- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
<Table>
(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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 000-19480
---------------------
PER-SE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
DELAWARE 58-1651222
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2840 MT. WILKINSON PARKWAY 30339
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
</Table>
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(770) 444-5300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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 18, 2002 was approximately $370,161,635 calculated
using the closing price on such date of $12.34. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of March 18, 2002 was
29,996,891.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 2, 2002 are incorporated herein by reference in Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER-SE TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE OF
FORM 10-K
---------
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
STOCKHOLDER MATTERS......................................... 8
ITEM 6. SELECTED FINANCIAL DATA..................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 10
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 24
ITEM 11. EXECUTIVE COMPENSATION...................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 25
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 25
</Table>
PART I
ITEM 1. BUSINESS
OVERVIEW OF THE COMPANY
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is a provider of
integrated business management outsourcing services, application software, and
Internet-enabled connectivity for the healthcare industry. Per-Se delivers its
services and products through its three operating divisions: Physician Services,
Application Software and e-Health Solutions.
Physician Services provides business management outsourcing services to the
hospital-affiliated physician practice market, physicians in academic settings
and other large physician practices. Services focus on the management of their
revenue cycle and include clinical data collection, data input, medical coding,
billing, contract management, cash collections and accounts receivable
management. These services are designed to assist healthcare providers with the
business management functions associated with the delivery of healthcare
services, allowing physicians to focus on providing quality patient care. These
services also assist physicians in improving cash flows and reducing
administrative costs and burdens.
The Application Software division provides enterprise-wide financial,
clinical and administrative software to acute care healthcare organizations,
including patient financial management software, clinical information software
and patient and staff scheduling systems. These applications enable healthcare
organizations to simultaneously optimize the quality of care delivered and the
profitability of business operations.
The e-Health Solutions division provides connectivity and business
intelligence solutions to healthcare providers and payers, which help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice management software as an Application
Service Provider ("ASP") to physician practices, and offers managed care
solutions to payers in ASP, turnkey or outsourced formats.
Per-Se markets its products and services to constituents of the healthcare
industry, primarily to hospital-affiliated physician practices, integrated
healthcare delivery networks ("IDNs") and hospitals.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 18 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
PHYSICIAN SERVICES
The healthcare industry in the United States spends approximately $1.2
trillion on an annual basis to provide patient care. Physician Services focuses
on the administrative functions of hospital-affiliated physician practices.
There are approximately 225,000 hospital-affiliated physicians, which yield a
market opportunity of approximately $7 billion for the provision of
comprehensive business management outsourcing services. Physician Services is
the largest provider of comprehensive business management outsourcing services
in the United States. Services include clinical data collection, data input,
medical coding, billing, contract management, cash collections and accounts
receivable management to hospital-affiliated physicians, physicians in academic
settings and other large physician practices. Organized around medical
specialties, Physician Services supports approximately 15,000 physician clients
in 42 states, offering business management outsourcing services revolving around
four areas: practice support services, revenue growth consulting, cost
management consulting and practice security services. All of the division's
services focus on improving the revenue cycle for physicians while minimizing
compliance risks. Physician Services currently supports the majority of medical
specialties in the hospital-based or academic market.
1
The business of providing integrated business management outsourcing
services is highly competitive. Physician Services competes with regional
physician reimbursement organizations and physician groups that provide their
own business management services in-house. 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 a diverse, integrated suite of
patient-centric, enterprise-wide software solutions 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 and hospitals -- and manage more than 26 million
lives online. Application Software's customers, which include approximately
2,000 healthcare organizations, depend on Application Software's solutions for
many critical functions, including: access to real-time, point-of-care clinical
information and decision analysis capability across the continuum of care
through the division's Patient1 product; comprehensive, consolidated billing
through patient financial management solutions containing intrinsic contract
management through the Business1 product; automation of enterprise-wide staff
and patient scheduling, management of surgical inventory, and enhancement of
enterprise-wide staff productivity through the Resource1 suite of products.
