under the Revolving Credit Facility are fully and
unconditionally guaranteed, on a senior secured basis, jointly and severally by
all of the Company's present and future domestic and material foreign
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain minor foreign subsidiaries, have provided guarantees and the parent
company does not have any significant operations or assets separate from its
investment in those subsidiaries. Any non-guarantor subsidiaries are minor
individually and in the aggregate to the Company's
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
consolidated financial statements. There are no restrictions on the Subsidiary
Guarantors that would prohibit the transfer of funds or assets to the parent
company by dividend or loan.
The Revolving Credit Facility contains financial and other restrictive
covenants, including, without limitation, those restricting additional
indebtedness, lien creation, dividend payments, asset sales and stock offerings,
and those requiring a minimum net worth, maximum leverage and minimum fixed
charge coverage, each as defined in the Revolving Credit Facility. The Company
was in compliance with all applicable covenants as of September 30, 2004.
The Company intends to use the Revolving Credit Facility, as needed, for
future investments in its operations, including capital expenditures, strategic
acquisitions, to secure its letters of credit, and other general corporate
purposes.
NOTE 11 -- INCOME TAXES
Income tax expense, which was primarily related to state and local income
taxes, was approximately $0.1 and $0.3 million for the three and nine months
ended September 30, 2004, respectively, as compared to income tax expense of
approximately $0.1 million and $0.8 million for the same periods in 2003. The
Company's estimated federal income tax expense for the three and nine month
periods ended September 30, 2004, is offset by the release of an equal amount of
the Company's valuation allowance.
As of September 30, 2004, the Company's remaining net deferred tax asset
was fully offset by a valuation allowance. Realization of the net deferred tax
asset is dependent upon the Company generating sufficient taxable income prior
to the expiration of the federal net operating loss carryforwards. The Company
is currently evaluating the realizability of the deferred tax asset and
anticipates releasing a portion of the valuation allowance in the fourth quarter
of 2004, when the Company develops its annual forecasts for future periods. Any
such reduction in the valuation allowance will be based on the estimated net
operating loss carryforwards to be utilized to offset projected pre-tax income
for the next two to three years.
NOTE 12 -- RESTRUCTURING EXPENSES
The amount of lease termination costs associated with a 1995 restructuring
applied against the reserve in the nine months ended September 30, 2004, is as
follows:
RESERVE BALANCE COSTS APPLIED RESERVE BALANCE
DECEMBER 31, 2003 AGAINST RESERVE SEPTEMBER 30, 2004
----------------- --------------- ------------------
(IN THOUSANDS)
Lease termination costs............... $1,430 $(225) $1,205
During the nine months ended September 30, 2004, the Company incurred
approximately $41,000 of restructuring expenses related to the realignment of
the Company into the Physician Services and Hospital Services divisions.
NOTE 13 -- SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its two
operating divisions: Physician Services and Hospital Services.
The Physician Services division provides Connective Healthcare solutions
that manage the revenue cycle for physician groups. The division is the largest
provider of business management outsourced services that supplant all or most of
the administrative functions of a physician group. The target market is
primarily hospital-affiliated physician groups in the specialties of radiology,
anesthesiology, emergency medicine and pathology as well as physician groups
practicing in the academic setting and other large physician groups. The
division recognizes revenue primarily on a contingency fee basis, which aligns
the division's interests with the interests of the physician groups it services.
The outsourced services business recognizes revenue as a percentage of the
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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
designed to increase revenue and decrease expenses for hospitals, with a focus
on revenue cycle management and resource management. The division's revenue
cycle management solutions enable a hospital's central billing office to improve
its revenue cycle. The division has one of the largest clearinghouses in the
medical industry, which provides an important infrastructure to support its
revenue cycle offering. The division also provides resource management solutions
that enable hospitals efficiently to manage resources, such as personnel and the
operating room, to reduce costs and improve their bottom line. The division
primarily recognizes revenue on a per-transaction basis for its revenue cycle
management solutions and primarily recognizes revenue on a
percentage-of-completion basis or upon software shipment for sales of its
resource management software solutions. Approximately 88% of the division's
revenue is recurring due to its transaction-based business and the maintenance
revenue from its substantial installed base for the resource management software
solutions. The business of the Hospital Services division is conducted by the
following wholly owned subsidiaries of the Company: Per-Se Transaction Services,
Inc., an Ohio corporation; Patient Account Management Services, Inc., an Ohio
corporation; PST Products, LLC, a California limited liability company; and
Knowledgeable Healthcare Solutions, Inc., an Alabama corporation. All of these
subsidiaries do business under the name "Per-Se Technologies."
The Company evaluates each segment's performance based on its segment
operating profit. Segment operating profit is revenue less segment operating
expenses, which include salaries and wages expenses, other operating expenses,
restructuring expenses, depreciation and amortization.
The Hospital Services segment revenue includes intersegment revenue for
services provided to the Physician Services segment, which are shown as
eliminations to reconcile to total consolidated revenue.
