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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO __________
COMMISSION FILE NUMBER 000-19480
PER-SE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-1651222
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2840 MT. WILKINSON PARKWAY 30339-3632
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(770) 444-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 15, 2000 was approximately $186,676,156 calculated using
the closing price on such date of $6.25. The number of shares outstanding of the
Registrant's common stock (the "Common Stock") as of March 15, 2000 was
29,868,185.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 4, 2000 are incorporated herein by reference in Part III.
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PER-SE TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE OF
FORM 10-K
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Item 5. Market for the Registrant's Common Equity and Related 8
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations...................................
Item 8. Financial Statements and Supplementary Data................. 18
Item 9. Changes in and Disagreements with Accountants on Accounting 18
and Financial Disclosure....................................
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and 19
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 19
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 19
8-K.........................................................
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THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
PER-SE TECHNOLOGIES, INC. OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 15 U.S.C.A
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF PER-SE TECHNOLOGIES,
INC. AND MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH
SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS
CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE
HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.1 TO THIS FORM 10-K, AND ARE HEREBY INCORPORATED BY REFERENCE. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF COMPANY
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware and formerly known as
Medaphis Corporation, is a global leader in delivering technology-enabled
business management services, financial and clinical software solutions and
Internet-enabled connectivity and e-health solutions to healthcare providers.
Per-Se delivers its services and products through its three operating segments:
Physician Services, Application Software and e-Health.
The Physician Services segment provides business management services to
physicians and healthcare organizations, including clinical data collection,
data input, medical coding, billing, contract management, cash collections and
accounts receivable management. These services are designed to assist healthcare
providers with the business management functions associated with the delivery of
healthcare services, allowing physicians and hospital staff to focus on
providing quality patient care. These services also assist physicians and
healthcare organizations in improving cash flows and reducing administrative
costs and burdens.
The Application Software segment provides financial and clinical software
including patient scheduling, staff management, clinical information systems and
patient financial management software. These applications enable healthcare
organizations to simultaneously optimize the quality of care delivered and the
profitability of business operations.
The e-Health segment offers Internet-enabled and private network
connectivity to both integrated healthcare delivery networks and physician
practices, including electronic claims processing, referral submissions,
eligibility verification and other electronic and paper transaction processing.
In addition, e-Health offers physician practice management software as
Application Service Provider ("ASP") to physician practices.
Per-Se markets its products and services primarily to integrated healthcare
delivery networks ("IDNs"), hospitals, physician practices, long-term care
facilities, home health providers and managed care organizations.
RECENT DEVELOPMENTS
In 1999, the Company completed the sale of its consulting services segment,
Impact Innovations Group ("Impact"), comprised of two divisions: commercial and
government. After reviewing several alternatives for Impact throughout 1998,
management concluded a sale of this segment would generate the greatest return
to the stockholders and finalized its plan to sell Impact. The Company sold the
commercial division of Impact to Complete Business Solutions, Inc. ("CBSI")
effective April 15, 1999 for $14.4 million, net of the final closing balance
sheet adjustment of $0.6 million which was paid on July 16, 1999. The government
division of Impact was sold on December 17, 1999 to J3 Technology Services Corp.
for initial consideration of $45.0 million, subject to certain closing
adjustments.
The results of operations for Impact and Medaphis Services Corporation
("Hospital Services"), which was sold in November of 1998, have been classified
as discontinued operations for all periods presented.
On August 16, 1999, the Company combined the operations of its core
businesses, Physician Services (formerly known as Medaphis Physician Services),
Application Software and e-Health (formerly known as Per-Se Technologies) and
changed its name from Medaphis Corporation to Per-Se Technologies, Inc. The new
organization reflects the Company's strategic focus on expanding its
leading-edge technology solutions and technology-enabled business management
services to create the market's most integrated end-to-end revenue optimization
solution for healthcare providers. Revenue optimization in healthcare refers to
providing the appropriate level of cost-effective, quality care and obtaining
the proper reimbursement as quickly as possible. The combined business offers a
unique portfolio of integrated software solutions, expert business management
services and Internet-enabled connectivity. In addition, the Company changed its
ticker symbol on The Nasdaq Stock Market(R)("Nasdaq") from MEDA to PSTI.
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On November 23, 1999, a special meeting of the Company's stockholders was
held at which the stockholders approved a one-for-three reverse split of the
Company's Common Stock (the "Reverse Split"). The Reverse Split reduced the
number of shares of the Company's Common Stock outstanding to approximately 30
million from approximately 90 million. This enabled the Company to bring its
number of outstanding shares down to a level more consistent with companies of
similar size and to maintain compliance with Nasdaq listing requirements. The
Reverse Split had no effect on the number of shares that the Company is
authorized to issue and no effect on the $0.01 par value of the Common Stock. No
fractional shares were issued in the Reverse Split; instead, stockholders will
be paid cash for any fractional shares. The numbers of shares, per share amounts
and market prices of the Company's Common Stock set forth herein have been
retroactively adjusted for all periods presented to reflect the Reverse Split.
On March 16, 2000, the Company announced the formation of a separate
e-Health segment. The e-Health segment has been managed historically as a part
of either the Company's Physician Services or Application Software segment.
Management believes that the formation of a separate segment will increase focus
and resources dedicated to e-Health initiatives, enabling the Company to
leverage its current capabilities. All business segment results set forth herein
have been retroactively adjusted for all periods presented to reflect the
formation of the e-Health segment.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 16 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
Physician Services
Physician Services is the largest provider of comprehensive business
management services, including clinical data collection, data input, medical
coding, billing, contract management, cash collections and accounts receivable
management to physicians and healthcare organizations in the United States.
Physician Services supports approximately 15,000 physician clients in 39 states,
offering practice support services, revenue growth consulting, cost management
consulting and practice security services designed to help its physician clients
optimize the business and administrative areas of their medical practices.
Practice support services include physician credentialing, scheduling,
coding and accounts receivable/revenue cycle management services. These services
are designed to allow physicians to focus on providing healthcare, maintaining a
stable patient base and remaining in compliance with complex healthcare rules
and regulations without having to manage the billing and collections.
Revenue growth consulting provides physician practices with a framework for
revenue growth through strategic planning including merger planning and
execution, fee schedule review utilizing geographic and specialty expertise and
billing and accounts receivable management in order to optimize revenue from
services provided while remaining in compliance with healthcare regulations.
In its cost management consulting services, Physician Services uses
proprietary technology solutions, industry expertise and a vast storehouse of
medical specialty specific information to provide operations planning,
benchmarking and productivity analysis for its physician clients. In addition,
in complete practice reviews, Physician Services analyzes client accounts
receivable and assists physician clients in optimizing payments while
maintaining compliance with healthcare regulations. This allows physicians to
better manage administrative productivity and control the expenses associated
with providing high quality healthcare.
Physician Services also provides practice security services that include
compliance program design, monitoring and consulting. These services may also be
utilized in conjunction with liability coverage for physician billing errors and
omissions through a business partner to provide physician clients with peace of
mind in the complex healthcare billing environment.
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Physician Services' systems currently support approximately 30 different
medical and surgical specialties. The majority of Physician Services' customers
are in the hospital-based physician market. However, Physician Services is
preparing for growth in the academic and surgical specialties markets.
The Physician Services business is highly competitive. Physician Services
competes with national and regional physician reimbursement organizations and
certain physician groups and hospitals that provide their own business
management services. Competition among these organizations is based upon the
relationship with the client or prospective client, the efficiency and
effectiveness of converting medical services to cash, the ability to provide
proactive practice management services and, to the extent that service offerings
are comparable, price.
Application Software
Application Software provides an integrated suite of patient-focused,
enterprise-wide software and services that enable healthcare organizations to
more effectively deliver quality care, manage resources, reduce costs, improve
productivity and drive operational effectiveness.
Application Software's products operate across the entire scope of the
healthcare enterprise -- IDNs, managed care organizations, physician groups,
payers, home health agencies and hospitals -- and manage more than 20 million
lives on line.
Application Software's customers, which include more than 2,000 healthcare
organizations, depend on Application Software's solutions for many critical
functions, including: providing access to real time, point-of-care clinical
information and decision analysis capability across the continuum of care;
automating enterprise-wide staff and patient scheduling; managing surgical
inventory; and enhancing enterprise-wide staff productivity.
Application Software is a market leader in several key areas of healthcare
information technology, including nurse scheduling and productivity management,
surgical scheduling and resource management and enterprise-wide staff and
productivity management.
Application Software competes against a variety of information technology
companies, including those marketing comprehensive, enterprise-wide health
information systems as well as niche and "best-of-breed" software application
vendors. Application Software's competitors are primarily national companies,
many of which have longer operating histories and greater financial resources
than those of Application Software.
Competition is based on product quality, ease of use and ease of
integration of new products with other existing and planned applications. Many
competitive offerings, however, operate on disparate technologies that are
linked through complex interfaces. Application Software's integrated approach to
its products and technologies enables it to deliver the real-time information
management capabilities that are so critical in today's age of enterprise-wide
healthcare.
e-Health
e-Health offers private network and Internet-based business-to-business
e-health solutions to healthcare providers. These solutions include electronic
claims and remittance advice processing, web-based provider compliance and
productivity management reporting, an ASP-based physician practice management
system, an Internet portal for healthcare statement review and electronic
payment processing and high speed print and mail services.
As a leader in electronic claims processing for healthcare, e-Health
processes more than two hundred million transactions per year for physicians and
healthcare organizations. This technology supports more than 140 governmental
payer connections in 46 states and more than 300 commercial connections as well
as claims processing for hospitals via more than 35 government connections in 15
states.
e-Health competes against a variety of Internet healthcare technology
companies, including those that have recently announced intentions to merge with
traditional healthcare technology vendors. Many competitive offerings, however
are entirely focused on the office-based physician, in contrast to e-Health's
current
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hospital-affiliated physician penetration. e-Health plans to extend its
penetration in hospital-affiliated specialties, such as radiology,
anesthesiology, pathology and emergency medicine, while also establishing a
customer base in various surgical specialties.
Competition in the e-health market is based on the number of electronic
connections a vendor provides between healthcare providers and payers, as well
as the value-added solutions that are offered (web-based reporting and
applications).
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
operating profit or loss and identifiable assets attributable to each segment
for each of the fiscal years ended 1999, 1998 and 1997 and as of December 31,
1999 and 1998, is presented in Note 16 of Notes to Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data.
HEALTHCARE INDUSTRY
The Company's business is affected by, among other things, trends in the
U.S. healthcare industry. As healthcare expenditures have grown as a percentage
of the U.S. gross national product, increasing focus has been placed on the
tremendous administrative costs associated with the delivery of care and the
increasing incidence of medical errors. Payers have actively sought to control
costs by, among other things, utilizing reimbursement methodologies, such as
managed care and fixed fee and capitated reimbursement models, to supplant the
more traditional fee-for-service structure. This shift to more restrictive
reimbursement models, coupled with extensive regulatory control and government
focus on fraud and abuse in the healthcare field, have helped to create a
significantly more complex accounting, coding, billing and collection
environment in healthcare. These issues create a positive marketing environment
for the sale of software and services that reduce the resources spent by
healthcare providers on administrative functions, that help ensure compliance in
an ever more complex regulatory environment and for solutions that can reduce
the opportunity for medical errors and improve the quality of care.
The healthcare industry, like many others, experienced pressures unique to
1999. During 1999, healthcare providers were very focused on the effects of the
Balanced Budget Act of 1997 (the "Balanced Budget Act"), on healthcare
reimbursements and on Year 2000 remediation to ensure that their operations
would not be adversely affected by the turn of the century. Management believes
that the increased focus on Year 2000 readiness resulted in reduced focus and
spending on new information technology or services projects. The Balanced Budget
Act may reduce the reimbursement available to healthcare providers, potentially
reducing the amount spent by healthcare providers for turnkey software
solutions, but at the same time, potentially shifting information technology
spending by healthcare providers to application service provider offerings or
outsourced services. Management believes that the Year 2000 focus has adversely
affected and could continue to adversely affect the revenue and profit margins
of the Company's operations through the first half of 2000. Management also
believes that the Balanced Budget Act will not affect the revenue and profit
margins of the Company's operations, but that it will affect the mix of software
and services that will be sold.
REGULATION
The Company's business is subject to numerous federal and state laws and to
a broad range of complex regulations, programs to combat fraud and abuse and
increasing restrictions on reimbursement for healthcare services. Each of the
major federal healthcare payment programs (Medicare, Medicaid and TRICARE) has
its own set of complex and sometimes conflicting regulations. Additional
regulations have been mandated by the Balanced Budget Act and the Health
Insurance Portability and Accountability Act ("HIPAA"), each of which could have
a significant impact on the Company's business. A number of states have also
imposed significant regulatory programs applicable to billing and payment for
healthcare services.
The federal government has maintained a significant emphasis on the
prevention of healthcare fraud and abuse. Pursuant to the False Claims Act, the
Medicare and Medicaid Patient and Program Protection Act and HIPAA, the federal
government has statutory authority to impose both civil and criminal sanctions
and
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penalties for submission of false claims to governmental payers. Civil monetary
penalties of up to $50,000 per offense may be imposed, as well as exclusion from
participation in Medicare and other governmental healthcare programs. In
addition, the False Claims Act allows a private party to bring a "qui tam" or
"whistleblower" suit alleging the filing of false or fraudulent Medicare or
Medicaid claims or other violations of the statute and to share in any damages
and civil penalties paid to the government. The U.S. Health Care Financing
Administration ("HCFA") also offers rewards for information leading to recovery
of Medicare funds, and the agency has begun to engage private contractors to
detect and investigate fraudulent billing practices.
The Office of Inspector General ("OIG") of the U.S. Department of Health
and Human Services has issued compliance guidance for third-party billing
companies, recommending components for an effective billing company compliance
program and identifying numerous risk areas associated with medical billing.