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. While the majority of the division's current customer
installed base is located in the United States and Canada, the international
market outside of North America is an area of focus for the division,
specifically for the Patient1 clinical information system and Resource1
products. Application Software is building the infrastructure to take advantage
of international demand through a series of distributors. Recent sales successes
include two sales during 2001 through the newly appointed Middle Eastern
distributor. The Company has distributors or customers in the United Kingdom,
Japan, Australia, Brazil and the Middle East.
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. 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 real-time, patient-centric
information and process oriented management capabilities that are critical in
today's age of enterprise-wide healthcare.
E-HEALTH SOLUTIONS
e-Health Solutions, through The Per-Se Exchange, the third largest
electronic clearinghouse in the healthcare industry, delivers private and
Internet-based business-to-business solutions that help providers, payers and
patients reduce administrative inefficiencies. The Per-Se Exchange focuses on
medical transaction processing for physicians, hospitals and integrated delivery
networks. Its solutions include electronic claims and remittance advice
processing, real-time eligibility verification, web-based provider compliance
and productivity management reporting, an Internet patient portal for healthcare
statement review and electronic payment processing, and high speed print and
mail services. The Per-Se Exchange processes approximately 240 million
transactions on an annual basis. This technology supports more than 1,400
governmental and commercial payer connections in 48 states. Other solutions
include managed care / payer administration solutions and a regionally-based ASP
physician practice management system for office-based physicians.
2
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 such as front-end edits, web-based
reporting and applications. e-Health Solutions competes against a variety of
traditional electronic data interface companies and Internet healthcare
technology companies. The division's clearinghouse, The Per-Se Exchange, is
focused almost entirely on medical claims in contrast to many competitors that
focus on pharmacy claims.
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
segment operating margin and identifiable assets attributable to each division
for each of the fiscal years ended 2001, 2000 and 1999 and as of December 31,
2001 and 2000, is presented in Note 18 of Notes to Consolidated Financial
Statements in Item 8. Financial Statements and Supplementary Data.
HEALTHCARE INDUSTRY
Per-Se's business is affected, among other things, by 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, fixed fee and capitated reimbursement models, which have
supplanted the more traditional fee-for-service structure. These 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 complex accounting, coding, billing and collection
environment in healthcare. These issues create a positive marketing environment
for the sale of services and software 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.
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.
The healthcare industry is focusing on the impact that regulations
governing standards for electronic transactions, privacy and information
security issued under the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") and implementation timeframes for those regulations might have on
their operations and information technology solutions. HIPAA was designed to
reduce the amount of administrative waste in healthcare today and to protect the
privacy of any patient's medical information. HIPAA regulations (those proposed
and those already final) identify certain standards for both human processes and
automated processes and systems for anyone handling patient medical information
and are focused around three areas: electronic transaction processing, patient
privacy and patient data security. HIPAA regulations related to standard data
formats and data sets for electronic health claim transaction processing became
final in 2000. Entities covered by the transaction standards regulations,
including certain subsidiaries of the Company, must comply with the standards by
October 16, 2002. However, that compliance date can be delayed for one year upon
filing a compliance plan by October 15, 2002. The HIPAA regulations related to
privacy of medical information became final in 2001. These regulations impose
extensive requirements on healthcare providers, healthcare clearinghouses and
health plans. In addition, they require those covered entities to impose privacy
protections by contract on entities that assist them in handling patient health
information. The privacy regulations have a required compliance date of April
2003. Additional HIPAA regulations for health information security have been
proposed, but are not yet final. The HIPAA regulations may impose the need for
additional required enhancements of the Company's internal systems and those
software applications sold, but at the same time, potentially create increased
demand for the services and solutions provided by the Company. While the Company
will incur
3
costs to become compliant with the HIPAA regulations passed for electronic
transaction processing and privacy, management believes these two regulations
will not have a significant overall impact on the Company's results of
operations. Management will evaluate the overall impact of the security
standards once finalized.