13
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
Physician Services................................. $66,059 $63,516 $195,317 $189,668
Hospital Services.................................. 28,057 24,423 78,274 72,339
Eliminations....................................... (3,475) (3,416) (10,208) (10,030)
------- ------- -------- --------
$90,641 $84,523 $263,383 $251,977
======= ======= ======== ========
Segment operating expenses:
Physician Services................................. $58,884 $56,010 $175,072 $167,064
Hospital Services.................................. 21,624 18,579 59,671 56,022
Corporate.......................................... 3,377 3,509 18,460 11,570
Eliminations....................................... (3,475) (3,416) (10,208) (10,030)
------- ------- -------- --------
$80,410 $74,682 $242,995 $224,626
======= ======= ======== ========
Segment operating income:
Physician Services................................. $ 7,175 $ 7,506 $ 20,245 $ 22,604
Hospital Services.................................. 6,433 5,844 18,603 16,317
Corporate.......................................... (3,377) (3,509) (18,460) (11,570)
------- ------- -------- --------
$10,231 $ 9,841 $ 20,388 $ 27,351
======= ======= ======== ========
Interest expense..................................... $ 1,410 $ 3,863 $ 5,483 $ 12,524
======= ======= ======== ========
Interest income...................................... $ (88) $ (79) $ (332) $ (245)
======= ======= ======== ========
Loss on extinguishment of debt....................... $ -- $ 6,034 $ 5,896 $ 6,255
======= ======= ======== ========
Income before income taxes........................... $ 8,909 $ 23 $ 9,341 $ 8,817
======= ======= ======== ========
Depreciation and amortization:
Physician Services................................. $ 2,508 $ 2,631 $ 7,273 $ 8,003
Hospital Services.................................. 1,414 1,278 4,114 3,967
Corporate.......................................... 119 173 391 601
------- ------- -------- --------
$ 4,041 $ 4,082 $ 11,778 $ 12,571
======= ======= ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services................................. $ 2,544 $ 1,529 $ 5,234 $ 3,773
Hospital Services.................................. 1,469 1,011 4,006 3,707
Corporate.......................................... 416 48 718 191
------- ------- -------- --------
$ 4,429 $ 2,588 $ 9,958 $ 7,671
======= ======= ======== ========
14
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services....................................... $ 65,627 $ 63,222
Hospital Services........................................ 59,019 58,021
Corporate................................................ 44,536 50,281
Discontinued operations.................................. -- 129
-------- --------
$169,182 $171,653
======== ========
NOTE 14 -- STATEMENT OF CASH FLOWS -- RESTATED
Certain amounts in the Company's Consolidated Statement of Cash Flows
related to Funds due Clients have been reclassified for the nine months ended
September 30, 2004 and 2003. The reclassification decreased net cash provided by
operating activities and increased net cash used for financing activities by
approximately $0.1 million and $0.3 million for the nine months ended September
30, 2004 and 2003, respectively. Additionally, for the nine months ended
September 30, 2003, the Company reclassified approximately $4.3 million related
to its debt refinancing from cash flows from operating activities to cash used
for financing activities.
15
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 physicians with the business management functions
associated with the delivery of healthcare services, allowing them 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
division also offers an ASP-based physician practice management solution, named
MedAxxis, for office-based physician groups.
To better serve the hospital marketplace, the Company 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 September 30, 2004,
increased approximately 7% as compared to the same period of 2003 primarily due
to the implementation of the record level of net new business sold in the
Physician Services division during the first six months of 2004 and the record
level of new business sold in the Hospital Services division on a year-to-date
basis. Consolidated operating margins declined from 11.6% in 2003 to 11.2% in
2004 primarily due to the deferral of approximately $0.9 million in the
Physician Service division.
Improvements in the Company's capital structure during 2004 decreased
interest expense during the third quarter of 2004 by $2.5 million, or 63%,
compared to the prior year period. This reduction resulted from the
16
Company's issuance of 3.25% subordinated convertible debentures at June 30,
2004, and the repayment of the Company's then-outstanding amounts under the Term
Loan B component of the Credit Agreement, which was bearing interest at 5.36%.
This decrease in interest expense, as well as the $16.2 million cash settlement
from Lloyd's that was received during July 2004, contributed positively to cash
provided by continuing operations during the nine months of 2004. Net cash
provided by continuing operations was $41.4 million in the current year
compared, an increase of 147% compared to the prior year period.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $66,059 $63,516
Hospital Services........................................... 28,057 24,423
Eliminations................................................ (3,475) (3,416)
------- -------
$90,641 $84,523
======= =======
Revenue for the Physician Services division increased approximately 4% in
the three months ended September 30, 2004, as compared to the same period in
2003. The revenue increase is due to the implementation of net new business sold
during the first six months of 2004. Net new business sold includes the
annualized revenue value of new contracts signed in a period, less the
annualized revenue value of terminated business in that same period. Pricing for
the division's services and products was stable compared to the prior year
period.
For the three months ended September 30, 2004, the Company deferred
approximately $0.9 million in revenue related to a large contract signed in
2004. The revenue deferral was required because the interim measurement periods
specified in the contract do not coincide with the Company's quarterly reporting
periods. As a result, a portion of the fees the Company received under this
contract in the quarter ended September 30, 2004, were subject to an interim
performance target for a fiscal quarter ending after September 30, 2004, and
consequently, were not considered fixed and determinable for revenue recognition
purposes at the end of the quarter. All expenses incurred by the Company related
to the contract during the quarter ended September 30, 2004, were recorded
during the quarter.
Net backlog in the Physician Services division at September 30, 2004, was
approximately $3 million, compared to approximately $3 million at June 30, 2004.
Net backlog represents the annualized revenue related to new contracts signed
with the business still to be implemented, less the annualized revenue related
to existing contracts where discontinuance notification has been received and
the customer has yet to be phased out. The Company focuses on maintaining a
positive net backlog and believes it is a useful indicator of future revenue
growth.
Revenue for the Hospital Services division increased approximately 15% for
the three months ended September 30, 2004, as compared to the same period in
2003. Pricing for the division's products and services was stable compared to
the prior year period. Revenue growth was equally driven by both the division's
resource management products and revenue cycle management services. Medical
transaction volume increased approximately 25% for the period over the same
period of 2003. The increase in revenue for revenue cycle management services
and the medical transaction volume increase primarily resulted from new business
sold during the second quarter of the current year. 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.