These risk areas include billing for services not documented, unbundling,
upcoding, routine waiver of copayment and deductible, etc. The OIG guidelines
are widely used by healthcare providers as a standard for evaluating prospective
billing contractors. The Company has an established compliance program
addressing each of the areas covered by the OIG release.
The OIG has announced plans to publish compliance guidance for physicians
during 2000. These guidelines will likely serve as a benchmark for physician
compliance plans.
Both governmental and private payers continue to implement measures to
restrict payments for healthcare services, including but not limited to bundling
edits, medical necessity edits and post-payment audits. These measures may
result in a decrease in revenue to the Company's provider clients and, as a
result, a decrease in revenue derived by the Company from such clients as well
as an increase in the cost of providing services.
EMPLOYEES
The Company currently employs approximately 5,750 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive office is leased and is located in
Atlanta, Georgia. The lease for that office expires in February 2005.
Physician Services
Physician Services' principal office is leased and is located in Atlanta,
Georgia. The lease for that office expires in February 2005. In addition to its
principal office, Physician Services, through its two operating subsidiaries,
operates approximately 150 business offices throughout the United States. Two of
the facilities are owned, one of which is encumbered by a deed of trust. All of
the remaining facilities are leased with expiration dates ranging from March
2000 to June 2011.
Application Software
Application Software's principal office is leased and is located in
Atlanta, Georgia. The lease for that office expires in February 2005. In
addition to its principal office, Application Software, through its various
operating subsidiaries, currently operates seven offices in the United States,
Australia, Canada and Europe. These facilities are leased with expiration dates
from March 2000 to December 2004.
e-Health
e-Health's principal office is leased and is located in Atlanta, Georgia.
The lease for that office expires in February 2005. In addition to its principal
office, e-Health currently operates eight offices in the United States. These
facilities are leased with expiration dates from June 2000 to May 2005.
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ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is included in Note 9 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
pages F-14 to F-15.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 23, 1999, a special meeting of the Company's stockholders was
held at which the stockholders approved the Reverse Split. Votes cast were
65,480,934 for, 4,304,557 against and 62,143 abstained.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of December 31, 1999:
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
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Allen W. Ritchie.................... 42 President and Chief Executive 1998
Officer
Philip M. Pead...................... 47 Executive Vice President and 1999
Chief Operating Officer
Wayne A. Tanner..................... 45 Executive Vice President and 1998
Chief Financial Officer
Randolph L.M. Hutto................. 51 Executive Vice President, General 1997
Counsel and Secretary
William J. DeZonia, Jr.............. 47 Senior Vice President and 1999
Chief Compliance Officer
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
ALLEN W. RITCHIE has served as the President and Chief Executive Officer of
the Company since July 1998. He has also been a member of Per-Se's Board of
Directors since July 1998. From April 1998 to July 1998, Mr. Ritchie served as
President and Chief Operating Officer of the Company. From January 1998 to April
1998, he served as Executive Vice President and Chief Financial Officer of the
Company. From 1991 to 1997, Mr. Ritchie served as a senior executive of AGCO
Corporation, including as President and as a member of AGCO's Board of
Directors.
PHILIP M. PEAD has served as Executive Vice President and Chief Operating
Officer of the Company since August 1999. Mr. Pead joined the Company in April
1997 as a senior executive in the Application Software and e-Health segments of
the Company's business and he served as the President of those segments from May
1997 until August 1999. From May 1996 to April 1997, Mr. Pead was employed by
Dun & Bradstreet Application Software as a senior executive with responsibility
for international operations. From August 1994 to May 1996, he was employed by
Attachmate Corporation, a leading provider of communications software, as a
senior executive with responsibility for Asia Pacific and Latin American
operations.
WAYNE A. TANNER has served as Executive Vice President and Chief Financial
Officer of the Company since September 1998. From 1990 until he joined the
Company, Mr. Tanner was a partner with Arthur Andersen LLP. His business
experience includes financial and strategic consulting, including corporate and
operational finance, merger and acquisition assistance, troubled company and
bankruptcy consulting, resolution of complex legal disputes and accounting and
auditing services to numerous privately and publicly held companies.
RANDOLPH L. M. HUTTO has served as Executive Vice President, General
Counsel and Secretary of the Company since August 1997. From 1992 to August
1997, Mr. Hutto was employed by First Financial Management Corporation ("FFMC")
and by First Data Corporation after its merger with FFMC, where he served in a
variety of executive positions, including Senior Executive Vice
President -- General Counsel and, most recently, Senior Vice
President -- Planning and Development. Prior to that, Mr. Hutto was a partner in
the law firm of Sutherland, Asbill & Brennan.
WILLIAM J. DEZONIA, JR. has served as Senior Vice President and Chief
Compliance Officer of the Company since August 1999. Mr. DeZonia joined Per-Se
in December 1995 as a result of the acquisition of Medical Management Sciences,
Inc. ("MMS"), where he was president and chief operating officer. Mr. DeZonia
has more than 20 years experience in the healthcare industry. Prior to joining
MMS in 1980, he worked for Blue Cross and Blue Shield of Virginia in claims
processing and marketing capacities.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on Nasdaq under the symbol PSTI.
The prices in the table below represent the high and low sales prices, as
adjusted for the Reverse Split, for the Common Stock as reported on Nasdaq for
the periods presented. Such prices are based on inter-dealer bid and asked
prices without markup, markdown or commissions and may not represent actual
transactions.
YEAR ENDED DECEMBER 31, 1999 HIGH LOW
- ---------------------------- ------- -------
First Quarter............................................. $16.875 $ 7.125
Second Quarter............................................ 17.438 7.500
Third Quarter............................................. 18.000 9.094
Fourth Quarter............................................ 10.500 6.000
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ---------------------------- ------- -------
First Quarter............................................. $37.500 $18.000
Second Quarter............................................ 33.000 17.438
Third Quarter............................................. 19.875 10.125
Fourth Quarter............................................ 13.688 7.875
The last reported sales price of the Common Stock as reported on Nasdaq on
March 15, 2000 was $6.25 per share. As of March 15, 2000, the Company's Common
Stock was held of record by 5,925 stockholders.
Per-Se has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future but intends instead
to retain any future earnings for reinvestment in its business. The Indenture
dated as of February 20, 1998, with respect to the Company's outstanding 9 1/2%
Senior Notes due 2005, contains restrictions on the Company's ability to declare
or pay cash dividends on its Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Per-Se for and as of each of the five fiscal years in the period ended
December 31, 1999. The selected consolidated financial information of Per-Se has
been derived from the audited consolidated financial statements of Per-Se which
give retroactive effect to the 1995 mergers with Automation Atwork ("Atwork")
and Healthcare Recoveries, Inc. ("HRI"), which was subsequently sold during
1997, and the 1996 mergers with Rapid Systems Solutions, Inc. ("Rapid Systems"),
which was subsequently sold during 1999, BSG Corporation ("BSG"), which was
subsequently sold in 1999 and Health Data Sciences Corporation ("HDS"), all of
which have been accounted for using the pooling-of-interests method of
accounting. All periods present the operations of Hospital Services and Impact
(which primarily consists of Rapid Systems and BSG) as discontinued operations.
YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
-------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue........................... $322,129 $ 349,823 $392,420 $ 400,451 $369,034
Salaries and wages................ 212,940 226,894 242,228 247,204 207,332
Other operating expenses.......... 104,192 126,183 123,094 130,007 106,000
Depreciation...................... 20,177 23,848 22,481 20,266 9,358
Amortization...................... 9,293 18,077 21,069 21,382 14,107
Interest expense, net............. $ 16,102 $ 23,494 $ 23,398 $ 11,585 $ 10,156
Intangible asset impairment....... -- 390,641 -- -- --
Litigation settlements............ 24,811 35,987 52,500 -- --
Restructuring and other charges... -- 5,191 16,741 119,434 48,750
Loss from continuing operations... (64,776) (558,957) (92,523) (99,644) (17,704)
Net loss(1)....................... (33,702) (560,214)(2) (19,303)(3) (137,337) (2,650)
Pro forma net loss(4)............. (33,702) (560,214) (19,303) (136,358) (4,780)
Weighted average shares
outstanding.................... 28,097 25,673 24,226 23,742 17,530
PER SHARE DATA(4)
Pro forma basic loss from
continuing operations.......... $ (2.31) $ (21.77) $ (3.82) $ (4.20) $ (1.01)
Pro forma basic net loss.......... $ (1.20) $ (21.82) $ (0.80) $ (5.74) $ (0.27)
AS OF DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- --------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital................... $ 93,304 $ 86,215 $ 64,522 $ 23,708 $ 54,909
Intangible assets................. 46,446 48,241 459,129 477,545 532,356
Total assets...................... 265,017 286,721 847,145 901,997 908,456
Total debt........................ 177,138 176,080 200,691 271,424 153,842
Convertible subordinated
debentures..................... -- -- -- -- 63,375
Stockholders' equity.............. $ 1,440 $ 2,323 $501,781 $ 508,525 $554,008
- ---------------
(1) Reflects the income (loss) from discontinued operations of $3.4 million, $
(0.1) million, $(0.7) million, $(37.7) million and $15.1 million for 1999,
1998, 1997, 1996 and 1995, respectively, and the gain on sale of
discontinued operations of $27.7 million in 1999 and $7.2 million in 1998.
(2) Reflects an $8.4 million extraordinary charge for the early extinguishment
of debt.
(3) Reflects the extraordinary income of $76.4 million relating to the sale of
HRI and a $2.5 million charge for the change in accounting for business
process reengineering costs incurred in connection with an information
technology project, pursuant to Emerging Issues Task Force Consensus No.
97-13, Accounting for Costs Incurred in Connection with a Consulting or an
Internal Project that Combines Business Process Reengineering and
Information Technology.
9
12
(4) In 1995 and 1996, the Company acquired Atwork, Consort Technologies, Inc
("Consort"), Intelligent Visual Computing ("IVC"), Rapid Systems and BSG in
merger transactions accounted for as poolings-of-interests. Prior to the
mergers, Atwork, Consort, IVC, Rapid Systems and a company acquired by BSG
prior to the Company's merger with BSG had elected "S" corporation status
for income tax purposes. As a result of the mergers (or, in the case of the
company acquired by BSG, its acquisition by BSG), such entities terminated
their "S" corporation elections. Pro forma net income (loss) and pro forma
net income (loss) per common share are presented in the consolidated
statements of operations as if each of these entities had been a "C"
corporation during the periods presented.
10
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fiscal 1999 compared to Fiscal 1998
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $240,200 $264,323
Application Software........................................ 62,145 70,849
e-Health.................................................... 31,343 25,886
Eliminations................................................ (11,559) (11,235)
-------- --------
$322,129 $349,823
======== ========
Revenue for the Physician Services segment decreased 9% to $240.2 million
in 1999 from $264.3 million in 1998. The decline in revenue is primarily
attributable to Per-Se and client initiated discontinuances during the last
quarter of 1998 and throughout 1999. However, the rate of client-initiated
discontinuances continues to decrease. Physician Services recorded annualized
new sales in 1999 of $41 million compared to $22 million in 1998.
The decrease in Application Software's revenue of 12% from 1998 to 1999 was
primarily attributable to percentage of completion accounting initiated in 1999
and lower clinical systems and scheduling products sales in 1999. Percentage of
completion accounting delays software revenue recognition over the
implementation period.
e-Health revenue increased by 21% in 1999 as compared with 1998. This
increase is a result of greater internal and external claims processing.
Approximately $3.1 million, or 57%, of this increase was attributable to
increases in volume in the Company's statement processing center ("Laser
Center"). Approximately $1.9 million, or 35%, of the revenue increase resulted
from electronic claims processed for Physician Services clients.
OPERATING LOSS. Operating loss, which excludes restructuring and other
charges, litigation settlements, intangible asset impairment and net interest
expense, classified by the Company's different operating segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $ (5,541) $(12,608)
Application Software........................................ (1,071) (8,932)
e-Health.................................................... (190) (912)
Corporate................................................... (17,671) (22,727)
-------- --------
$(24,473) $(45,179)
======== ========
Operating loss for the Physician Services segment decreased 56% to $5.5
million in 1999 compared to $12.6 million in 1998. The decrease is primarily
attributable to the following: (1) decrease in depreciation expense due to
assets becoming fully depreciated, (2) decrease in amortization expense due to
the intangible asset impairment charge in 1998 and (3) a gain on the sale of an
unprofitable portion of the Physician Services' emergency medicine services
operations.
Application Software's 1999 operating loss was 88% lower than in 1998. The
decrease is primarily the result of increases to the allowance for doubtful
accounts recognized in 1998 and lower salaries and wages expense in 1999.
The operating loss for e-Health in 1999 was 79% lower than in 1998
primarily due to the previously mentioned increase in revenue.
11
14
The Company's corporate overhead costs decreased by 22% to $17.7 million in
1999 compared to $22.7 million in 1998. This reduction is primarily related to
management's continued commitment to reduce operating costs while improving
process efficiency. For the year ended 1998, certain corporate overhead expenses
of $6.8 million and $2.6 million have been reclassified to the Physician
Services segment and the Application Software segment, respectively.
INTEREST. Net interest expense was $16.1 million for the year ended
December 31, 1999 as compared to $23.5 million in the same period in 1998. The
decrease is primarily related to less debt outstanding and interest income of
$2.4 million generated from the short-term investment of cash.
LITIGATION SETTLEMENTS. In June 1999, the Company accrued an estimated
litigation settlement liability of $21.5 million related to the Company's legal
dispute with Foundation Health Services, Inc. ("Foundation"), formerly Health
Systems International, Inc., arising from Per-Se's June 1996 acquisition of
Health Data Sciences Corporation ("HDS"). The estimated liability was based upon
an agreement in principle with Foundation. When the agreement was finalized in
October 1999, the cost to the Company was reduced to $17.0 million and as a
result, $4.4 million of the litigation settlement liability was reversed.