On March 21, 2002, the Department of Health & Human Services announced a
number of proposed changes to the privacy regulations issued under HIPAA. The
announced intent of the proposed changes is "to ensure strong privacy
protections while correcting certain unintended consequences (under the current
regulations) that threatened patients' access to quality healthcare." The
proposed changes are expected to address a number of subjects including consent,
notice, disclosures and accounting for disclosures, business associate
agreements and de-identification of protected health information. The proposed
changes are expected to be published in the Federal Register on March 27, 2002,
followed by a 30-day comment period.
REGULATION
Per-Se's business is subject to numerous federal and state laws, a broad
range of complex regulations, and 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 of 1997 and HIPAA, and
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 of 1987 and HIPAA, the
federal government has statutory authority to impose both civil and criminal
sanctions and 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. Centers for
Medicare & Medicaid Services ("CMS," formerly the Health Care Financing
Administration) also offers rewards for information leading to recovery of
Medicare funds, and CMS engages private contractors to detect and investigate
fraudulent billing practices.
The Company has a well-established compliance program modeled after the
Office of Inspector General's ("OIG") Compliance Program Guidance for
Third-Party Medical Billing Companies that is designed and maintained to detect
and prevent regulatory violations. The Company believes its compliance program
is effective. However, a compliance program cannot be expected to provide
absolute assurance of compliance with the law. The existence of an effective
compliance program, though, may reduce the severity of civil and criminal
sanctions for certain healthcare related offenses.
In accordance with HIPAA, final rules were published in 2000 regarding the
standards for electronic transactions as well as standards for privacy of
individually identifiable health information. These rules set new or higher
standards for the healthcare industry as to handling healthcare transactions and
information, with penalties for noncompliance.
The transaction standard regulations establish uniform electronic standards
for eight of the most common healthcare transactions by reference to technical
standards promulgated by recognized standards publishing organizations. Under
the new standards, by October 16, 2002, healthcare providers, healthcare
clearinghouses and health plans transmitting or receiving health transactions
electronically will be required to send and receive data in a single format,
rather than the large number of different data formats currently used. However,
those covered entities can extend the compliance deadline by one year upon
filing a compliance plan by October 15, 2002. Small health plans have until
October 2003 to comply and are not required to file a compliance plan. The
operations of certain Company subsidiaries fall under the transaction standards
regulations.
4
The Company handles patient health information in the ordinary course of
its business. HIPAA privacy standards will require certain subsidiaries of the
Company to handle such information with great care, to establish safeguards with
regard to security, access and use of the information, and to restrict the
manner in which the information is used by other parties. Failure to do so may
result in governmental enforcement actions. Other subsidiaries will be required
by their covered entity customers to institute privacy protections by contract.
Although the HIPAA privacy regulations do not provide a private right of action
for individuals, they allow states to impose more stringent privacy protections.
Thus, there may be state privacy actions that could be brought by individuals
who believe their personal information has been misused. Certain subsidiaries of
the Company must comply with the HIPAA privacy regulations by April 2003. As
noted above, on March 21, 2002, the Department of Health & Human Services
announced a number of proposed changes to the privacy regulations issued under
HIPAA.