17
Segment Operating Income. Segment operating income is segment revenue less
segment operating expenses, which include salaries and wages expense, other
operating expenses, depreciation, amortization and other expenses. Segment
operating income, classified by the Company's divisions, is as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 7,175 $ 7,506
Hospital Services........................................... 6,433 5,844
Corporate................................................... (3,377) (3,509)
------- -------
$10,231 $ 9,841
======= =======
Physician Services' division operating income decreased approximately 4% in
the three months ended September 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 10.9% in the three months ended
September 30, 2004, versus approximately 11.8% in the same period in 2003.
Margins for the current year period were negatively impacted due to the deferral
of approximately $0.9 million in revenue related to a large contract, signed in
2004, for which the division has quarterly performance goals. While the division
was unable to recognize all the revenue related to the contract during the
quarter, all expenses related to the contract were recorded during the third
quarter. Cash flow related to the contract was not impacted.
Hospital Services' division operating income increased approximately 10% in
the three months ended September 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 22.9% versus approximately 23.9%
in the prior year period. Margins in the quarter deteriorated due to a large
print and mail customer contract, signed in the second quarter of 2004, which
was profitable in the quarter but below the normal profitability level for print
and mail contracts. As part of the transaction in signing the customer, the
Company acquired substantially all of the production assets and personnel of the
customer's hospital and physician patient statement and paper claims print and
mail business. The division will consolidate this operation into its existing
print and mail facility located in Lawrenceville, Georgia during the first half
of 2005, which is expected to improve margins for this contract.
Corporate overhead expenses, which include certain executive and
administrative functions, decreased approximately 4% or approximately $0.1
million in the three months ended September 30, 2004, compared to the same
period in 2003. The decrease is primarily attributable to the approximately $1.5
million gain recognized on the Lloyd's settlement, which was partially offset by
the non-cash expense of approximately $1.0 million upon its exit of the
Company's former corporate office facility (refer to Notes 3 and 9 of Notes to
Financial Statements for additional information). The net gain of these two
items was offset by approximately $0.5 million of professional services expense
related to the Company's initiative to comply with the requirements of Section
404(a) of the Sarbanes-Oxley Act.
Other Expenses. On May 10, 2004, the Company reached a settlement with the
Company's former insurance carrier, Certain Underwriters at Lloyd's of London
(collectively "Lloyd's"). On July 7, 2004, pursuant to the settlement, as
amended, Lloyd's paid the Company $16.2 million in cash. As of the payment date,
the Company had an approximately $14.7 million receivable from Lloyd's and
recognized a gain of approximately $1.5 million on the settlement in the three
months ended September 30, 2004. The gain has been reflected in the Company's
Corporate segment. In the Consolidated Statement of Operations, the gain is
included in other expenses.
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable, operating lease
for that office space in February 2004 which will expire in June 2014. While the
new landlord assumed the payments for the lease of the Company's former
corporate office, which expires in February 2005, the Company recorded a
non-cash expense of approximately $1.0 million related to the lease expense upon
its exit of the former office facility. The expense has been reflected in the
Company's Corporate segment. In the Consolidated Statement of Operations, the
expense is included in other expenses.
18
Interest. Interest expense was approximately $1.4 million for the three
months ended September 30, 2004, as compared to $3.9 million for the same period
in 2003. The decrease is primarily attributable to a reduction in the interest
rates resulting from the issuance of its 3.25% subordinated convertible
debentures and the concurrent retirement of the Term Loan B debt, which had a
LIBOR-based floating interest rate. The average interest rate decreased
approximately 5.6 percentage points during the three months ended September 30,
2004, versus the comparable period in 2003. Interest income was $0.1 million for
the three-months ended September 30, 2004 and 2003.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was approximately $0.1 million for the three months ended
September 30, 2004, and 2003. The Company's estimated federal income tax expense
for the three months ended September 30, 2004, is offset by the release of an
equal amount of the Company's valuation allowance.
As of September 30, 2004, the Company's net deferred tax asset was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company is
currently evaluating the realizability of the deferred tax asset and anticipates
releasing a portion of the valuation allowance in the fourth quarter of 2004,
when the Company develops its annual forecasts for future periods. Any such
reduction in the valuation allowance will be based on the estimated net
operating loss carryforwards to be utilized to offset projected pre-tax income
for the next two to three years.
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, and the Company
recognized a gain on the sale of Patient1 of approximately $10.4 million, net of
taxes of approximately $0.5 million, which was subject to closing adjustments.
Net proceeds on the sale of Patient1 were approximately $27.9 million, subject
to closing adjustments. The Company and Misys entered into binding arbitration
regarding the final closing adjustments and on May 21, 2004, the arbitrator
awarded the Company approximately $4.3 million. On June 1, 2004, the Company
received payment of approximately $4.5 million, which included interest of
approximately $0.2 million. The Company recognized an additional gain on sale of
approximately $3.6 million, net of taxes of approximately $0.2 million, in 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.
19
Summarized operating results for the discontinued operations are as
follows:
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue......................... $-- $-- $-- $2,168 $ 160 $ 2,328
=== === === ====== ===== =======
Loss from discontinued
operations before income
taxes......................... $-- $-- $-- $ (224) $(977) $(1,201)
Income tax expense.............. -- -- -- 4 -- 4
--- --- --- ------ ----- -------
Loss from discontinued
operations, net of tax........ $-- $-- $-- $ (228) $(977) $(1,205)
=== === === ====== ===== =======
NINE MONTHS ENDED SEPTEMBER 30, 2004, AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $195,317 $189,668
Hospital Services........................................... 78,274 72,339
Eliminations................................................ (10,208) (10,030)
-------- --------
$263,383 $251,977
======== ========
Revenue for the Physician Services division increased approximately 3% in
the nine months ended September 30, 2004, as compared to the same period in
2003. The revenue increase is due to the implementation of net new business sold
during prior periods. Net new business sold includes the annualized revenue
value of new contracts signed in a period, less the annualized revenue value of
terminated business in that same period. Revenue also increased due to one
additional business day in the nine months ended September 30, 2004, compared to
the prior year. Pricing for the division's services and products was stable
compared to the prior year period.