Also in June 1999, the Company accrued litigation settlement charges of
$6.0 million related to litigation arising from Per-Se's December 1995
acquisition of Medical Management Sciences, Inc. ("MMS"). In addition, the
Company paid $1.8 million to settle contract claims against the Company's
wholly-owned operating subsidiary, PST Emergency Medicine Services, Inc.
(formerly known as Gottlieb's Financial Services, Inc. or GFS) (the "Emergency
Medicine" division) which arose in January 1998 in the ordinary course of
business.
The Company accrued $19.5 million during the third quarter of 1998 as a
result of its resolution of two federal investigations into billing and
collection practices of the Company.
In June 1998, the Company accrued an estimated litigation settlement
liability of $21.3 million associated with claims made on behalf of certain
former BSG Corporation ("BSG") shareholders in connection with Per-Se's
acquisition of BSG in June 1996. Such liability was estimated based upon a
proposed settlement of approximately 1.1 million shares of Common Stock. This
settlement was subsequently finalized for 1.7 million shares of Common Stock,
and, based on the prevailing market price, the settlement was valued at $15.9
million. The Company reversed approximately $5.4 million of the litigation
settlement liability in the fourth quarter of 1998 to reflect the final
settlement value.
RESTRUCTURING AND OTHER CHARGES. In 1999, the Company reevaluated the
adequacy of its reserves for lease termination costs established in prior
periods. As a result of this evaluation, the Company increased its lease
termination reserve for Physician Services by $0.3 million and reduced
Application Software's lease termination reserve by $0.3 million.
In December 1998, management of Application Software adopted a plan to
restructure its operations to align Application Software's resources more
appropriately with future operational needs and new product development. In
order to accomplish these objectives, Application Software's executive
management terminated approximately 35 employees, primarily in the areas of
professional services and research and development, and recorded severance costs
of approximately $1.3 million.
Other components of the 1998 charges were: (i) $0.7 million in non-cash
property and equipment impairment charges associated with certain properties
held for sale; (ii) $2.0 million in legal costs associated with various lawsuits
and investigations; and (iii) $1.2 million of severance costs, primarily related
to former executive officers.
INCOME TAXES. During 1999 and 1998, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
recorded a full valuation allowance against the net deferred tax asset in both
years. If, during future periods, management believes the Company will generate
sufficient taxable income to realize the deferred tax asset, the Company will
adjust this valuation reserve accordingly.
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DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the years ended December 31, 1999 and 1998 is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998
------- -----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- --------
(IN THOUSANDS)
Revenue......................................... $54,916 $100,081 $79,731 $179,812
======= ======== ======= ========
Income (loss) from discontinued operations
before taxes.................................. 3,958 5,192 (5,263) (71)
Income tax expense (benefit).................... 555 2,079 (2,079) --
------- -------- ------- --------
Income (loss) from discontinued operations, net
of tax........................................ $ 3,403 $ 3,113 $(3,184) $ (71)
======= ======== ======= ========
Management initiated a plan to focus the Company's financial and management
resources on its three core healthcare segments, in an effort to return the
Company to profitability. Management defined these segments as: Physician
Services, Application Software and e-Health. In 1998, management began to seek
alternatives for the remaining non-core business segments: Hospital Services and
Impact. Although Hospital Services provided business management and accounts
receivable management services to approximately 1,200 hospitals, the Company's
management deemed the segment non-core as a substantial portion of the services
offered was bad debt collection. Impact was deemed non-core as it did not
provide consulting services to the healthcare industry.
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. In
February 1999, the Company received additional proceeds of $0.5 million based on
the Hospital Services final closing balance sheet. In addition, Per-Se could
receive a purchase price adjustment of up to $10.0 million subject to Hospital
Services' achievement of various operational targets in 1999. The purchase price
adjustment will be determined by the second quarter of 2000. The Company
recorded a $6.8 million gain, net of taxes of $5.4 million, as a result of this
sale.
In 1999, the Company completed the sale of both divisions of Impact. After
reviewing several alternatives for Impact throughout 1998, management concluded
a sale of this segment would generate the greatest return to the stockholders
and finalized its plan to sell Impact. The Company sold the commercial division
of Impact to Complete Business Solutions, Inc. ("CBSI") effective April 15, 1999
for $14.4 million, net of the final closing balance sheet adjustment of $0.6
million which was paid on July 16, 1999. The government division of Impact was
sold on December 17, 1999 to J3 Technology Services Corp. for initial
consideration of $45.0 million, subject to certain closing adjustments. The
Company recorded a $28.1 million gain as a result of the Impact sales.
The results of operations for Hospital Services and Impact have been
classified as discontinued operations for all periods presented.
Fiscal 1998 compared to Fiscal 1997
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $264,323 $278,475
Application Software........................................ 70,849 85,037
e-Health.................................................... 25,886 25,342
HRI......................................................... -- 14,720
Eliminations................................................ (11,235) (11,154)
-------- --------
$349,823 $392,420
======== ========
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Physician Services' revenue decreased by 5% in 1998 as compared to 1997.
This decline was attributable both to operating problems at the Emergency
Medicine division and to an increase in client losses within the entire
Physician Services segment. Revenue declines attributable to client losses in
1998 at the Emergency Medicine division and Physician Services were
approximately $22.9 million and $54.7 million, respectively. In addition, the
Physician Services segment was affected by the revenue pressures on the
physician accounts receivable operations resulting from an increase in managed
care.
Application Software's revenue decreased 17% in 1998 as compared with 1997.
Approximately 67% of this decrease was a result of a slowdown in the sale of
software licenses in its scheduling product lines. Management believes the
slowdown was due primarily to certain technical problems with a prior release
within its patient scheduling product line. Management believes these problems
have been corrected and Application Software has made progress in rebuilding its
relationship with clients. The overall revenue decline at Application Software
was also impacted by a 13% decrease in revenue from the sale and support of
clinical information systems. In the fourth quarter of 1998, the Company sold
its first license for its newly released Patient1(TM) product; revenue from this
license sale was recognized in 1999 over the installation period using the
percentage of completion method of accounting.
On May 28, 1997, Per-Se completed the sale of HRI and, as a result, there
are only five months of revenue from HRI in 1997 and none in 1998.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes
restructuring and other charges, litigation settlements, intangible asset
impairment and net interest expense, classified by the Company's different
operating segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $(12,608) $(11,402)
Application Software........................................ (8,932) 19,560
e-Health.................................................... (912) 613
HRI......................................................... -- 3,685
Corporate................................................... (22,727) (28,908)
-------- --------
$(45,179) $(16,452)
======== ========
The increase in the 1998 operating loss as compared to 1997 for the
Physician Services segment is directly attributable to revenue declines
resulting from the various operational issues in the Emergency Medicine division
and client losses throughout the segment.
The operating loss for Application Software in 1998 as compared to 1997's
operating profit, was primarily a result of the previously mentioned decline in
software license sales, increases in investments in new product development and
an increase in its allowance for doubtful accounts receivable. During 1998,
Application Software increased its reserves for bad debt by $7.3 million related
to various receivables, including receivables from Allegheny Health, Education
and Research Foundation and certain affiliates ("AHERF"), which filed for
protection under Chapter 11 of the United States Bankruptcy Code.
The Company believes that Application Software has corrected the problems
in its patient scheduling product and that it has made progress in rebuilding
its relationships with clients. These improvements are reflected in Application
Software's 43% increase in its patient scheduling license sales in the fourth
quarter of 1998 as compared with the sales in the third quarter of 1998.
The operating loss for e-Health in 1998 as compared to an operating profit
in 1997 was primarily the result of higher operating expenses.
The Company's corporate overhead costs decreased by 21% for the year ended
December 31, 1998 as compared to the previous year. This reduction is primarily
the result of fewer professional service fees and a reduction of headcount
resulting from process improvement initiatives.
14
17
INTEREST. Net interest expense in 1998 was approximately the same as it
was in 1997.
INTANGIBLE ASSET IMPAIRMENT. At September 30, 1998, the Company recorded
an intangible asset impairment charge of $390.6 million to adjust the intangible
assets of the Physician Services segment to their fair value. Management
regularly monitors its results of operations and other developments within the
industry to adjust its cash flow forecast, as necessary, to determine if an
adjustment is necessary to the carrying value of the Company's intangible
assets.
LITIGATION SETTLEMENTS. The Company accrued $19.5 million during the third
quarter of 1998 as a result of its resolution with the government concerning two
federal investigations into billing and collection practices of the Company.
In June 1998, the Company accrued an estimated litigation settlement
liability of $21.3 million associated with claims made on behalf of certain
former BSG shareholders in connection with Per-Se's acquisition of BSG in June
1996. Such liability was estimated based upon a proposed settlement of
approximately 1.1 million shares of Common Stock. This settlement was
subsequently finalized for 1.7 million shares of Common Stock, and, based on the
prevailing market price, the settlement was valued at $15.9 million. The Company
reversed approximately $5.4 million of the litigation settlement liability in
the fourth quarter of 1998 to reflect the final settlement value.
In 1997, the Company accrued a non-cash litigation settlement liability of
$52.5 million for the settlement of a class action legal matter brought against
the Company in 1996. The settlement was comprised of approximately 1.3 million
shares of Common Stock and warrants to purchase 1.8 million shares of Common
Stock at $36 per share for a five-year period.
RESTRUCTURING AND OTHER CHARGES. In December 1998, management of
Application Software adopted a plan to restructure its operations to align
Application Software's resources more appropriately with future operational
needs and new product development. In order to accomplish these objectives,
Application Software's executive management terminated approximately 35
employees, primarily in the areas of professional services and research and
development, and recorded severance costs of approximately $1.3 million.
During 1997, the Company adopted a restructuring plan to combine the
operations of Application Software and Impact (the "Application Software
Restructuring"). The objective of the Application Software Restructuring was to
improve profitability thorough capitalizing on perceived synergies of these
similar businesses and better utilizing office space and other resources. In
connection with the Application Software Restructuring, the Company recorded
charges of approximately $1.1 million, primarily consisting of lease termination
costs and severance costs. See "-- Discontinued Operations" where management's
decision to sell Impact is discussed.
In early 1995, the Company initiated a reengineering program focused upon
its billing and accounts receivable management operations (the "Reengineering
Project"). The objectives of the Reengineering Project were: (i) to improve
profitability in the near term through office consolidations (the "Physician
Services Restructuring Plan"); (ii) to improve longer-term profitability by
developing technology and then leveraging such technology to make the Company's
workflow process more efficient; and (iii) to standardize operating procedures
through Physician Services. During 1997, the Company recognized additional
restructuring expenses of approximately $1.7 million related to adjustments to
the lease termination costs associated with the Physician Services Restructuring
Plan.
Other components of the 1998 charges were: (i) $0.7 million in non-cash
property and equipment impairment charges associated with certain properties
held for sale; (ii) $2.0 million in legal costs associated with various lawsuits
and investigations; and (iii) $1.2 million of severance costs, primarily related
to former executive officers.
Other components of the 1997 amounts were: (i) $5.0 million in non-cash
property and equipment impairment charges associated with Company's assessment
of the recoverability of certain of its long-lived assets; (ii) $2.6 million in
legal costs associated with various lawsuits and investigations; and (iii) $6.4
million of various other costs, including severance and other individually
insignificant, non-recurring items.
15
18
INCOME TAXES. During 1998, the Company reassessed the recoverability of
its deferred tax asset. Based on its analysis, the Company recorded a full
valuation allowance against the net deferred tax asset.
Effective income tax rates for 1997 vary from statutory rates primarily as
a result of nondeductible goodwill associated with merger transactions
consummated by the Company in previous years.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the years ended December 31, 1998 and 1997 is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997
----------------------------- ------------------------------
HOSPITAL HOSPITAL
SERVICES IMPACT TOTAL SERVICES IMPACT TOTAL
-------- ------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue...................... $100,081 $79,731 $179,812 $97,095 $101,524 $198,619
======== ======= ======== ======= ======== ========
Income (loss) from
discontinued operation
before taxes............... 5,192 (5,263) (71) 9,508 (10,419) (911)
Income tax expense
(benefit).................. 2,079 (2,079) -- 3,910 (4,115) (205)
-------- ------- -------- ------- -------- --------
Income (loss) from
discontinued operations,
net of tax................. $ 3,113 $(3,184) $ (71) $ 5,598 $ (6,304) $ (706)
======== ======= ======== ======= ======== ========
EXTRAORDINARY ITEMS. In February 1998, the Company used the proceeds from
the February 1998 issuance of Notes (see Liquidity and Capital Resources) and
the Credit Facility to redeem the Company's then-current debt facility. In
November 1998, the Company used $71.5 million of the $103.2 million net proceeds
received from the sale of Hospital Services to repay and terminate the Credit
Facility. The Company recorded extraordinary charges in 1998 of $8.4 million,
net of tax of $3.8 million, to write-off the unamortized costs associated with
the early extinguishment of both the Company's previous debt facility and the
Credit Facility.
On May 28, 1997, Per-Se sold HRI through an initial public offering of 100%
of its stock, which generated net proceeds to the Company of $126.4 million. The
Company recorded an extraordinary gain on the sale of HRI of $76.4 million, net
of tax of $46.2 million, in the second quarter of 1997. Per-Se had acquired HRI
on August 28, 1995 through a business combination accounted for as a
pooling-of-interests.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In November 1997, the Emerging
Issues Task Force ("EITF") issued EITF 97-13 Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology ("EITF 97-13"). EITF
97-13 requires process reengineering costs, as defined, which had been
previously capitalized as part of an information technology project to be
expensed in the quarter which includes November 1997. The Company recorded a
charge of $2.5 million, net of tax of $1.6 million, in the fourth quarter of
1997 as a result of EITF 97-13.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $93.3 million at December 31, 1999,
including $74.4 million of unrestricted cash and cash equivalents. The $19.9
million increase in cash and cash equivalents from December 31, 1998 is
primarily the result of net proceeds from the sale of non-core operations and
other assets totaling $57.2 million. The increase was offset by the payment of
semi-annual interest payments required under the $175 million of 9 1/2% Senior
Notes due 2005 (the "Notes") and payments related to the legal settlements with
the government concerning the Emergency Medicine division and with Foundation.