EMPLOYEES
The Company currently employs approximately 4,800 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
FORWARD-LOOKING STATEMENTS
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report,
including certain statements set forth under the captions "Healthcare Industry,"
"Regulation," "Overview of Critical Accounting Policies," "Results of
Operations," "Segment Operating Margin," "Process Improvement Project,"
"Goodwill/Client List Impairment," "Recent Accounting Pronouncements," "Market
for the Registrant's Common Equity and Related Stockholder Matters" and
"Liquidity and Capital Resources," are "forward-looking statements" within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934,
as amended by the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Forward-looking statements include the Company's expectations with
respect to industry growth segments, effect of industry and regulatory changes
on the Company's customer base, use of estimates for revenue recognition, bad
debt accruals in reserve for doubtful accounts receivable and other estimates
used for accounting purposes, corporate cost structure, the impact of
operational improvement or cost reduction initiatives and associated cost
savings, effect of adoption of recent accounting pronouncements, overall
profitability and the availability of capital. Although the Company believes
that the statements it has made are based on reasonable assumptions, they are
based on current information and beliefs and, accordingly, the Company can give
no assurance that its expectations will be achieved. In addition, these
statements are subject to factors that could cause actual results to differ
materially from those suggested by the forward-looking statements. These factors
include, but are not limited to, factors identified under the caption "Factors
That May Affect Future Results of Operations, Financial Condition or Business"
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7. The Company disclaims any responsibility to update any
forward-looking statements.
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 operates 105 business offices throughout
the United States. One of the facilities is owned. All of the remaining
facilities are leased with expiration dates that vary through June 2011.
5
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 operates six offices in
the United States and the United Kingdom. These facilities are leased with
expiration dates that vary through November 2006.
E-HEALTH SOLUTIONS
e-Health Solutions' 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 Solutions operates ten offices in the United States.
These facilities are leased with expiration dates that vary through January
2006.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is included in Note 11 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
pages F-17 to F-19.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company:
<Table>
<Caption>
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
- ---- --- ----------------------------------- ---------------
Philip M. Pead.................... 49 President and Chief Executive 1999
Officer
Chris E. Perkins.................. 39 Executive Vice President and Chief 2000
Financial Officer of the Company
Karen B. Andrews.................. 47 Senior Vice President of the 2000
Company and the President of the
Company's Application Software
division
William N. Dagher................. 38 Senior Vice President of the 2000
Company and the President of the
Company's e-Health Solutions
division
Frank B. Murphy................... 43 Senior Vice President of the 2000
Company and the President of the
Company's Physician Services
division
</Table>
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 or her
successor is elected and qualified or until his or her earlier resignation or
removal.
Philip M. Pead has served as the President and Chief Executive Officer of
the Company since November 2000. He has also been a member of Per-Se's Board of
Directors since November 2000. From August 1999 to November 2000, Mr. Pead
served as Executive Vice President and Chief Operating Officer of the Company.
Mr. Pead joined the Company in April 1997 as a senior executive in the
Application Software and e-Health Solutions divisions of the Company's business
and he served as President of those divisions 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.
6
Chris E. Perkins has served as Executive Vice President and Chief Financial
Officer of the Company since February 2001. From April 2000 to February 2001,
Mr. Perkins served as Senior Vice President of Corporate Development. Prior to
joining Per-Se in April 2000, Mr. Perkins held various executive management
positions with AGCO Corporation. He was appointed as AGCO's Chief Financial
Officer in January 1996, after serving as Vice President of Finance and
Administration, and in various roles within corporate development. In July 1998,
Mr. Perkins was named Vice President of AGCO's parts division, a $500 million
global business unit, for which he was responsible for all operations. Mr.
Perkins also spent seven years in public accounting with Arthur Andersen.
Karen B. Andrews has served as President of the Application Software
division since October 2000. In this position, Ms. Andrews is responsible for
the entire operations of the Application Software division. From 1997 to October
2000, Ms. Andrews served as Senior Vice President of Customer Service within the
Application Software division. Prior to joining Per-Se in 1997, Ms. Andrews was
Vice President of Professional Services for Geac SmartStream, formerly Dun &
Bradstreet Software. She also served as a senior manager with
PricewaterhouseCoopers, focusing on implementing application software solutions
and process improvement.