For the nine months ended September 30, 2004, the Company deferred
approximately $0.9 million in revenue related to a large contract signed in
2004. The revenue deferral was required because the interim measurement periods
specified in the contract do not coincide with the Company's quarterly reporting
periods. As a result, a portion of the fees the Company received under this
contract in the quarter ended September 30, 2004, were subject to an interim
performance target for a fiscal quarter ending after September 30, 2004, and
consequently, were not considered fixed and determinable for revenue recognition
purposes at the end of the quarter. All expenses incurred by the Company related
to the contract during the quarter ended September 30, 2004, were recorded
during the quarter.
Net backlog at September 30, 2004, was approximately $3 million, compared
to the negative backlog for the Physician Services division of approximately $2
million at December 31, 2003. 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 8% for
the nine months ended September 30, 2004, as compared to the same period in
2003. Pricing for the division's products and services was stable compared to
the prior year period. Revenue growth in the division was positively impacted by
an increase in resource management revenue of approximately $3 million,
primarily attributable to previously unbilled maintenance for certain resource
management software customers for which revenue was recognized upon receipt
20
of payment. Revenue growth was also positively impacted by an increase in
revenue cycle management revenue of approximately $3 million. This growth is
evidenced by the medical transaction volume increase of approximately 13% for
the period over the same period of 2003. Transaction volume growth and revenue
growth can differ 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, depreciation, amortization and other expenses. Segment
operating income, classified by the Company's divisions, is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2004 2003
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 20,245 $ 22,604
Hospital Services........................................... 18,603 16,317
Corporate................................................... (18,460) (11,570)
-------- --------
$ 20,388 $ 27,351
======== ========
Physician Services' segment operating income decreased approximately 10% in
the nine months ended September 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 10.4% in the nine months ended
September 30, 2004, versus approximately 11.9% in the same period in 2003.
Margins for the current year period were impacted by the implementation of
approximately $15 million of net new business sold during the first six months
of 2004, compared to net new business sold of $6 million in the first six months
of 2003. The operating margin for the current year period was negatively
impacted by the deferral of approximately $0.9 million in revenue, as previously
mentioned.
Hospital Services' segment operating income increased approximately 14% in
the nine months ended September 30, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 23.8% in the nine months ended
September 30, 2004, versus approximately 22.6% in the prior year period. The
operating margin improvement is attributable to the previously unbilled
maintenance revenue for certain resource management software customers that was
recognized upon receipt of payment.
Corporate overhead expenses, which include certain executive and
administrative functions, increased approximately 60% or approximately $6.9
million in the nine months ended September 30, 2004, compared to the same period
in 2003. The increase is attributable to approximately $6.3 million of expenses
incurred in 2004 to perform the additional procedures discussed below, the
non-cash expense of approximately $1.0 million upon its exit of the Company's
former corporate facility, and approximately $0.9 million of professional
services expense related to the Company's initiative to comply with the
requirements of Section 404(a) of the Sarbanes-Oxley Act. The increase is
partially offset by approximately $1.5 million gain recognized on the Lloyd's
settlement.
Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's independent auditors advised the Company and the
Audit Committee of the Board of Directors that additional procedures should be
performed related to the allegations. These additional procedures were required
due to Statement of Auditing Standards No. 99, Consideration of Fraud in a
Financial Statement Audit, ("SAS No. 99"), which became effective for periods
beginning on or after December 15, 2002. Due to the volume and, in some cases,
vague nature of many of the allegations, the scope of the additional procedures
was broad and extensive.
21
The Company recorded costs related to the additional procedures totaling
approximately $6.3 million during the nine months ended September 30, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Operations. In segment reporting, these costs are classified in the Corporate
segment.
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). On July 7, 2004, pursuant to the settlement, as amended, Lloyd's
paid the Company $16.2 million in cash. As of the payment date, the Company had
an approximately $14.7 million receivable from Lloyd's and recognized a gain of
approximately $1.5 million on the settlement in the three months ended September
30, 2004. The gain has been reflected in the Company's Corporate segment. In the
Consolidated Statement of Operations, the gain is included in other expenses.
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable, operating lease
for that office space in February 2004 which will expire in June 2014. While the
new landlord assumed the payments for the lease of the Company's former
corporate office, the Company recorded a non-cash expense of approximately $1.0
million upon its exit of the former office facility. The expense has been
reflected in the Company's Corporate segment. In the Consolidated Statement of
Operations, the expense is included in other expenses.
Interest. Interest expense was approximately $5.5 million for the nine
months ended September 30, 2004, as compared to $12.5 million for the same
period in 2003. The decrease is attributable to the Company retiring $50 million
of long-term debt in the first nine months of 2003, and concurrently, entering
into a new Credit Agreement in September 2003 at substantially lower interest
rates. The Company further reduced its interest rates through the issuance of
its 3.25% subordinated convertible debentures. The average interest rate
decreased approximately 4.6 percentage points during the nine months ended
September 30, 2004, versus the comparable period in 2003. Interest income was
$0.3 million for the nine-month periods ended September 30, 2004 and 2003.
Loss on Extinguishment of Debt. During the nine months ended September 30,
2004, in connection with the retirement of the Company's then-outstanding $118.8
million under the Term Loan B, the Company wrote off approximately $3.5 million
of deferred debt issuance costs associated with the Term Loan B. Additionally,
the Company incurred a prepayment penalty of approximately $2.4 million due to
the early retirement of the Term Loan B.
During the nine months ended September 30, 2003, the Company wrote off
approximately $1.6 million of deferred debt issuance costs associated with the
original issuance of the Notes (refer to Note 10 of Notes to Financial
Statements for additional information) and incurred expenses of approximately
$4.7 million related to the retirement of the Notes.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was approximately $0.3 million and $0.8 million for the nine
months ended September 30, 2004 and 2003, respectively. The Company's estimated
federal income tax expense for the nine months ended September 30, 2004, is
offset by the release of an equal amount of the Company's valuation allowance.