The Notes, which were sold on February 20, 1998, bear interest at the rate
of 9 1/2% per annum, payable semi-annually on February 15 and August 15,
commencing on August 15, 1998, and will mature on February 15, 2005. The Notes
are redeemable at the option of the Company, in whole or in part, at any time on
or after February 15, 2002, at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest. In addition, at any time on or
prior to February 15, 2001, the Company may redeem up to 35%
16
19
of the original principal amount of the Notes at a redemption price equal to
109.5% of the principal amount thereof, plus accrued and unpaid interest to the
redemption date, with the net cash proceeds of one or more equity offerings;
provided that at least $100 million aggregate principal amount of the Notes
remain outstanding immediately following any such redemption.
Payment of principal, premium, if any, and interest on the Notes is fully
and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operations or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are insignificant
individually and in the aggregate to the consolidated financial statements.
The Company completed its divestiture of non-core operations in December
1999. The Company sold Hospital Services on November 30, 1998 for $103.2 million
net proceeds. In February 1999, the Company received additional proceeds of $0.5
million based on Hospital Services' tangible net worth at closing. In addition,
Per-Se could receive a purchase price adjustment of up to $10.0 million subject
to Hospital Services' achievement of various operational targets in 1999. The
purchase price adjustment will be determined by the second quarter of 2000.
The Company sold the commercial division of Impact effective April 15, 1999
for $14.4 million, net of the final closing balance sheet adjustment of $0.6
million which was paid on July 16, 1999. The Company sold the government
division of Impact on December 17, 1999 for approximately $45.0 million, subject
to final closing adjustments that the Company expects to finalize in the first
quarter of 2000.
Under the Indenture governing the Notes, the balance of the excess
proceeds, as defined, from the sale of Hospital Services, the two divisions of
Impact or the sale of any other asset having a fair value in excess of $1.0
million, must be invested in the Company's business within 360 days of receipt
of proceeds related to the sale. To the extent that such excess proceeds are not
invested and the aggregate of excess proceeds is greater than $10.0 million, the
Company is required to offer to repurchase the Notes at par with such proceeds.
As of December 31, 1999, excess proceeds related to the sale of non-core
operations and other assets totaled approximately $64.4 million. The excess
proceeds are the result of various asset sales and, as such, these proceeds must
be invested in the Company's business at varying points in time during 2000. The
Company must invest a minimum of approximately $7.1 million by April 14, 2000 to
preclude the Company's obligation to make an offer to repurchase Senior Notes at
par during the second quarter of 2000 and a minimum of approximately $52.1
million must be invested by December 11, 2000 to preclude the Company's
obligation to make an offer to repurchase Senior Notes at par in the first
quarter of 2001.
The Company believes that its current cash flow is sufficient to permit the
Company to meet its operating expenses, service its debt requirements as they
become due in the next twelve months and for the long term and to invest in the
business; however, there can be no assurance that such results will be achieved.
If the Company is unable to service its indebtedness, it will be required to
adopt alternative strategies, which may include actions such as reducing or
delaying capital expenditures, selling assets, restricting or refinancing its
indebtedness or seeking additional equity capital. There can be no assurance
that any of these strategies could be effected on satisfactory terms.
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other general
corporate purposes may be impaired; and (ii) a substantial portion of the
Company's cash flow from operations may be dedicated to the payment of principal
and interest on its indebtedness thereby reducing the funds available to the
Company for its operations. In addition, the Indenture for the Notes contains
restrictive covenants, including without limitation those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets.
17
20
To enhance the Company's financial flexibility, management is currently
considering a new credit facility. This flexibility may enhance management's
ability to make strategic investments in the business and better align working
capital with Company operations.
YEAR 2000
The Company did not experience any impact from the date change occurring
between December 31, 1999 and January 1, 2000 (commonly known as the "Year 2000"
problem) and does not expect to experience any significant impact from the Year
2000 problem (including related issues such as leap year) on its operations
going forward. However, it is possible that the full impact of the Year 2000
problem has not yet been manifested and billing, payroll, monthly, quarterly or
annual financial closings or other matters may be impacted by the Year 2000
problem.
In conjunction with its Year 2000 efforts the Company replaced some
outdated hardware and non-compliant software and consolidated its billing
platforms from eighteen systems to six compliant systems ("Systems
Assimilation") rather than make all the systems Year 2000 compatible. The
Company completed the required transitions before the end of 1999. Through
December 31, 1999, the Company had spent approximately $11.4 million on its Year
2000 and Systems Assimilation efforts.
The Company developed contingency plans during the fourth quarter of 1998
and throughout 1999 in response to assessments of the Year 2000 readiness of
customers, vendors and resellers. Although these contingency plans remain
readily available, the Company was not required to implement any of them during
1999 or through current date 2000.
NEW ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and Exchange Commission (the
"Commission") issued Staff Accounting Bulletin Number 101, Revenue Recognition
in Financial Statements ("SAB 101"). SAB 101 summarizes certain of the
Commission's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 provides interpretative
guidance on the unbilled accounts receivable and related revenue recognition
within the Company's industry. The Commission's guidance requires the accounting
change to be reflected by the Company's quarter ended March 31, 2000. Therefore,
consistent with the Commission's guidance and changing industry practice, the
Company will begin recognizing revenue in its Physician Services segment on an
"as billed" basis in fiscal 2000. The Company does not expect this change to
significantly affect annual recognized revenue amounts. The change in accounting
method will result in the elimination of approximately $38 million of unbilled
accounts receivable. The one-time, cumulative charge in the Company's March 31,
2000 statement of operations will be approximately $23 million, on a net of tax
basis. This will have no effect on cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G of Form 10-K, is included in the sections entitled
"Management of the Company" and
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21
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the
Proxy Statement for the Annual Meeting of Stockholders to be held on May 4, 2000
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 4, 2000 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 4, 2000 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Report of Independent Accountants;
Consolidated Balance Sheets -- as of December 31, 1999 and 1998;
Consolidated Statements of Operations -- years ended December 31,
1999, 1998 and 1997;
Consolidated Statements of Cash Flows -- years ended December 31,
1999, 1998 and 1997;
Consolidated Statements of Stockholders' Equity -- years ended
December 31, 1999, 1998 and 1997; and Notes to Consolidated Financial
Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Report of Independent Accountants;
Schedule II -- Valuation and Qualifying Accounts -- years ended
December 31, 1999, 1998 and 1997
Schedules, other than Schedule II, are omitted because of the absence
of the conditions under which they are required.
19
22
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference to
other filings:
EXHIBIT
NUMBER DOCUMENT
- ------- --------
2.1 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc. (incorporated by
reference to Exhibit 2.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions, Inc., E-Business Solutions.com,
Inc., Impact Innovations Holdings, Inc. and Registrant
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on May 5, 1999).
2.3 -- Stock Purchase Agreement dated as of November 4, 1999, among
J3 Technology Services Corp., Impact Innovations Holdings,
Inc., Impact Innovations Government Group, Inc. and
Registrant (incorporated by reference to Exhibit 2.3 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
3.1 -- Restated Certificate of Incorporation of Registrant.
3.2 -- Restated By-laws of Registrant.
4.1 -- Specimen Common Stock Certificate.
4.2 -- Form of Option Agreement relating to Registrant's Second
Amended and Restated Non-Qualified Stock Option Plan.
4.3 -- Form of Option Agreement relating to Registrant's Senior
Executive Performance Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-1, File No. 33-42216).
4.4 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Employees of Acquired
Companies (incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-3, File No. 33-71552).
4.5 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan.
4.6 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees.
4.7 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, File No. 000-19480 (the "1995 Form
10-K")).
4.8 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on March 3,
1998).
4.9 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998).
4.10 -- 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).
4.11 -- Registration Rights Letter Agreement dated as of May 3,
1999, among NFT Ventures Inc., Raymond J. Noorda, Mark
Rogers, NP Ventures, Ltd., Steven G. Papermaster and
Registrant (incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3, file No. 333-78775).
10.1 -- Second Amended and Restated Per-Se Technologies, Inc.
Non-Qualified Stock Option Plan.
20
23
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.2 -- Registrant's Senior Executive Performance Non-Qualified
Stock Option Plan (incorporated by reference to Exhibit 28.2
to Registration Statement on Form S-8, File No. 33-46847).
10.3 -- First Amendment to Registrant's Senior Executive Performance
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
10.4 -- Registrant's Non-Qualified Stock Option Plan for Employees
of Acquired Companies (incorporated by reference to Exhibit
99.1 to Registration Statement on Form S-8, File No.
33-67752).
10.5 -- First Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-71556).
10.6 -- Second Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-88442).
10.7 -- Third Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.14 to the 1995 Form 10-K).
10.8 -- Fourth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99.2 to Registration Statement on Form
S-8, File No. 333-3213).
10.9 -- Fifth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07627).
10.10 -- Sixth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.21 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the "1996 Form
10-K")).
10.11 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by.
reference to Exhibit 10.23 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 (the "1998 Form
10-K")).
10.12 -- Eighth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies.
10.13 -- Registrant's Non-Employee Director Stock Option Plan, dated
as of August 12, 1994 (incorporated by reference to Exhibit
10.2 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
10.14 -- First Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.25 to
the 1998 Form 10-K).
10.15 -- Second Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999).
10.16 -- Third Amendment to Registrant's Non-Employee Director Stock
Option Plan.
10.17 -- Registrant's Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 to the 1996 Form 10-K).
10.18 -- First Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.24 to the 1996 Form 10-K).
10.19 -- Second Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.25 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "1997 Form 10-K")).
21
24
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.20 -- Third Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.26 to the 1997 Form 10-K).
10.21 -- Fourth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.27 to the 1997 Form 10-K).
10.22 -- Fifth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.28 to the 1997 Form 10-K).
10.23 -- Sixth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.32 to the 1998 Form 10-K).
10.24 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees.
10.25 -- Restricted Stock Plan of the Registrant, dated as of August
12, 1994 (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-4, File No. 33-88910).
10.26 -- The Per-Se Technologies Employees' Retirement Savings Plan.
10.27 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.28 -- Registrant's Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.29 -- First Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
10.30 -- Second Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
10.31 -- Third Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.76 to the 1997 Form
10-K).
10.32 -- Fourth Amendment to Registrant's Deferred Compensation Plan.
10.33 -- Written description of Registrant's Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit 10.4
to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.34 -- Registrant's Non-Employee Director Deferred Stock Credit
Plan (incorporated by reference to Exhibit 10.5 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
10.35 -- Registrant's Long Term Incentive Plan (incorporated by
reference to Exhibit 10.3 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.36 -- Employment Agreement dated November 19, 1996, between
Registrant and David E. McDowell (incorporated by reference
to Exhibit 10.49 to the 1996 Form 10-K).
10.37 -- Amendment Number 1 to Employment Agreement by and between
Registrant and David E. McDowell, dated October 20, 1999.
10.38 -- Employment Agreement dated July 28, 1997, between Registrant
and Randolph L.M. Hutto (incorporated by reference to
Exhibit 10.10 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.39 -- Employment Agreement dated January 25, 1998, between
Registrant and Allen W. Ritchie (incorporated by reference
to Exhibit 10.69 to the 1997 Form 10-K).
10.40 -- Employment Agreement dated July 27, 1998, between Registrant
and Wayne A. Tanner (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
22
25
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.41 -- Employment Agreement dated as of June 1, 1999, between
Registrant and Philip M. Pead (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.42 -- Employment Agreement dated as of June 25, 1999, between
Medaphis Physician Services Corporation and William J.
DeZonia.
10.43 -- Corporate Integrity Agreement between the Office of the
Inspector General of the Department of Health and Human
Services and Registrant (incorporated by reference to
Exhibit 10.4 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.44 -- Settlement Agreement and Full and Complete Release dated
June 24, 1999, among James F. Thacker, et al., and
Registrant (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999).
10.45 -- First Amendment to Second Amended and Restated Per-Se
Technologies, Inc. Non-Qualified Stock Option Plan.
10.46 -- Fourth Amendment to Registrant's Non-Employee Director Stock
Option Plan.
21 -- Subsidiaries of Registrant.
23.1 -- Consent of PricewaterhouseCoopers LLP.
27 -- Financial Data Schedule (for SEC use only).
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
- ---------------
* The exhibits, which are referenced in the above documents, are hereby
incorporated by reference. Such exhibits have been omitted for purposes of
this filing but will be furnished supplementary to the Commission upon
request.
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended December 31,
1999:
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT
------------- ---------- --------------
Registrant's stockholders approved a one-for-three reverse
stock split of Registrant's common stock.................. No November 24, 1999
Sale of remaining operations of Impact Innovations Group to
J3 Technologies Services Corp............................. No December 30, 1999
23
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Per-Se Technologies, Inc.
(Registrant)
By: /s/ WAYNE A. TANNER
------------------------------------
Wayne A. Tanner
Executive Vice President and
Chief Financial Officer
/s/ MARY C. BLACKADAR
------------------------------------
Mary C. Blackadar
Vice President and Controller
(Principal Accounting Officer)
Date: March 27, 2000
24
27
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 27, 2000 /s/ DAVID E. MCDOWELL
-----------------------------------------------------
David E. McDowell
Chairman and Director
March 27, 2000 /s/ ALLEN W. RITCHIE
-----------------------------------------------------
Allen W. Ritchie
President, Chief Executive Officer, and Director
March 27, 2000 /s/ WAYNE A. TANNER
-----------------------------------------------------
Wayne A. Tanner
Executive Vice President and Chief Financial Officer
March 27, 2000 /s/ MARY C. BLACKADAR
-----------------------------------------------------
Mary C. Blackadar
Vice President and Controller (Principal Accounting
Officer)
March 27, 2000 /s/ RODERICK M. HILLS
-----------------------------------------------------
Roderick M. Hills
Director
March 27, 2000 /s/ DAVID R. HOLBROOKE, M.D.