William N. Dagher has served as President of the e-Health Solutions
division since October 2000. In this position, Mr. Dagher is responsible for the
entire operations of the e-Health Solutions division. From 1998 to October 2000,
Mr. Dagher was Senior Vice President of Per-Se's e-Health Operations and Chief
Information Officer. Prior to 1998, he served for four years in various senior
management positions at MedPartners, Inc. (now known as Caremark Rx, Inc.). In
his four years at MedPartners, he held the positions of Vice President of
Information Systems and Vice President of Mergers and Acquisitions. Prior to
joining MedPartners, Mr. Dagher was Director of Client Service at Per-Se. From
1990 to 1993, he was National Director of Physician Practice Management at KPMG
Peat Marwick.
Frank B. Murphy has served as President of the Physician Services division
since October 2000. In this position, Mr. Murphy is responsible for the entire
operations of the Physician Services division. Mr. Murphy, who joined Per-Se in
1998, has also served as Senior Vice President, Operations of the Physician
Services division and Senior Vice President of the academic and multi-specialty
services group within the Physician Services division. Before joining Per-Se, he
worked in leadership roles with a strategic consulting company specializing in
physician practice management, and a multi-hospital division for an
investor-owned company. He also served as President and Chief Executive Officer
of Trident Regional Health Systems in Charleston, South Carolina, a wholly-owned
subsidiary of Hospital Corporation of America.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol PSTI.
The prices in the table below represent the high and low sales price 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.
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001 HIGH LOW
- ---------------------------- ------- ------
First Quarter............................................... $ 7.375 $3.219
Second Quarter.............................................. 8.250 5.375
Third Quarter............................................... 8.950 7.380
Fourth Quarter.............................................. 10.770 7.780
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2000 HIGH LOW
- ---------------------------- ------- ------
First Quarter............................................... $ 9.875 $5.500
Second Quarter.............................................. 9.406 3.875
Third Quarter............................................... 13.875 8.625
Fourth Quarter.............................................. 12.813 2.125
</Table>
The last reported sales price of the Common Stock as reported on Nasdaq on
March 18, 2002 was $12.34 per share. As of March 18, 2002, the Company's Common
Stock was held of record by 3,724 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 (see Note 9), contains restrictions on the Company's
ability to declare or pay cash dividends on its Common Stock.
8
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 including the period
ended December 31, 2001. The selected consolidated financial information of
Per-Se has been derived from the audited consolidated financial statements of
Per-Se. The years ended December 31, 1997, 1998 and 1999 present the operations
of Medaphis Services Corporation ("Hospital Services") and Impact Innovations
Group ("Impact"), which primarily consists of Rapid Systems and BSG, as
discontinued operations. Hospital Services was sold in 1998 and Impact was sold
in 1999 as part of management's plan to divest non-core business operations.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue............................ $328,877 $310,008 $322,129 $ 349,823 $392,420
Salaries and wages................. 199,254 193,952 212,940 226,894 242,228
Other operating expenses........... 92,421 94,364 104,192 126,183 123,094
Depreciation....................... 12,401 15,562 20,177 23,848 22,481
Amortization....................... 13,245 10,125 9,293 18,077 21,069
Interest expense, net.............. 17,159 14,525 16,102 23,494 23,398
Goodwill and client lists
impairment....................... -- -- -- 390,641 --
Process improvement project........ 3,423 501 -- -- --
Litigation settlements............. -- 1,147 24,811 35,987 52,500
Non-recurring, restructuring and
other expenses................... 593 2,382 -- 5,191 16,741
Income tax expense (benefit)....... 607 (695) (610) 58,465 (16,568)
Loss from continuing operations.... (10,226) (21,855) (64,776) (558,957) (92,523)
Net loss (1)....................... (6,338) (48,202)(2) (33,702) (560,214)(3) (19,303)(4)
Weighted average shares
outstanding...................... 29,915 29,852 28,097 25,673 24,226
PER SHARE DATA
Basic and diluted loss from
continuing operations......... $ (0.34) $ (0.74) $ (2.31) $ (21.77) $ (3.82)
Basic and diluted net loss....... $ (0.21) $ (1.62) $ (1.20) $ (21.82) $ (0.80)
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital....................... $ 24,307 $ 27,179 $ 93,304 $ 86,215 $ 64,522
Intangible assets..................... 77,268 72,695 46,446 48,241 459,129
Total assets.......................... 202,891 214,126 265,017 286,721 847,145
Total debt............................ 175,091 175,000 177,138 176,080 200,691
Stockholders' (deficit) equity........ (50,130) (44,136)(2) 1,440 2,323 501,781
</Table>
- ---------------
(1) Reflects the results from discontinued operations of $3.9 million, $11.3
million, $31.1 million, $7.1 million and $(0.7) million for 2001, 2000,
1999, 1998 and 1997, respectively.