As of September 30, 2004, the Company's net deferred tax asset was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company is
currently evaluating the realizability of the deferred tax asset and anticipates
releasing a portion of the valuation allowance in the fourth quarter of 2004,
when the Company develops its annual forecasts for future periods. Any such
reduction in the valuation allowance will be based on the estimated net
operating loss carryforwards to be utilized to offset projected pre-tax income
for the next two to three years.
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, and 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. Net
proceeds on the sale of Patient1 were approximately $27.9 million, subject to
closing adjustments. The Company and Misys entered into binding
22
arbitration regarding the final closing adjustments and on May 21, 2004, the
arbitrator awarded the Company approximately $4.3. On June 1, 2004, the Company
received payment of approximately $4.5 million, which included interest of
approximately $0.2 million. The Company recognized an additional gain on sale of
approximately $3.6 million, net of taxes of approximately $0.2 million, in 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:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue...................... $ -- $ 106 $ 106 $ 15,247 $ 330 $15,577
==== ===== ===== ======== ======= =======
Loss from discontinued
operations before income
taxes...................... $(18) $(303) $(321) $ (1,291) $(2,851) $(4,142)
Income tax expense........... -- -- -- 45 -- 45
---- ----- ----- -------- ------- -------
Loss from discontinued
operations, net of tax..... $(18) $(303) $(321) $ (1,336) $(2,851) $(4,187)
==== ===== ===== ======== ======= =======
The major classes of assets and liabilities for the discontinued operations
are as follows:
AS OF
--------------------------------------
DECEMBER 31,
SEPTEMBER 30, 2004 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 nine months ended September 30, 2004 and 2003, the Company
incurred expenses of approximately $0.1 million and $0.5 million, respectively,
which were primarily legal costs, associated with MSC and Impact. Pursuant to
APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and
23
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
September 30, 2004, and December 31, 2003, and cash flows from continuing
operations for the nine months ended September 30, 2004, and 2003, (in
thousands):
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Unrestricted cash and cash equivalents.............. $36,573 $25,271
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
-------- -----------
AS RESTATED
Cash provided by continuing operations...................... $ 41,388 $ 16,764
Cash (used for) provided by investing activities from
continuing operations..................................... $ (7,645) $ 19,367
Cash used for financing activities from continuing
operations................................................ $(21,927) $(52,437)
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 at September 30, 2004, and December 31, 2003, represents
amounts collected on behalf of certain Physician Services and Hospital Services
clients, a portion of which is held in trust until it is remitted to such
clients.
During the nine months ended September 30, 2004, the Company generated
approximately $41.4 million in cash from continuing operations, which includes
cash generated from normal operations as well as the receipt of the $16.2
million settlement from Lloyd's of London (refer to "Note 9 -- Legal Matters" in
the Company's Notes to Consolidated Financial Statements for more information)
offset by cash payments related to additional procedures necessary under SAS No.
99 totaling approximately $6.3 million (refer to "Note 3 -- Additional
Procedures" in the Company's Notes to Consolidated Financial Statements for more
information), the payment of approximately $5.7 million in expenses and legal
settlements related to the matter with Lloyd's of London and interest payments
of approximately $3.5 million.
During the nine months ended September 30, 2003, cash provided by
continuing operations was approximately $16.8 million, which includes cash
provided by normal operations offset by the payment of approximately $4.7
million in expenses and legal settlements related to the matter with Lloyd's of
London (refer to "Note 9 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information) and interest payments of
approximately $16.6 million.
During the nine months ended September 30, 2004, cash used for investing
activities from continuing operations was approximately $7.6 million consisting
primarily of approximately $10.0 million for capital expenditures and investment
in software development costs and approximately $1.1 million of cash used for an
acquisition, partially offset by approximately $3.5 million of net proceeds
related to the final closing adjustments from the July 2003 sale of Patient1.
During the nine months ended September 30, 2003, cash provided by investing
activities from continuing operations totaled approximately $19.4 million, which
included approximately $27.1 million in net proceeds related to the July 2003
sale of Patient1, partially offset by approximately $7.7 million for capital
expenditures and software development costs.
During the nine months ended September 30, 2004, the Company used
approximately $21.9 million in cash for financing activities. On June 30, 2004
the Company raised $125 million from the sale of 3.25% Convertible Subordinated
Debentures due 2024 (the "Debentures") and retired the $118.8 million then
outstanding under the Term Loan B concurrently with the completion of the
Debentures offering. On June 30, 2004, the Company also completed an amendment
to the Revolving Credit Facility to increase its capacity and lower the
Company's
24
borrowing rate. The Revolving Credit Facility's capacity was expanded from $50
million to $75 million and the facility's maturity was extended to three years.
The Company incurred a prepayment penalty on the early retirement of the Term
Loan B totaling $2.4 million in addition to financing costs of $3.5 million
related to the Debentures offering and amendment to the Revolving Credit
Facility. The Company also repurchased, for approximately $25 million, an
aggregate of approximately 2.0 million shares of the Company's outstanding
common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. The cost of the
refinancing and purchase of common stock is partially offset by proceeds from
the exercise of stock options of approximately $5.9 million.
During the nine months ended September 30, 2003, the Company used
approximately $52.4 million in cash for financing activities primarily for
repayment of the Company's long-term debt. During the first nine months of 2003,
the Company used cash-on-hand as well as the net proceeds from the Patient1
divestiture to retire $50.0 million of long-term debt and refinanced the
remaining $125 million in long-term debt by entering into a $175 million Credit
Agreement (the "Credit Agreement"). The Credit Agreement consisted of a $125
million Term Loan B (the "Term Loan B") and a $50 million revolving credit
facility (the "Revolving Credit Facility"). In conjunction with the refinancing
transaction, the Company capitalized approximately $5.4 million in expenses,
including legal and other professional fees related to the Credit Agreement and
other costs, which are included in the Company's other long-term assets on the
Consolidated Balance Sheet. Financing cash flows associated with the repayment
of long-term debt in the nine months ended September 30, 2003, were offset by
approximately $7.0 million of proceeds from employees' exercise of stock
options.