-----------------------------------------------------
David R. Holbrooke, M.D.
Director
March 27, 2000 /s/ KEVIN E. MOLEY
-----------------------------------------------------
Kevin E. Moley
Director
March 27, 2000 /s/ C. CHRISTOPHER TROWER
-----------------------------------------------------
C. Christopher Trower
Director
-----------------------------------------------------
John C. Pope
Director
25
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Per-Se Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Per-Se
Technologies, Inc. and its subsidiaries (the "Company") at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 8, 2000
F-1
29
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
DECEMBER 31,
---------------------
1999 1998
--------- ---------
Current Assets:
Cash:
Cash and cash equivalents.............................. $ 74,354 $ 54,409
Restricted cash........................................ 7,519 5,754
--------- ---------
Total cash........................................ 81,873 60,163
Accounts receivable, billed (less allowances of $11,613
and $17,160)........................................... 46,097 54,800
Accounts receivable, unbilled............................. 42,813 46,757
Other..................................................... 7,394 8,022
--------- ---------
Total current assets.............................. 178,177 169,742
Property and equipment...................................... 34,103 47,954
Intangible assets........................................... 46,446 48,241
Net assets of discontinued operations....................... -- 11,872
Other....................................................... 6,291 8,912
--------- ---------
$ 265,017 $ 286,721
========= =========
Current Liabilities:
Accounts payable.......................................... $ 10,005 $ 8,550
Accrued compensation...................................... 21,842 21,234
Accrued expenses.......................................... 26,449 22,361
Accrued litigation settlements............................ 4,043 12,026
Current portion of long-term debt......................... 2,138 1,067
--------- ---------
64,477 65,238
Deferred revenue.......................................... 20,396 18,289
--------- ---------
Total current liabilities......................... 84,873 83,527
Long-term debt.............................................. 175,000 175,013
Accrued litigation settlements.............................. -- 20,250
Other obligations........................................... 3,704 5,608
--------- ---------
Total liabilities................................. 263,577 284,398
--------- ---------
Commitments and contingencies (Notes 8 and 9)
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
29,575 and 78,745 issued and outstanding in 1999 and
1998, respectively..................................... 296 787
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 771,864 740,014
Warrants.................................................. 1,495 --
Accumulated deficit....................................... (772,215) (738,390)
--------- ---------
1,440 2,411
Less treasury stock, at cost -- 15 shares in 1998......... -- 88
--------- ---------
Total stockholders' equity........................ 1,440 2,323
--------- ---------
$ 265,017 $ 286,721
========= =========
See notes to consolidated financial statements.
F-2
30
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- --------- --------
Revenue..................................................... $322,129 $ 349,823 $392,420
-------- --------- --------
Salaries and wages.......................................... 212,940 226,894 242,228
Other operating expenses.................................... 104,192 126,183 123,094
Depreciation................................................ 20,177 23,848 22,481
Amortization................................................ 9,293 18,077 21,069
Interest expense, net....................................... 16,102 23,494 23,398
Intangible asset impairment................................. -- 390,641 --
Litigation settlements...................................... 24,811 35,987 52,500
Restructuring and other charges............................. -- 5,191 16,741
-------- --------- --------
Total expenses.................................... 387,515 850,315 501,511
-------- --------- --------
Loss before income taxes.................................... (65,386) (500,492) (109,091)
Income tax (benefit) expense................................ (610) 58,465 (16,568)
-------- --------- --------
Loss from continuing operations............................. (64,776) (558,957) (92,523)
-------- --------- --------
Discontinued operations, net of tax:
Income (loss) from discontinued operations............. 3,403 (71) (706)
Gain on sale of subsidiaries........................... 27,671 7,214 --
-------- --------- --------
31,074 7,143 (706)
-------- --------- --------
Loss before extraordinary item and cumulative effect of
accounting change......................................... (33,702) (551,814) (93,229)
Extraordinary items, net of tax............................. -- (8,400) 76,391
Cumulative effect of accounting change, net of tax.......... -- -- (2,465)
-------- --------- --------
Net loss.......................................... $(33,702) $(560,214) $(19,303)
======== ========= ========
Basic net (loss) income per share:
Loss from continuing operations........................ $ (2.31) $ (21.77) $ (3.82)
Income (loss) from discontinued operations, net of
tax.................................................. 1.11 0.28 (0.03)
Extraordinary items, net of tax........................ -- (0.33) 3.15
Cumulative effect of accounting change, net of tax..... -- -- (0.10)
-------- --------- --------
Net loss............................................... $ (1.20) $ (21.82) $ (0.80)
======== ========= ========
Weighted average shares outstanding......................... 28,097 25,673 24,226
======== ========= ========
See notes to consolidated financial statements.
F-3
31
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(33,702) $(560,214) $ (19,303)
Adjustments to reconcile net loss to net cash used for
operating activities:
(Income) loss from discontinued operations................ (3,403) 71 706
Depreciation and amortization............................. 29,470 41,925 43,550
Gain on sale of subsidiaries.............................. (27,997) (12,229) (122,583)
Gain (loss) on long-lived assets.......................... (4,772) 391,322 7,098
Cumulative effect of accounting change.................... -- -- 4,094
Non-cash litigation settlement costs...................... 16,433 -- --
Early extinguishment of debt.............................. -- 12,145 --
Deferred income taxes..................................... -- 58,465 15,492
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash......................................... (572) (2,504) (1,698)
Accounts receivable, billed............................. 8,703 13,800 (6,055)
Accounts receivable, unbilled........................... 3,863 13,471 1,054
Accounts payable........................................ 1,455 (514) 1,382
Accrued compensation.................................... 608 (5,392) 6,031
Accrued expenses........................................ (6) (3,712) (22,539)
Accrued litigation settlements.......................... (11,971) 32,639 52,500
Deferred revenue........................................ 2,107 2,124 9,216
Other, net.............................................. 820 6,966 6,961
-------- --------- ---------
Net cash used for continuing operations................. (18,964) (11,637) (24,094)
Net cash (used for) provided by discontinued
operations........................................... (2,942) 5,240 4,114
-------- --------- ---------
Net cash used for operating activities............. (21,906) (6,397) (19,980)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.......................... (32) (670) (6,103)
Purchases of property and equipment......................... (10,418) (23,789) (10,995)
Net proceeds from sale of subsidiaries...................... 47,986 103,204 126,375
Proceeds from sale of property and equipment................ 12,003 915 3,644
Software development costs.................................. (7,498) (4,515) (5,203)
-------- --------- ---------
Net cash provided by investing activities.......... 42,041 75,145 107,718
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock............................. 920 1,447 1,216
Proceeds from the exercise of stock options................. 217 5,688 6,104
Proceeds from borrowings.................................... -- 386,969 327,325
Payments of debt............................................ (1,042) (410,712) (398,058)
Debt issuance costs......................................... (285) (12,460) (13,596)
-------- --------- ---------
Net cash used for financing activities............. (190) (29,068) (77,009)
-------- --------- ---------
CASH AND CASH EQUIVALENTS:
Net change.................................................. 19,945 39,680 10,729
Balance at beginning of period.............................. 54,409 14,729 4,000
-------- --------- ---------
Balance at end of period.................................... $ 74,354 $ 54,409 $ 14,729
======== ========= =========
See notes to consolidated financial statements.
F-4
32
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON PREFERRED TREASURY
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT WARRANTS AMOUNT
------- ------ --------- --------- -------- ----------- -------- --------
BALANCE AT DECEMBER 31,
1996...................... 71,705 $ 717 -- $ -- $666,673 $(158,696) $ -- $(169)
Issuance of common stock.... 205 2 -- -- 1,214 -- -- --
Exercise of stock options
(including tax benefit of
$2,762)................... 1,303 13 -- -- 8,594 -- -- 259
Net loss.................... -- -- -- -- -- (19,303) -- --
Other....................... (9) -- -- -- 2,517 50 -- (90)
------- ----- -- ------ -------- --------- ------ -----
BALANCE AT DECEMBER 31,
1997...................... 73,204 732 -- -- 678,998 (177,949) -- --
Issuance of common stock.... 272 3 -- -- 1,444 -- -- --
Exercise of stock options... 1,242 12 -- -- 5,582 (49) -- 143
Funding of litigation
settlements............... 3,985 40 -- -- 53,587 -- -- (70)
Net loss.................... -- -- -- -- -- (560,214) -- --
Other....................... 42 -- -- -- 403 (178) -- (161)
------- ----- -- ------ -------- --------- ------ -----
BALANCE AT DECEMBER 31,
1998...................... 78,745 787 -- -- 740,014 (738,390) -- (88)
Issuance of common stock.... 316 3 -- -- 917 -- -- --
Exercise of stock options... 159 2 -- -- 215 -- -- --
Funding of litigation
settlements............... 9,500 95 -- -- 30,131 -- 1,495 --
Reverse 1 for 3 stock
split..................... (59,151) (591) -- -- 567 -- -- --
Net loss.................... -- -- -- -- -- (33,702) -- --
Other....................... 6 -- -- -- 20 (123) 88
------- ----- -- ------ -------- --------- ------ -----
BALANCE AT DECEMBER 31,
1999...................... 29,575 $ 296 -- $ -- $771,864 $(772,215) $1,495 $ --
======= ===== == ====== ======== ========= ====== =====
TOTAL
STOCKHOLDERS'
EQUITY
-------------
BALANCE AT DECEMBER 31,
1996...................... $ 508,525
Issuance of common stock.... 1,216
Exercise of stock options
(including tax benefit of
$2,762)................... 8,866
Net loss.................... (19,303)
Other....................... 2,477
---------
BALANCE AT DECEMBER 31,
1997...................... 501,781
Issuance of common stock.... 1,447
Exercise of stock options... 5,688
Funding of litigation
settlements............... 53,557
Net loss.................... (560,214)
Other....................... 64
---------
BALANCE AT DECEMBER 31,
1998...................... 2,323
Issuance of common stock.... 920
Exercise of stock options... 217
Funding of litigation
settlements............... 31,721
Reverse 1 for 3 stock
split..................... (24)
Net loss.................... (33,702)
Other....................... (15)
---------
BALANCE AT DECEMBER 31,
1999...................... $ 1,440
=========
See notes to consolidated financial statements.
F-5
33
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Per-Se Technologies, Inc. and its subsidiaries ("Per-Se" or the
"Company"). All significant intercompany transactions have been eliminated.
Certain amounts in the prior years' consolidated financial statements have been
reclassified to conform to the current year presentation. Per-Se completed the
sale of Medaphis Services Corporation ("Hospital Services") in 1998 and Impact
Innovations Group ("Impact") in 1999. The results of these segments are
classified as discontinued operations for all periods presented. See Note 2 for
further discussion of the Company's discontinued operations.
NATURE OF OPERATIONS. Per-Se provides business management services,
application software solutions and Internet-based connectivity primarily to the
healthcare industry throughout the United States. The Company historically has
not experienced any significant losses related to individual clients, classes of
clients or groups of clients in any geographical area.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. Fees for the Company's business management services
are primarily based on a percentage of net collections on clients' patient
accounts, and revenue is recognized as such business management services are
performed. Accounts receivable, billed, represents amounts invoiced to clients.
Accounts receivable, unbilled, represents amounts recognized for services
rendered but not yet invoiced and is based on the Company's estimate of the fees
that will be invoiced when collections on patient accounts are received.
On December 3, 1999, the Securities and Exchange Commission (the
"Commission") issued Staff Accounting Bulletin Number 101, Revenue Recognition
in Financial Statements ("SAB 101"). SAB 101 summarizes certain of the
Commission's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB 101 provides interpretative
guidance on the unbilled accounts receivable and related revenue recognition
within the Company's industry. The Commission's guidance requires the accounting
change to be reflected by the Company's quarter ending March 31, 2000.
Therefore, consistent with the Commission's guidance and changing industry
practice, the Company will begin recognizing revenue in its Physician Services
segment on an "as billed" basis in fiscal 2000. The Company does not expect this
change to significantly affect annual recognized revenue amounts. The change in
accounting method will result in the elimination of approximately $38 million of
unbilled accounts receivable. The one-time, cumulative charge in the Company's
March 31, 2000 statement of operations will be approximately $23 million, on a
net of tax basis. This will have no effect on cash flow.
For software license sales where no significant contractual obligations
remain outstanding, the Company recognizes revenue upon shipment. For contracts
under which the Company is required to make significant production, modification
or customization changes, revenue from software licenses is recognized using the
percentage-of-completion method over the implementation period. Where services
are considered essential to the functionality of the arrangement, the software
license is recognized over the implementation period using the percentage of
completion method. When the Company receives payment prior to shipment or
fulfillment of significant vendor obligations, such payments are recorded as
deferred revenue and are recognized as revenue upon shipment or fulfillment of
significant vendor obligations. The license agreements typically provide for
partial payments upon shipment; such terms result in an unbilled receivable at
the date the revenue is recognized. Revenue from software implementation
services is recognized as the services are performed.
F-6
34
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software maintenance payments received in advance are deferred and recognized
ratably over the term of the maintenance agreement, which is typically one year.
Revenue from systems integration contracts is recorded based on the terms
of the underlying contracts, which are primarily time and material or fixed
price contracts. Revenue from time and material type contracts is recognized as
services are rendered and costs are incurred based on contractual rates. Revenue
from fixed price contracts is recorded using the percentage of completion
method. Anticipated losses, if any, are charged to operations in the period that
such losses are determined. Revenue for which customers have not yet been
invoiced is reflected as unbilled accounts receivable in the accompanying
consolidated balance sheets.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
RESTRICTED CASH. Restricted cash principally represents amounts collected
on behalf of certain clients, a portion of which is held in trust until remitted
to such clients. In 1999, the Company also had restrictions on $4.6 million of
its cash as security for certain of the Company's letters of credit.