(2) Reflects a $37.7 million expense for the change in accounting for revenue
pursuant to Staff Accounting Bulletin Number 101, Revenue Recognition in
Financial Statements ("SAB 101") and the corresponding increase in the
Company's deferred tax valuation allowance.
(3) Reflects an $8.4 million extraordinary expense for the early extinguishment
of debt.
9
(4) Reflects extraordinary income of $76.4 million related to the sale of
Healthcare Recoveries, Inc. ("HRI") and a $2.5 million expense 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements about
circumstances that have not yet occurred. All statements, trend analysis and
other information contained below relating to markets, our products and trends
in revenue, as well as other statements including words such as "anticipate",
"believe" or "expect" and statements in the future tense are forward-looking
statements. These forward-looking statements are subject to business and
economic risks and actual events or our actual future results could differ
materially from those set forth in the forward-looking statements due to such
risks and uncertainties. The Company disclaims any responsibility to update any
forward-looking statement. Risks and uncertainties that may affect our future
results and performance include, but are not limited to, those discussed under
the heading "Factors That May Affect Future Results of Operations, Financial
Condition or Business" at pages 21 to 23 of this Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), which eliminates the pooling method of accounting for all
business combinations initiated after June 30, 2001, and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. The Company adopted SFAS No. 141 for business
combinations initiated after June 30, 2001. It had no impact on the Company's
Consolidated Statements of Operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually for impairment. The Company adopted the standard on
January 1, 2002. As required by SFAS No. 142, the Company will complete the
impairment test of its goodwill by June 30, 2002. No asset impairment
write-downs are expected to occur as a result of adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"). SFAS No. 144 replaces Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS No. 121"). SFAS No. 144 requires that long-lived
assets to be disposed of by sale, including those of discontinued operations, be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet been incurred. SFAS No.
144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted the standard on January 1,
2002. No asset impairment is expected to occur as a result of adoption.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that management
believes are the most "critical" -- that is, they are both most important to the
portrayal of the Company's financial condition and results, and they require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
10
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company's revenue is derived from products and services delivered to
the healthcare industry through its three operating divisions:
Physician Services provides business management outsourcing services
to hospital-affiliated physicians, physicians in academic settings and
other large physician practices. Fees for these services are primarily
based on a percentage of net collections on our clients' accounts
receivable. Revenue is recognized when our customers receive payment on
those accounts receivable. The Physician Services division does not rely,
to any material extent, on estimates in the recognition of this revenue.
Application Software provides enterprise-wide financial, clinical and
administrative software to acute care healthcare organizations. For
contracts under which the division is required to make significant
production, modification or customization changes, revenue from software
licenses and services is recognized using the percentage-of-completion
method over the implementation period. 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. An unbilled
receivable is recorded when the Company recognizes revenue on the
percentage-of-completion basis prior to achieving a contracted billing
milestone. For minor add-on software license sales where no significant
customization remains outstanding, the fee is fixed, an agreement exists
and collectibility is probable, the division recognizes revenue upon
shipment. Software maintenance payments received in advance are deferred
and recognized ratably over the term of the maintenance agreement, which is
typically one year.