For more information about the Company's long-term debt, refer to "Note 10
-- Long-Term Debt" in the Company's Notes to Consolidated Financial Statements.
The level of the Company's indebtedness could adversely impact the
Company's ability to obtain additional financing. A substantial portion of the
Company's cash flow from operations could be dedicated to the payment of
principal and interest on its indebtedness.
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). In the settlement, Lloyd's agreed to pay the Company $20 million in
cash by July 9, 2004. Lloyd's also agreed to defend, settle or otherwise resolve
at their expense the two remaining pending claims covered under the errors and
omissions ("E&O") policies issued to the Company by Lloyd's. In exchange, the
Company provided Lloyd's with a full release of all E&O and directors and
officers and company reimbursement ("D&O") policies. The California Superior
Court retained jurisdiction to enforce any aspect of the settlement agreement.
As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O settlements covered by Lloyd's. Effective
on May 12, 2004, as a result of negotiations among the Company, Lloyd's, and a
party to a prior E&O settlement with the Company, the Lloyd's settlement was
amended to reduce by $3.8 million the additional amounts to be paid by the
Company under the prior E&O settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
Lloyd's receivable by $3.8 million. On July 7, 2004, pursuant to the settlement
as amended, Lloyd's paid the Company $16.2 million in cash.
During the course of litigation the Company funded 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
nine months ended September 30, 2004, was approximately $5.7 million, which
consisted of approximately $2.1 million related to the cost of pursuing the
litigation against Lloyd's and approximately $3.6 million related to the funding
of legal costs and litigation settlements covered by the Lloyd's E&O policies.
The negative impact of these items on the Company's cash flow for the nine
months ended September 30, 2003, was approximately $4.7 million, which consisted
of approximately $1.8 million related to insurance premium increases for new
insurance coverage and the cost of pursuing the litigation against Lloyd's and
approximately $2.9 million related to the funding of legal costs and litigation
settlements covered by the Lloyd's E&O policies.
25
With the exception of the cash received from the Company's settlement with
Lloyd's and payments made for the additional procedures associated with the 2003
year-end audit, the Company has not experienced material changes in the
underlying components of cash generated by operating activities from continuing
operations. The Company believes that existing cash and the cash provided by
operations will provide sufficient capital to fund its working capital
requirements, contractual obligations, investing and financing needs.
FORWARD-LOOKING STATEMENTS
Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including but not limited to
certain statements set forth under the captions "Note 8 -- Discontinued
Operations and Divestitures," "Note 9 -- Legal Matters," "Note 10 -- Long-Term
Debt," "Note 11 -- Income Taxes," "Results of Operations" and "Liquidity and
Capital Resources," are "forward-looking statements" within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Forward-looking statements include the Company's expectations with respect to
meritorious defenses to the claims and other issues asserted in pending legal
matters, the effect of industry and regulatory changes on the Company's customer
base, the impact of revenue backlog on future revenue, fair market value less
costs to sell of Business1, overall profitability and the availability of
capital. Although the Company believes that the statements it has made are based
on reasonable assumptions, they are based on current information and beliefs
and, accordingly, the Company can give no assurance that its expectations will
be achieved. In addition, these statements are subject to factors that could
cause actual results to differ materially from those suggested by the
forward-looking statements. These factors include, but are not limited to,
factors identified below under the caption "Factors That May Affect Future
Results of Operations, Financial Condition or Business" and "Quantitative and
Qualitative Disclosures about Market Risk." The Company disclaims any
responsibility to update any forward-looking statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
Per-Se provides the following risk factor disclosures in connection with
its continuing efforts to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include, but are not limited to, the following:
IF THE COMPANY FAILS TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, THE
COMPANY MAY NOT BE ABLE TO ACCURATELY REPORT THE COMPANY'S FINANCIAL RESULTS
ON A TIMELY BASIS. AS A RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE
CONFIDENCE IN THE COMPANY'S FINANCIAL REPORTING WHICH WOULD HARM THE COMPANY'S
BUSINESS AND THE TRADING PRICE OF THE COMPANY'S STOCK.
As a result of errors that led to the restatements of the Company's
financial statements for the years ended December 31, 2001, and 2002, and the
nine months ended September 30, 2003, the Company's independent auditors
determined that a material weakness related to the Company's internal controls
existed. 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. 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 the Company's 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 the Company's fiscal year
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
26
the Company's 2003 audit, there can be no assurance that the Company or its
independent auditors will be able to conclude that the Company has effective
internal controls over financial reporting in connection with the 2004 audit,
which could raise the same concerns identified above.
THE COMPANY HAS A SIGNIFICANT AMOUNT OF LONG-TERM DEBT AND OBLIGATIONS TO MAKE
PAYMENTS, WHICH COULD LIMIT THE COMPANY'S FUNDS AVAILABLE FOR OTHER
ACTIVITIES.
The Company has approximately $125 million of long-term indebtedness and,
as a result, has obligations to make interest and principal payments on that
debt. If unable to make the required debt payments, the Company could be
required to reduce or delay capital expenditures, sell certain assets,
restructure or refinance the Company's indebtedness, or seek additional equity
capital. The Company's ability to make payments on the Company's debt
obligations will depend on future operating performance, which may be affected
by conditions beyond the Company's control.
THE COMPANY IS REGULARLY INVOLVED IN LITIGATION, WHICH MAY EXPOSE THE COMPANY
TO SIGNIFICANT LIABILITIES.