PROPERTY AND EQUIPMENT. Property and equipment, including equipment under
capital leases, are stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets, generally ten years
for furniture and fixtures, three to ten years for equipment and twenty years
for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
client lists and software development costs.
Goodwill and Client Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized over its estimated useful life using
the straight-line method. The Company is amortizing its goodwill of $10.4
million over its remaining useful life of fifteen years and its client lists of
$21.3 million over their remaining estimated nine-year period of benefit.
The Company monitors events and changes in circumstances that could
indicate the carrying amounts of the intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of the intangible assets by determining whether the carrying
value of such intangible assets will be recovered through undiscounted expected
future cash flows. Should the Company determine that the carrying values of
specific intangible assets are not recoverable, as was the case during 1998, the
Company would record a charge to reduce the carrying value of such assets to
their fair values. The Company determines fair value based on discounted
expected future cash flows during the period of benefit. See Note 5 where the
1998 impairment of intangibles assets is discussed. No impairment losses that
were related to goodwill or clients lists from continuing operations were
recorded in 1999 or 1997.
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software developed by
the Application Software and e-Health segments for resale. Software development
costs are capitalized upon the establishment of technological feasibility for
each product and capitalization ceases when the product or process is available
for general release to customers. Software development costs are amortized using
the straight-line method over the estimated economic lives of the assets, which
are generally three to five years.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). In Note 12, the Company presents
the disclosure requirements of Statement of Financial Accounting Standards No.
123, Accounting for Stock-based Compensation ("SFAS No. 123"). SFAS No. 123
requires that companies which elect to not account for stock-based compensation
as prescribed by
F-7
35
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that statement shall disclose, among other things, the pro forma effects on net
income (loss) and basic net income (loss) per share as if SFAS No. 123 had been
adopted.
LEGAL COSTS. The Company records charges for the legal and administrative
fees, costs and expenses and damages or settlements it anticipates incurring in
conjunction with its legal matters when management can reasonably estimate these
costs.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws and changes to such laws. Management includes the consideration of
future events in assessing the likelihood that tax benefits will be realized in
the future. See Note 13 where the Company discusses the realizability of the
deferred tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of the Company's
financial instruments, including total cash, accounts receivable, accounts
payable, accrued compensation, accrued expenses and current portion of long-term
debt approximates fair value.
BASIC NET LOSS PER COMMON SHARE. Basic net loss per common share is based
on the weighted average number of shares of common stock outstanding during the
period. Diluted net loss per common share is not presented as it is
antidilutive. Stock options and warrants are the only securities issued that
would have been included in the pro forma diluted earnings per share
calculation.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In November 1997, the Emerging
Issues Task Force ("EITF") issued EITF 97-13, Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology ("EITF 97-13"). EITF
97-13 requires process reengineering costs, as defined, which had been
previously capitalized as part of an information technology project to be
expensed in the quarter including November 1997. The Company recorded a charge
of $2.5 million, net of tax of $1.6 million, in the fourth quarter of 1997 as a
result of EITF 97-13.
SEGMENT REPORTING. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the
way companies report information about operating segments including the related
disclosures about products and services. The Company adopted SFAS No. 131 during
the year ended December 31, 1997 and, as required, restated prior years for
comparability. See Note 16 where the Company discloses information about its
reportable segments.
COMPREHENSIVE INCOME. On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. The
Company's net loss, as presented in the Consolidated Statements of Operations,
approximates the Company's other comprehensive income amount, as defined, for
all periods presented.
2. DISCONTINUED OPERATIONS AND DIVESTITURES
Management initiated a plan to focus the Company's financial and management
resources on its three core healthcare segments, in an effort to return the
Company to profitability. Management defined these segments as: Physician
Services, Application Software and e-Health. In 1998, management began to seek
alternatives for the remaining non-core business segments: Hospital Services and
Impact. Although Hospital Services provided business management and accounts
receivable management services to approximately 1,200 hospitals, the Company's
management deemed the segment non-core as a substantial portion of the services
offered was bad debt collection. Impact was deemed non-core as it did not
provide consulting services to the healthcare industry.
F-8
36
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. In
February 1999, the Company received additional proceeds of $0.5 million based on
the Hospital Services final closing balance sheet. In addition, Per-Se could
receive a purchase price adjustment of up to $10.0 million subject to Hospital
Services' achievement of various operational targets in 1999. The purchase price
adjustment will be determined by the second quarter of 2000. The Company
recorded a $6.8 million gain, net of taxes of $5.4 million, as a result of this
sale.
In 1999, the Company completed the sale of both divisions of Impact. After
reviewing several alternatives for Impact throughout 1998, management concluded
a sale of this segment would generate the greatest return to the stockholders
and finalized its plan to sell Impact. The Company sold the commercial division
of Impact to Complete Business Solutions, Inc. ("CBSI") effective April 15, 1999
for $14.4 million, net of the final closing balance sheet adjustment of $0.6
million which was paid on July 16, 1999. The government division of Impact was
sold on December 17, 1999 to J3 Technology Services Corp. for initial
consideration of $45.0 million, subject to certain closing adjustments. The
Company recorded a $28.1 million gain as a result of the Impact sales.
Pursuant to APB No. 30, Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, the consolidated financial
statements of the Company have been presented to reflect both Hospital Services
and Impact as discontinued operations for all periods presented.
The net operating results of these segments have been reported in the
Consolidated Statements of Operations as "Income (loss) from discontinued
operations"; the net assets have been reported in the Consolidated Balance
Sheets as "Net assets of discontinued operations"; and the net cash flows have
been reported in the Consolidated Statements of Cash Flows as "Net cash (used
for) provided by discontinued operations."
Summarized financial information for the discontinued operations is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
------- ----------------------------- ------------------------------
HOSPITAL HOSPITAL
IMPACT SERVICES IMPACT TOTAL SERVICES IMPACT TOTAL
------- -------- ------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue............................... $54,916 $100,081 $79,731 $179,812 $97,095 $101,524 $198,619
======= ======== ======= ======== ======= ======== ========
Income (loss) from discontinued
operations before income taxes...... 3,958 5,192 (5,263) (71) 9,508 (10,419) (911)
Income tax expense (benefit).......... 555 2,079 (2,079) -- 3,910 (4,115) (205)
------- -------- ------- -------- ------- -------- --------
Income (loss) from discontinued
operations, net of tax.............. $ 3,403 $ 3,113 $(3,184) $ (71) $ 5,598 $ (6,304) $ (706)
======= ======== ======= ======== ======= ======== ========
AS OF DECEMBER 31, 1998
-----------------------
IMPACT
-----------------------
(IN THOUSANDS)
Current assets..................................... $16,399
Total assets....................................... 21,829
Current liabilities................................ 9,787
Total liabilities.................................. 9,957
Net assets of discontinued operations.............. 11,872
On May 28, 1997, Per-Se sold Healthcare Recoveries, Inc. ("HRI") through an
initial public offering of 100% of its stock, which generated net proceeds to
the Company of $126.4 million and an extraordinary gain of $76.4 million, net of
taxes of $46.2 million. Per-Se acquired HRI on August 28, 1995 through a
business
F-9
37
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
combination accounted for as a pooling-of-interests and therefore, the resultant
gain from the sale has been presented as an extraordinary item. The net proceeds
from the sale were used to pay down borrowings under the then-current debt
facility. At the time of the sale, HRI was not a separate reportable segment.
3. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
1999 1998 1997
---- ------ -------
(IN THOUSANDS)
Restructuring charges....................................... $-- $1,289 $ 2,759
Property and equipment impairment........................... -- 681 4,959
Legal costs................................................. -- 1,999 2,600
Pooling charges............................................. -- -- (17)
Severance costs............................................. -- 1,222 2,524
Other....................................................... -- -- 3,916
-- ------ -------
$-- $5,191 $16,741
== ====== =======
Restructuring Charges. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). There were two components
of the Reengineering Project: (i) workflow, process and operational improvements
along with new technology development; and (ii) office consolidation within
Physician Services (the "Physician Services Restructuring Plan"). The Company
periodically reevaluates the adequacy of the reserves established for the
Physician Services Restructuring Plan and in 1999 and 1997 recorded an
additional charge of $0.3 million and $1.7 million, respectively, for lease
termination costs.
In August 1997, the Company adopted a plan to combine the operations of its
software and consulting companies and recorded charges of $0.5 million for the
costs associated with the termination of certain leases and $0.6 million for
severance costs related to approximately 10 employees who had been notified of
their termination. In 1999, the Company revised its plan to combine the
operations of its software and consulting companies and reduced the reserve for
lease termination costs by $0.3 million.
In 1998, Application Software recorded approximately $1.3 million of
restructuring costs for severance when management decided to restructure its
operations to more appropriately align Application Software's resources with
future operational needs and new product development. The severance costs relate
to approximately 35 employees, primarily in the areas of professional services
and research and development, who had been notified of their termination.
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for all of the restructurings
discussed above are as follows:
RESERVE COSTS RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE APPLIED BALANCE
JANUARY 1, RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31,
1997 ADJUSTMENTS RESERVE 1997 ADJUSTMENTS RESERVE 1998
---------- ----------- ------- ------------ ----------- ------- ------------
(IN THOUSANDS)
Lease termination
costs.............. $5,314 $2,176 $(2,035) $5,455 $ -- $(1,163) $4,292
Severance............ -- 583 (425) 158 1,289 (299) 1,148
------ ------ ------- ------ ------ ------- ------
$5,314 $2,759 $(2,460) $5,613 $1,289 $(1,462) $5,440
====== ====== ======= ====== ====== ======= ======
COSTS RESERVE
APPLIED BALANCE
AGAINST DECEMBER 31,
RESERVE 1999
------- ------------
(IN THOUSANDS)
Lease termination
costs.............. $ (764) $3,528
Severance............ (875) 273
------- ------
$(1,639) $3,801
======= ======
The terminated leases have various expiration dates through 2005 and the
severance will be paid during 2000.
F-10
38
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment Impairment. In connection with the Company's
assessment of the recoverability of certain of its long-lived assets, the
Company recorded a charge of $5.0 million for impairment losses during 1997.
In 1998, the Company recorded a charge of $0.7 million related to the
write-down of certain properties held for sale to their net realizable value.
Legal Costs. In 1998 and 1997, the Company evaluated the adequacy of its
reserves for the legal and administrative fees, costs and expenses associated
with various legal matters and recorded a net charge of $2.0 million and $2.6
million, respectively.
Severance Costs. In 1995, management of Physician Services formalized an
involuntary severance benefit plan. The Company recorded charges of
approximately $0.5 million in 1997 in accordance with Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits,
to reflect the expense for employees' rights to involuntary severance benefits
that have accumulated to date.
In 1998 and 1997, the Company recorded charges of $1.2 million and $2.0
million, respectively, for severance costs associated with former executive
management.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1999 1998
-------- --------
(IN THOUSANDS)
Land........................................................ $ 1,790 $ 3,861
Buildings................................................... 5,536 7,865
Furniture and fixtures...................................... 25,373 15,201
Equipment................................................... 102,844 95,383
Leasehold improvements...................................... 9,134 8,662
-------- --------
144,677 130,972
Less accumulated depreciation............................... 110,574 83,018
-------- --------
$ 34,103 $ 47,954
======== ========
5. INTANGIBLE ASSETS AND IMPAIRMENT CHARGE
Intangible assets consists of the following:
1999 1998
------- -------
(IN THOUSANDS)
Goodwill.................................................... $12,317 $12,317
Client lists................................................ 39,681 39,681
Software development costs.................................. 44,814 37,316
------- -------
96,812 89,314
Less accumulated amortization............................... 50,366 41,073
------- -------
$46,446 $48,241
======= =======
At September 30, 1998, the Company recorded an intangible asset impairment
charge of $390.6 million to adjust the intangible assets of the Physician
Services segment to their fair value. Management regularly monitors its results
of operations and other developments within the industry to adjust its cash flow
forecast, as necessary, to determine if an adjustment is necessary to the
carrying value of the Company's intangible assets.
F-11
39
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures on capitalized software development costs were approximately
$7.5 million, $4.5 million and $5.2 million in 1999, 1998 and 1997,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $4.5 million, $5.0 million and $4.5 million in 1999, 1998 and
1997, respectively. The unamortized balance of software development costs at
December 31, 1999 and 1998 was $14.8 million and $11.8 million, respectively.
The Company recorded research and development expenses of approximately
$9.2 million, $10.8 million and $4.5 million in 1999, 1998 and 1997,
respectively.
6. ACCRUED EXPENSES
Accrued expenses consists of the following:
1999 1998
------- -------
(IN THOUSANDS)
Accrued interest............................................ $ 6,264 $ 6,253
Accrued restructuring and severance costs................... 2,331 3,711
Accrued legal costs......................................... 532 1,222
Accrued taxes............................................... 1,842 2,301
Funds due clients........................................... 3,419 753
Accrued costs of businesses acquired........................ 406 574
Other....................................................... 11,655 7,547
------- -------
$26,449 $22,361
======= =======
7. LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
-------- --------
(IN THOUSANDS)
9 1/2% Senior Notes due 2005 (the "Notes").................. $175,000 $175,000
Capital lease obligations, weighted average effective
interest rates of 8.7% and 7.7%........................... 38 135
Other....................................................... 2,100 945
-------- --------
177,138 176,080
Less current portion........................................ 2,138 1,067
-------- --------
$175,000 $175,013
======== ========
On February 20, 1998, the Company sold the Notes. The Notes bear interest
at the rate of 9 1/2% per annum, payable semi-annually on February 15 and August
15, which commenced on August 15, 1998 and will mature on February 15, 2005. The
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after February 15, 2002, at a declining premium to par until 2004
and at par thereafter, plus accrued and unpaid interest. In addition, at any
time on or prior to February 15, 2001, the Company may redeem up to 35% of the
original principal amount of the Notes at a redemption price equal to 109.5% of
the principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more equity offerings; provided that at least $100 million aggregate principal
amount of the Notes remain outstanding immediately following any such
redemption.
Payment of principal, premium, if any, and interest on the Notes is fully
and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operations or assets, separate from
its
F-12
40
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment in subsidiaries. Any non-guarantor subsidiaries are inconsequential
individually and in the aggregate to the consolidated financial statements.
At December 31, 1999, the estimated fair value of the Notes is
approximately $135.6 million based on the quoted market price for these Notes.
Although the fair value of the Notes is less than the carrying amount,
settlement at the reported fair value may not be possible. The carrying amounts
of the remaining debt reflected in the consolidated balance sheets approximate
fair value of such instruments due to the variable rate nature of substantially
all of this debt.
The Company entered into a $100 million credit facility (the "Credit
Facility") on February 20, 1998. The Company used the proceeds from the offering
of the Notes, together with the initial borrowing under this Credit Facility and
available cash, to repay $210 million under a previous debt facility plus
accrued interest. The Company paid a quarterly commitment fee on the unused
portion of the Credit Facility ranging from 0.25% to 0.75% per annum based on
the Company's leverage ratio. On November 30, 1998, the Company used $71.5
million of the $103.2 million net proceeds received from the sale of Hospital
Services to repay and terminate the Credit Facility. The Company recorded
charges in 1998 of $8.4 million, net of tax of $3.8 million, to write-off the
unamortized costs associated with both the Company's previous debt facility and
the Credit Facility.
It is the Company's policy to amortize debt issuance costs using the
straight-line method over the life of the debt agreement. Amortization expense
related to debt issuance costs for the years ended 1999, 1998 and 1997 were $1.2
million, $2.5 million and $3.0 million, respectively.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1999 and 1998, the net book value of equipment subject to
capital leases totaled $0.1 million and $0.2 million, respectively.
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
2000........................................................ $ 2,138
2001........................................................ --
2002........................................................ --
2003........................................................ --
2004........................................................ --
Thereafter.................................................. 175,000
--------
$177,138
========
8. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, which expire at various dates through 2011. Rent expense was $16.7
million, $15.3 million and $17.9 million for the years ended December 31, 1999,
1998 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
2000........................................................ $16,483
2001........................................................ 12,822
2002........................................................ 11,139
2003........................................................ 8,926
2004........................................................ 7,232
Thereafter.................................................. 6,858
-------
$63,460
=======
F-13
41
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LEGAL MATTERS
SETTLED LEGAL MATTERS
In October 1999, the Company and Foundation Health Services, Inc.
("Foundation"), formerly Health Systems International, Inc., settled litigation
arising out of Per-Se's acquisition of Health Data Sciences Corporation ("HDS")
in June of 1996. Pursuant to the settlement, Foundation realized $25.0 million
from its investment in HDS, consisting of $3.6 million from the sale of 325,590
shares of Per-Se Common Stock received by Foundation in the June 1996 HDS
transaction, $4.6 million in cash funded by the Company's insurers, $5.0 million
in cash paid by the Company and $11.8 million from the October 1999 sale by
Foundation of 1,333,333 shares of Per-Se Common Stock issued to Foundation.
On June 24, 1999, the Company entered into a settlement agreement with the
former shareholders of Medical Management Sciences, Inc. ("MMS") related to
claims arising out of Per-Se's acquisition of MMS in December of 1995. The
litigation has been dismissed with prejudice. The settlement agreement provided
for the issuance by the Company to the MMS Shareholders of 166,667 shares of
Common Stock and warrants to purchase an additional 166,667 shares of Common
Stock. In addition, the Company entered into a five-year consulting agreement
with Providence Management Corporation, a company controlled by a former MMS
shareholder, providing for a $300,000 up front payment and $150,000 a year for
the five-year term. The Company also paid the MMS Shareholders $375,000 for the
MMS Shareholders' interest in a malpractice claim.
On June 21, 1999, the Company finalized the settlement with the United
States government concerning its investigation of the Company's wholly-owned
subsidiary, PST Emergency Medicine Services, Inc. (the "Emergency Medicine
division"), formerly Gottlieb's Financial Services, Inc., requiring the Company
to pay to the United States and the various states a total of $15.0 million. The
Company paid $6.8 million to the United States on June 29, 1999, $1.2 million on
September 30, 1999, $2.2 million, in the aggregate, to the participating states
on October 1, 1999 and $1.2 million to the United States on December 31, 1999.
The balance of $3.6 million will be paid in $0.9 million increments to the
United States at the end of each calendar quarter of 2000. The deferred portion
of the settlement payment will bear interest at the one-year Treasury Bill rate.
All pending claims against the Company by the United States and the Relator in
underlying qui tam litigation have been dismissed with prejudice and the United
States has released the Company from all civil and administrative claims arising
out of the emergency room billing of government programs services provided by
the Emergency Medicine division from 1993 through the date of the settlement
agreement with the United States. The settlement agreements with the
participating states provide for the release of the Company by the states of all
civil and administrative claims arising out of the emergency room billing
services provided by the Emergency Medicine division from 1993 through the date
of the settlement agreement with the individual state.
On June 16, 1999, the Company agreed to settle certain contract claims
arising out of a 1996 contract for emergency room billing services to be
provided by the Emergency Medicine division to Spectrum Healthcare, Inc.
("Spectrum") and Emcare, Inc. ("Emcare"), the successor to Spectrum's emergency
business. The Company paid Emcare $1.75 million in cash in exchange for a
release by Spectrum and Emcare of all claims against the Emergency Medicine
division for breach of contract.
On January 28, 1998, SCI Management Corporation ("SCI") filed a complaint
against BSG Alliance/IT, Inc. (later known as Impact Innovations Group, Inc.)
seeking recovery for alleged damages in connection with work performed by the
commercial division of Impact under a consulting contract. The Company sold the
commercial division of Impact effective April 15, 1999 but retained
responsibility for this matter. The Company and SCI reached an agreement to
refund $5.3 million to SCI and on November 4, 1999, the Company paid $3.2
million to SCI and issued a promissory note for $2.1 million bearing interest at
8.25% payable on October 31, 2000.
F-14
42
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENDING LEGAL MATTERS
On May 10, 1999, a motion to reopen a putative class action complaint filed
by Ernest Hecht and Stephen D. Strandberger was granted. During 1998, this case
had been dismissed with prejudice and without leave to amend. The reinstated
appeal is pending. The Company is unable to estimate the final outcome and any
loss related to this matter.
On January 8, 1997, the Commission notified the Company that it was
conducting a formal, non-public investigation into, among other things, former
officers and Company transactions including the restatements of the Company's
consolidated financial statements for the three months and year ended December
31, 1995 and its unaudited balance sheets as of March 31, 1996 and June 30,
1996. The Company continues to monitor the investigation as it proceeds.
The Company is subject to claims and litigation in the ordinary course of
its business. 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 Medicare, Medicaid
and certain other federal and state healthcare programs. The Company and its
clients have received, and the Company may continue to receive, official
inquiries concerning billing and collection practices.
The Company believes that it has meritorious defenses to the claims
assessed in legal matters. There can be no assurance that existing or future
claims, government investigations, including the Commission investigation, and
legal matters will not have an adverse effect on the Company. Since the Company
is unable to estimate a range of awards or losses, if any, on pending legal
matters, no amounts have been reflected in the financial statements unless
noted.
10. CAPITAL STOCK
On November 23, 1999, a special meeting of the Company's stockholders was
held at which the stockholders approved a one-for-three reverse split of the
Company's Common Stock (the "Reverse Split"). The Reverse Split reduced the
number of shares of the Company's Common Stock outstanding to approximately 30
million from approximately 90 million. This enabled the Company to bring its
number of outstanding shares down to a level more consistent with companies of
similar size and to maintain compliance with The Nasdaq Stock Market (R)
("Nasdaq") listing requirements. The Reverse Split had no effect on the number
of shares that the Company is authorized to issue and no effect on the $0.01 par
value of the Common Stock. No fractional shares were issued in the Reverse
Split; instead, stockholders will be paid cash for any fractional shares. The
numbers of shares, per share amounts and market prices of the Company's Common
Stock set forth herein have been retroactively adjusted for all periods
presented to reflect the Reverse Split.
On June 17, 1997, the Company's stockholders approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to authorize the
Board of Directors to issue from time to time, without further stockholder
action (unless required in a specific case by applicable Nasdaq rules), 20
million shares of one or more series of preferred stock (the "Preferred Stock"),
with such terms and for such consideration as the Board of Directors may
determine.
The flexibility to issue shares of one or more series of Preferred Stock,
in general, may have the effect of discouraging an attempt to assume control of
a Company by a present or future stockholder or of hindering an attempt to
remove the Company's incumbent management. Stockholders of the Company do not
have preemptive rights to subscribe for or purchase any shares of Preferred
Stock that may be issued in the future. Upon issuance, outstanding Preferred
Stock would rank senior to the Common Stock and non-voting common stock with
respect to dividends and liquidation rights. Depending on the voting rights
applicable to each series of Preferred Stock, the issuance of shares of
Preferred Stock could dilute the voting power of the holders of the Common
Stock.
F-15
43
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCKHOLDERS' RIGHTS PLAN
On January 21, 1999, the Company's Board of Directors approved a
stockholders' rights plan (the "Rights Plan"). Pursuant to the Rights Plan, the
Company declared a dividend of one right for each outstanding share of Common
Stock to stockholders of record at the close of business on February 16, 1999
(the "Record Date"). Each right entitles the registered holder to purchase from
the Company a unit consisting of one one-hundredth of a share (a "Unit") of
Series A Junior Participating Preferred Stock, without par value (the "Series A
Preferred Stock"), at a purchase price of $75 per Unit, as adjusted for the
Reverse Split.
Initially, the rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate rights certificates will
be distributed. Subject to certain exceptions specified in the Rights Plan, the
rights will separate from the Common Stock and a distribution date will occur
upon the earlier of (i) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding shares of Common
Stock other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders or the date a
person has entered into an agreement or arrangement with the Company or any
subsidiary of the Company providing for an Acquisition Transaction (the "Stock
Acquisition Date") or (ii) 10 business days following the commencement of a
tender offer.
In the event that a person becomes an Acquiring Person, except pursuant to
an offer for all outstanding shares of Common Stock which the independent
directors determine to be fair and not inadequate to and to otherwise be in the
best interests of the Company and its stockholders, after receiving advice from
one or more investment banking firms (a "Qualifying Offer"), each holder of a
right will thereafter have the right to receive, upon exercise, Common Stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a value equal to two times the exercise price of the right.
Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company or in the event of the redemption of the
rights as set forth above.
12. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies and a Non-Qualified Stock Option Plan for Non-Executive Employees.
Granted options expire 10 to 11 years after the date of grant and generally vest
over a three-to-five-year period. The total number of options available for
future grant under these stock options plans was approximately 1.7 million at
December 31, 1999.
The Company also has a Non-Employee Director Stock Option Plan (the
"Director Plan") for non-employees who serve on the Company's Board of
Directors. The Director Plan provides for an initial grant of 3,333 options at a
strike price corresponding to the average of the fair market values for the five
trading days prior to the date of the grant. Additionally, each non-employee
director receives an annual grant of 666 options at each subsequent annual
meeting in which the non-employee director is a member of the Board of
Directors. All options granted under the Director Plan originally vested over a
five-year period and expired eleven years from the date of grant. On April 1,
1999, the Director Plan was amended so that all options granted under the
Director Plan fully vest as of the date of grant but shall not become
exercisable until one year after the date of grant. As of December 31, 1999, the
Company had 7,211 options available for future grant under this plan.
F-16
44
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a Senior Executive Non-Qualified Stock Option Plan which
permits certain of the Company's former executive officers to purchase up to an
aggregate of 183,582 shares of the Company's Common Stock at $6 per share. All
remaining options available for grant under this plan have been granted.
Currently, there are 26,667 options exercisable that will expire January 16,
2001.
Activity related to all stock option plans and warrants, is summarized as
follows (shares in thousands):
1999 1998 1997
------------------------- ------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------- ----------------
Options outstanding as of
January 1.............. 3,705 $16.62 3,048 $17.89 3,709 $26.24
Granted.................. 401 10.15 1,997 16.23 3,154 18.63
Exercised................ (53) 4.03 (414) 13.91 (434) 14.28
Canceled................. (933) 16.65 (926) 21.13 (3,381) 28.20
------ ------ -------
Options outstanding as of
December 31............ 3,120 $16.00 3,705 $16.62 3,048 $17.89
====== ====== =======
Options exercisable as of
December 31............ 1,592 $17.23 1,281 $16.85 1,185 $16.92
====== ====== =======
Weighted-average fair
value of options
granted during the
year................... $ 6.31 $ 7.53 $ 9.15
The following table summarizes information about stock options outstanding
at December 31, 1999 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED- NUMBER
NUMBER AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- ------------------------ -------------- ----------- --------- ------------ ---------
$0.066 to $6.00......................... 95 2.23 $ 3.81 95 $ 3.81
$7.83 to $13.05......................... 1,013 9.53 9.69 309 9.85
$13.594 to $22.50....................... 1,649 7.66 17.20 946 17.21
$26.10 to $29.625....................... 286 7.61 28.64 180 28.61
$30.00 to $135.00....................... 77 6.09 41.51 62 41.94
----- -----
$0.066 to $135.00....................... 3,120 8.06 16.00 1,592 17.23
===== =====
On April 25, 1997, the Compensation Committee of the Board of Directors of
the Company approved an adjustment of the exercise price for certain outstanding
employee stock options, which had an exercise price of $16.50 and above. The
revised exercise price of $16.125 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by then-current executive officers of the Company were adjusted as part of
such option restrike, but no adjustments were made to any options held by
directors or former employees of the Company. In approving the adjustment, the
Compensation Committee relied upon the views of its outside advisors with
respect to the legal, accounting and compensation issues associated with the
action and took into consideration, among other things, the following factors:
(i) the Company historically had paid salaries which were at or below market
levels and had made up for lower salaries through stock option grants to
employees; (ii) the Company historically had used stock options as its principal
long-term incentive program; (iii) the highly skilled employees of the Company
possessed marketable skills; and (iv) senior management of the Company believed
that there was potential for increased
F-17
45
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
attrition among its key employees and that adjustment of the exercise price of
the outstanding options would significantly help to mitigate such risk.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted to employees with an exercise price equal to the quoted market
price of the Common Stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the fair value of each option grant and stock based award has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1999 1998 1997
----- ----- -----
Expected life (years)....................................... 4.50 3.74 4.33
Risk-free interest rate..................................... 5.78% 5.09% 6.39%
Dividend rate............................................... 0.00% 0.00% 0.00%
Expected volatility......................................... 76.22% 61.66% 54.09%
In June of 1999, in connection with the settlement with the former
shareholders of MMS, the Company issued warrants to purchase 166,667 shares of
Common Stock. These warrants are currently exercisable at an exercise price of
$15.9375 per share and will expire in 2004.