The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not yet resulted in legal
action.
The Company may not be able to successfully resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, the Company's insurance coverage may not fully
cover any damages assessed against the Company. Although the Company maintains
all insurance coverage in amounts that it believes is sufficient for its
business, such coverage may prove to be inadequate or may become unavailable on
acceptable terms, if at all. A successful claim brought against the Company,
which is uninsured or under-insured, could materially harm the Company's
business, results of operations or financial condition.
THE PHYSICIAN MANAGEMENT OUTSOURCING BUSINESS IS HIGHLY COMPETITIVE AND THE
COMPANY'S INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY
AFFECT THE COMPANY.
The physician business management outsourcing business, especially for
revenue cycle management, is highly competitive. The Company competes with
regional and local physician reimbursement organizations as well as physician
groups that provide their own business management services in house. Successful
competition within this industry is dependent on numerous industry and market
conditions. Potential industry and market changes that could adversely affect
the Company's ability to compete for business management outsourcing services
include an increase in the number of local, regional or national competitors
providing comparable services and new alliances between healthcare providers and
third-party payers in which healthcare providers are employed by such
third-party payers.
THE BUSINESS OF PROVIDING SERVICES AND SOLUTIONS TO HOSPITALS FOR BOTH REVENUE
CYCLE AND RESOURCE MANAGEMENT IS ALSO HIGHLY COMPETITIVE AND THE COMPANY'S
INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY AFFECT THE
COMPANY.
The business of providing services and solutions to hospitals for both
revenue cycle and resource management is also highly competitive. The Company
competes with traditional electronic data interface companies, outsourcing
companies and specialized software vendors with national, regional and local
bases. Some competitors have longer operating histories and greater financial,
technical and marketing resources than the Company. The Company's successful
competition within this industry is dependent on numerous industry and market
conditions.
27
THE MARKETS FOR THE COMPANY'S SERVICES AND SOLUTIONS ARE CHARACTERIZED BY
RAPIDLY CHANGING TECHNOLOGY, EVOLVING INDUSTRY STANDARDS AND FREQUENT NEW
PRODUCT INTRODUCTIONS AND THE COMPANY'S INABILITY TO KEEP PACE COULD ADVERSELY
AFFECT THE COMPANY.
The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including the
Company's ability to enhance existing products and services; introduce new
products and services quickly and cost effectively; achieve market acceptance
for new products and services; and respond to emerging industry standards and
other technological changes.
Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing the Company's technology
going forward. The costs associated with refining, enhancing and developing
these systems may increase significantly in the future. Existing software and
technology may become obsolete as a result of ongoing technological developments
in the marketplace.
THE HEALTHCARE MARKETPLACE IS CHARACTERIZED BY CONSOLIDATION, WHICH MAY RESULT
IN FEWER POTENTIAL CUSTOMERS FOR THE COMPANY'S SERVICES.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.
Consolidation of management and billing services through integrated delivery
systems may result in a decrease in demand for the Company's business management
outsourcing services for particular physician practices.
THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE THE COMPANY'S
COSTS OF OPERATION.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Federal and state legislatures
have periodically considered programs to reform or amend the U.S. healthcare
system at both the federal and state level and to change healthcare financing
and reimbursement systems, such as the Balanced Budget Act of 1997 and the
Medicare Modernization Act of 2003. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Current or future government regulations or healthcare reform measures
may affect the Company's business. Healthcare industry participants may respond
by reducing their investments or postponing investment decisions, including
investments in the Company's products and services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid or other government-funded healthcare programs.
In the past, the Company has been the subject of federal investigations,
and the Company may become the subject of false claims litigation or additional
investigations relating to its billing and collection activities. Any such
proceeding or investigation could have a material adverse effect on the
Company's business.
Under the Health Insurance Portability and Accountability Act of 1996
("HIPAA"), final rules have been published regarding standards for electronic
transactions as well as standards for privacy and security of individually
identifiable health information. The HIPAA rules set new or higher standards for
the healthcare industry in handling healthcare transactions and information,
with penalties for noncompliance. The Company
28
has incurred and will continue to incur costs to comply with these rules.
Although management believes that future compliance costs will not have a
material impact on the Company's results of operations, compliance with these
rules may prove to be more costly than anticipated. Failure to comply with such
rules may have a material adverse effect on the Company's business and may
subject the Company to civil and criminal penalties as well as loss of
customers.
The Company relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA-compliant format. While the Company
believes it will be fully and properly prepared to process electronic medical
claims in a HIPAA-compliant format, there can be no assurance that third
parties, including healthcare providers and payers, will likewise be prepared to
supply all the data elements required to process electronic medical claims and
make electronic remittance under HIPAA's standards. If payers reject electronic
medical claims and such claims are processed manually rather than
electronically, there could be a material adverse affect on the Company's
business. The Company has made and expects to continue to make investments in
product enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require the Company to make investments in new
products or charge higher prices.
Numerous federal and state civil and criminal laws govern the collection,
use, storage and disclosure of health information for the purpose of
safeguarding the privacy and security of such information. Federal or state
governments may impose penalties for noncompliance, both criminal and civil.
Persons who believe their health information has been misused or disclosed
improperly may bring claims and payers who believe instances of noncompliance
with privacy and security standards have occurred may bring administrative
sanctions or remedial actions against offending parties.
Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that the debate on healthcare reform will continue. The Company
also expects that the federal government as well as state governments will pass
laws and issue regulations addressing healthcare issues and reimbursement of
healthcare providers. The Company cannot predict whether the government will
enact new legislation and regulations, and, if enacted, whether such new
developments will affect the Company's business.
THE TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE VOLATILE AND NEGATIVELY
AFFECT YOUR INVESTMENT.