During 1998, in connection with the settlement of a putative class action
law suit, the Company issued warrants to purchase 1,769,841 shares of Common
Stock. These warrants are currently exercisable at an exercise price of $36.00
per share and will expire in 2003.
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's pro forma net loss and
pro forma basic loss per share would have increased to the following pro forma
amounts:
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net loss:
As reported......................................... $(33,702) $(560,214) $(19,303)
Pro forma -- for SFAS No. 123....................... (52,686) (573,791) (34,374)
Pro forma basic net loss per share:
As reported......................................... $ (1.20) $ (21.82) $ (0.80)
Pro forma -- for SFAS No. 123....................... (1.88) (22.35) (1.42)
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
Per-Se has never paid cash dividends on its Common Stock. The Indenture
dated as of February 20, 1998, with respect to the Company's outstanding 9 1/2%
Senior Notes due 2005, contains restrictions on the Company's ability to declare
or pay cash dividends on its Common Stock.
F-18
46
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
Income tax (benefit) expense is comprised of the following:
1999 1998 1997
------- --------- --------
(IN THOUSANDS)
Current:
Federal................................................... $ -- $ -- $ 943
State..................................................... (1,165) 1,234 6,092
Deferred:
Federal................................................... (5,806) (127,783) 10,629
State..................................................... (797) (17,524) 1,620
Foreign................................................... -- -- 380
Valuation allowance......................................... 6,603 203,772 8,126
------- --------- --------
Total income tax (benefit) expense................ (1,165) 59,699 27,790
Income tax benefit (expense) on extraordinary item.......... -- 3,779 (46,192)
Cumulative effect of accounting change...................... -- -- 1,629
Income tax benefit (expense) on discontinued operations..... 555 (5,013) 205
------- --------- --------
Income tax (benefit) expense on continuing operations....... $ (610) $ 58,465 $(16,568)
======= ========= ========
A reconciliation between the amount determined by applying the federal
statutory rate to loss before income taxes and income tax (benefit) expense is
as follows:
1999 1998 1997
-------- --------- --------
(IN THOUSANDS)
Income tax benefit at federal statutory rate................ $(11,582) $(175,172) $(38,182)
State taxes, net of federal benefit......................... (1,588) (24,024) (5,236)
Nondeductible goodwill amortization......................... -- 2,927 3,241
Nondeductible deal costs of business combinations........... -- -- (38)
Nondeductible litigation settlement......................... 6,749 6,900 13,097
Nondeductible write-off of goodwill......................... -- 43,558 --
Valuation allowance......................................... 6,603 203,772 8,126
Foreign..................................................... -- -- 541
Other....................................................... (792) 504 1,883
-------- --------- --------
$ (610) $ 58,465 $(16,568)
======== ========= ========
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes at December 31, 1999 and 1998
are as follows:
1999 1998
-------- --------
(IN THOUSANDS)
Current:
Accounts receivable, unbilled............................... $(23,310) $(27,095)
Acquisition accruals........................................ 663 461
Accrued expenses............................................ 20,164 38,978
Valuation allowance......................................... (5,496) (24,279)
Other....................................................... 7,979 11,935
-------- --------
$ -- $ --
======== ========
F-19
47
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998
-------- --------
(IN THOUSANDS)
Noncurrent:
Net operating loss carryforwards............................ $151,266 $126,093
Valuation allowance......................................... (231,339) (205,953)
Depreciation and amortization............................... 78,060 77,847
Other....................................................... 2,013 2,013
-------- --------
$ -- $ --
======== ========
At December 31, 1999, the Company had projected federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $380 million,
which consist of $312 million of consolidated NOLs and $68 million of separate
return limitation year NOLs. The NOLs will expire at various dates between 2004
and 2019.
As of December 31, 1999, the Company has a deferred tax asset of $236.8
million, which is offset by a valuation allowance of $236.8 million. Realization
of the deferred tax asset is dependent upon the Company generating sufficient
taxable income prior to the expiration of the NOLs. If, during future periods,
management believes the Company will generate sufficient taxable income to
realize the deferred tax asset, the Company will adjust this valuation reserve
accordingly.
14. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans, a percentage of which are matched by the Company. The Company's
contribution expense was $1.8 million, $1.7 million and $1.9 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company maintains a noncontributory money purchase pension plan that
covers substantially all employees who are retained by the Company primarily to
service specific physician clients. Contributions are determined annually by the
Company not to exceed the maximum amount deductible for federal income tax
purposes. The Company's contribution to the plan were $0.3 million, $0.7 million
and $0.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
In July 1999, the Company's Board of Directors approved the termination of
the Company's Employee Stock Purchase Plan ("ESPP") effective as of the close of
business on December 31, 1999.
15. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Additions to capital lease obligations.................. $ -- $ 42 $ --
Common Stock issued upon funding of litigation
settlements.......................................... 30,226 53,557 --
Issuance of promissory note............................. 2,100 -- --
Issuance of stock warrants.............................. 1,495 -- --
Cash paid for:
Interest................................................ 16,956 15,371 19,835
Income taxes............................................ 946 1,484 10,747
F-20
48
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT REPORTING
The Company's reportable segments are strategic business units that offer
different services and products. Per-Se provides its services and products
through its three operating segments: Physician Services, Application Software
and e-Health.
Physician Services provides business management services to physicians and
healthcare organizations, including clinical data collection, data input,
medical coding, billing, contract management, cash collections and accounts
receivable management. These services are designed to assist healthcare
providers with the business management functions associated with the delivery of
healthcare services, allowing physicians and hospital staff to focus on
providing quality patient care. These services also assist physicians and
healthcare organizations in improving cash flows and reducing administrative
costs and burdens.
The Application Software segment provides financial and clinical software
including patient scheduling, staff management, clinical information systems and
patient financial management software. These applications enable healthcare
organizations to simultaneously optimize the quality of care delivered and the
profitability of business operations.
The e-Health segment offers Internet-enabled and private network
connectivity to both integrated healthcare delivery networks and physician
practices, including electronic claims processing, referral submissions,
eligibility verification and other electronic and paper transaction processing.
In addition, e-Health offers physician practice management software as
Application Service Provider ("ASP") to physician practices.
Certain expenses previously included in Corporate overhead have been
reclassified to the Physician Services segment and the Application Software
segment for all periods presented.
HRI provided subrogation and related recovery services primarily to
healthcare payers and was sold on May 28, 1997.
Per-Se evaluates each segment's performance based on operating profit or
loss. The Company accounts for intersegment sales as if the sales were to third
parties.
Information concerning the operations in these reportable segments is as
follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Revenue:
Physician Services................................... $240,200 $264,323 $278,475
Application Software................................. 62,145 70,849 85,037
e-Health............................................. 31,343 25,886 25,342
HRI.................................................. -- -- 14,720
Eliminations......................................... (11,559) (11,235) (11,154)
-------- -------- --------
$322,129 $349,823 $392,420
======== ======== ========
F-21
49
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Operating (loss) profit (1):
Physician Services................................... $ (5,541) $(12,608) $(11,402)
Application Software................................. (1,071) (8,932) 19,560
e-Health............................................. (190) (912) 613
HRI.................................................. -- -- 3,685
Corporate............................................ (17,671) (22,727) (28,908)
-------- -------- --------
$(24,473) $(45,179) $(16,452)
======== ======== ========
Interest expense, net.................................. $ 16,102 $ 23,494 $ 23,398
======== ======== ========
Restructuring and other charges
(including intangible asset impairment
and litigation settlements):
Physician Services................................... $ 2,086 $411,139 $ 7,394
Application Software................................. (336) 1,245 1,006
Corporate............................................ 23,061 19,435 60,841
-------- -------- --------
$ 24,811 $431,819 $ 69,241
======== ======== ========
Loss before income taxes............................... $(65,386) $(500,492) $(109,091)
======== ======== ========
Depreciation and amortization:
Physician Services................................... $ 15,674 $ 28,340 $ 34,360
Application Software................................. 6,793 7,342 5,258
e-Health............................................. 2,429 1,912 1,630
HRI.................................................. -- -- 401
Corporate............................................ 4,574 4,331 1,901
-------- -------- --------
$ 29,470 $ 41,925 $ 43,550
======== ======== ========
Capital expenditures:
Physician Services................................... $ 7,422 $ 15,836 $ 5,646
Application Software................................. 1,242 2,863 1,697
e-Health............................................. 882 2,300 1,089
HRI.................................................. -- -- 108
Corporate............................................ 872 2,790 2,455
-------- -------- --------
$ 10,418 $ 23,789 $ 10,995
======== ======== ========
1999 1998
-------- --------
(IN THOUSANDS)
Identifiable assets:
Physician Services........................................ $116,423 $134,485
Application Software...................................... 39,265 46,917
e-Health.................................................. 18,904 18,403
Corporate (2)............................................. 90,425 86,916
-------- --------
$265,017 $286,721
======== ========
- ---------------
(1) Excludes restructuring and other charges, litigation settlements, intangible
asset impairment and interest expense.
(2) 1998 includes net assets of $11,872 related to discontinued operations.
F-22
50
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 (1)(2):
Revenue....................................... $ 81,374 $ 82,357 $ 81,270 $77,128
Net loss from continuing operations........... (14,570) (39,984) (4,685) (5,537)
Discontinued operations....................... 774 4,374 (4,604) 30,530
Net (loss) income............................. (13,796) (35,610) (9,289) 24,993
Net loss per common share from continuing
operations................................. (0.55) (1.44) (0.16) (0.19)
Discontinued operations per common share...... 0.03 0.16 (0.15) 1.03
Net (loss) income per common share............ $ (0.52) $ (1.28) $ (0.31) $ 0.84
Weighted average shares outstanding........... 26,309 27,775 28,465 29,798
1998 (3)(4):
Revenue....................................... $ 95,347 $ 89,330 $ 81,980 $83,166
Net loss from continuing operations........... (6,645) (31,886) (513,158)(5) (7,268)
Discontinued operations....................... 1,494 2,071 (2,847) 6,425(6)
Extraordinary items........................... (5,557) -- -- (2,843)
Net loss...................................... (10,708) (29,815) (516,005) (3,686)
Net loss per common share from continuing
operations................................. (0.27) (1.24) (19.57) (0.28)
Discontinued operations per common share...... 0.06 0.08 (0.11) 0.24
Extraordinary item per common share........... (0.23) -- -- (0.10)
Net loss per common share..................... $ (0.44) $ (1.16) $ (19.68) $ (0.14)
Weighted average shares outstanding........... 24,493 25,712 26,218 26,242
- ---------------
(1) The quarterly periods ended June 30, 1999 and September 30, 1999 also
included the impact of $29.2 million and $(4.4) million, respectively, of
charges for litigation settlements.
(2) The quarterly periods ended March 31, 1999, June 30, 1999, September 30,
1999 and December 31, 1999 also included the impact of $0.5 million, $4.0
million, $(6.0) million and $29.2 million, respectively, of gain (loss) on
the sale of discontinued operations.
(3) The quarterly periods ended March 31, 1998, June 30, 1998, September 30,
1998 and December 31, 1998 included the impact of $0.6 million, $1.0
million, $1.8 million and $1.8 million, respectively, of restructuring and
other charges. See Note 3 for a detailed explanation of these charges.
(4) The quarterly periods ended June 30, 1998, September 30, 1998 and December
31, 1998 also included the impact of $21.9 million, $19.5 million and $(5.4)
million, respectively, of charges for litigation settlements.
(5) The quarterly period ended September 30, 1998 also included the impact of a
$390.6 million intangible asset impairment charge.
(6) The quarterly period ended December 31, 1998 also included the gain on the
sale of Hospital Services of $7.2 million, net of tax.
F-23
51
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Per-Se Technologies, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 8, 2000 appearing in the 1999 Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 8, 2000
F-24
52
PER-SE TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ---------- ---------- -------- ---------- -----------
(IN THOUSANDS)
Year Ended December 31, 1999
Allowance for doubtful accounts............ $ 20,723 $ 4,991 -- $(11,213) $ 14,501
Valuation allowance for deferred taxes..... 230,232 -- -- 6,603 236,835
Year Ended December 31, 1998
Allowance for doubtful accounts............ $ 10,746 $ 14,269 -- $ (4,292) $ 20,723
Valuation allowance for deferred taxes..... 26,460 203,772 -- -- 230,232
Year Ended December 31, 1997
Allowance for doubtful accounts............ $ 8,146 $ 6,459 $43 $ (3,902) $ 10,746
Valuation allowance for deferred taxes..... 18,334 8,126 -- -- 26,460
F-25