The trading price of the Company's common stock may be volatile. The market
for the Company's common stock may experience significant price and volume
fluctuations in response to a number of factors including actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments
and other factors, many of which are beyond the Company's control. Furthermore,
the stock market in general and the market for software, healthcare business
services and high technology companies in particular, has experienced volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of the Company's common stock, regardless of actual operating
performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, any fluctuation in the prevailing
interest rates is not expected to have a material effect on the Company's
financial statements.
The Company has the option of entering into loans based on LIBOR or base
rates under the Revolving Credit Facility. As such, the Company could experience
fluctuations in the interest rates if the Company were to borrow amounts under
the Revolving Credit Facility, the Company could experience fluctuations in
interest rates under the Revolving Credit Facility. The Company has not incurred
any borrowings under the Revolving Credit Facility.
29
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
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
existed, 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 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. Those errors generally related to the timing of recording accruals
for sales commissions, vacation liabilities, legal expenses, incentive
compensation and other liabilities. The Company has taken steps during the
quarter ended September 30, 2004, to improve controls in these areas. Of those
steps, the following constitute changes in the Company's internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting:
- Hired a new Vice President -- Corporate Controller and Principal
Accounting Officer;
- Reorganized the Company's accounting groups so that the divisional
accounting departments now report directly to the Corporate Controller;
- Instituted a formal checklist to help ensure all month-end close
procedures and processes are completed in a timely fashion; and
- Required monthly review and documented approval by appropriate levels of
management for all balance sheet account reconciliations, including
accruals for sales commissions, vacation liabilities, legal expenses,
health insurance and incentive compensation;
Management believes the actions taken and additional controls implemented
in the third quarter of 2004 have effectively addressed the material weakness
identified by the Company's independent registered public accounting firm. The
Company did not incur material costs in taking these actions and implementing
these additional controls.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of September 30,
2004. Based in part on the steps taken by the Company to improve its internal
controls, the Company's Chief Executive Officer and the Company's Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2004, to provide reasonable
assurance that information the Company is required to disclose in reports that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported accurately. It should be noted that
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 within the
Company have been detected. Furthermore, 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, regardless of how unlikely.
Because of these inherent limitations in a cost-effective control system,
misstatements or omissions due to error or fraud may occur and not be detected.
30
In addition to the internal control enhancements identified above, in
connection with efforts to comply with Section 404(a) of the Sarbanes-Oxley Act
in 2004, the Company has implemented additional controls, policies and
procedures during the quarter ended September 30, 2004, and will continue to
enhance its internal control structure, as necessary, on an ongoing basis. None
of the additional controls, policies and procedures implemented during the
quarter ended September 30, 2004, related to Section 404(a) of the
Sarbanes-Oxley Act of 2002 constitute changes in the Company's internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
31
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in "Note 9 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DOCUMENT
------- --------
2.1 -- Asset Purchase Agreement dated as of June 18, 2003, among
Misys Hospital Systems, Inc., Misys Healthcare Systems
(International) Limited, Misys plc, Registrant, and PST
Products, LLC, together with the First Amendment thereto
dated as of June 28, 2003 (incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed on August 5,
2003.)
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999).
3.2 -- Restated By-laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
the year ended December 31, 2003).
4.1 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including Form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.2 -- First Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of May 4, 2000 (incorporated by
reference to Exhibit 4.4 to Quarterly Report of Form 10-Q
for the quarter ended March 31, 2000).
4.3 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001).
4.4 -- Third Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of March 10, 2003 (incorporated by
reference to Exhibit 4.13 to Annual Report on Form 10-K for
the year ended December 31, 2002).
4.5 -- Indenture dated as of June 30, 2004, between Registrant and
U.S. Bank National Association, as Trustee, relating to
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.5 to Quarterly
Report of Form 10-Q for the quarter ended June 30, 2004).
4.6 -- Resale Registration Rights Agreement dated as of June 30,
2004, between Registrant and Banc of America Securities LLC,
as representative of the several initial purchasers of
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.6 to Quarterly
Report of Form 10-Q for the quarter ended June 30, 2004).
10.1 -- Seventh Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.36 to Registration Statement on Form S-1, File
No. 333-119012).
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.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
PER-SE TECHNOLOGIES, INC.
(Registrant)
By: /s/ CHRIS E. PERKINS
--------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
By: /s/ RICHARD A. FLYNT
--------------------------------------
Richard A. Flynt
Vice President and Corporate
Controller
(Principal Accounting Officer)
Date: March 4, 2005
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT
------- --------
2.1 -- Asset Purchase Agreement dated as of June 18, 2003, among
Misys Hospital Systems, Inc., Misys Healthcare Systems
(International) Limited, Misys plc, Registrant, and PST
Products, LLC, together with the First Amendment thereto
dated as of June 28, 2003 (incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed on August 5,
2003.)
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999).
3.2 -- Restated By-laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
the year ended December 31, 2003).
4.1 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including Form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.2 -- First Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of May 4, 2000 (incorporated by
reference to Exhibit 4.4 to Quarterly Report of Form 10-Q
for the quarter ended March 31, 2000).
4.3 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001).
4.4 -- Third Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of March 10, 2003 (incorporated by
reference to Exhibit 4.13 to Annual Report on Form 10-K for
the year ended December 31, 2002).
4.5 -- Indenture dated as of June 30, 2004, between Registrant and
U.S. Bank National Association, as Trustee, relating to
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.5 to Quarterly
Report of Form 10-Q for the quarter ended June 30, 2004).
4.6 -- Resale Registration Rights Agreement dated as of June 30,
2004, between Registrant and Banc of America Securities LLC,
as representative of the several initial purchasers of
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.6 to Quarterly
Report of Form 10-Q for the quarter ended June 30, 2004).
10.1 -- Seventh Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.36 to Registration Statement on Form S-1, File
No. 333-119012).
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.
34