The Application Software division relies on estimates of work to be
completed when recognizing revenue on contracts using
percentage-of-completion accounting. Because revenue could be impacted if
the estimates of the extent of completion differ from actual results,
periodic reviews of the estimated hours or days to complete major projects
are made by the Application Software division and compared to budgeted
hours or days to support the revenue recognized on that project.
Approximately 27% of the division's revenue is determined using
percentage-of-completion accounting for the year ended December 31, 2001.
e-Health Solutions delivers private and internet-based
business-to-business solutions that help healthcare providers, payers and
patients reduce administrative inefficiencies. Revenue related to
electronic claims and remittance advice processing and real-time
eligibility verification is recognized on a per transaction basis net of
electronic claims rebates. Revenue related to high-speed print and mail
services is billed and recognized when the services are delivered and
includes all costs of delivering the product; the division includes all
costs of delivering the product in operating expenses. For software
contracts under which the division is required to make significant
production, modification or customization changes, revenue from software
licenses and services is recognized using the percentage-of-completion
method over the implementation period. Approximately 1.9% of the division's
revenue is determined using percentage-of-completion accounting for the
year ended December 31, 2001. Revenue related to the ASP physician practice
management system is recognized as monthly subscription revenue
AMORTIZATION OF INTANGIBLES
Amortization of intangible assets includes the amortization of goodwill,
client lists, trademark, developed technology and software development costs.
The Company relies on estimates of the useful lives of these assets on which to
base its amortization. The estimation of an asset's remaining useful life is
11
determined based on the Company's historical experience, market conditions and
the product or services provided. The Company periodically evaluates whether
changes have occurred that would require revision of the remaining estimated
useful lives of the intangible. Additionally under SFAS No. 121, the Company
evaluates whether there have been any changes that would render its intangibles
impaired. Conditions that may indicate an impairment issue exists include an
economic downturn or change in future operations. In the event a condition is
identified that indicates an impairment might exist, an assessment is performed
using a variety of methodologies including cash flow analysis, estimates of
sales proceeds and independent appraisals. Where applicable, an appropriate
interest rate is utilized based on appropriate borrowing rates.
In accordance with Accounting Principles Board Opinion 16, Business
Combinations, the Company finalized the purchase price allocation of its most
recent acquisitions, with a portion of the amount previously allocated to
goodwill being reallocated to finite-lived intangible assets. The amounts
reallocated to finite-lived intangible assets totaled approximately $9.2
million. Due to this reallocation, amortization expense related to these
finite-lived intangibles will result in an increase in amortization expense of
$1.6 million in 2002, which will be offset by a reduction in goodwill
amortization of $3.5 million due to adoption of SFAS No. 142. The net reduction
in amortization expense in 2002 will be $1.9 million, or $0.06 per share on a
fully diluted basis.
Goodwill -- Goodwill represents the excess of the cost of businesses
acquired in the e-Health Solutions division from 1995 to 2001, over the
fair market value of their identifiable net assets. Prior to the adoption
of SFAS No. 142 on January 1, 2002, the Company amortized its goodwill over
its estimated useful life of no greater than twenty years. Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually for impairment.
Client Lists -- Client lists represent the value of clients acquired
in the Physician Services division from 1992 to 1996 and the e-Health
Solutions division from 1995 to 2001. Client lists are being amortized over
their estimated useful lives, which range from five to ten years.
Other Intangibles -- Developed Technology represents the value of the
systems acquired in the e-Health Solutions division from 2000 to 2001.
These intangible assets are being amortized over their estimated useful
lives of five years. Trademark represents the value of the trademarks
acquired in the e-Health Solutions division from 2000 to 2001. Under SFAS
No. 142, this indefinite lived intangible asset will not be amortized.
Software Development Costs -- Software development includes costs
incurred in the development or the enhancement of software developed by the
Application Software and e-Health Solutions divisions 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 over the greater of the ratio that current revenues
bear to total and anticipated future revenues for the applicable product or
straight-line method over the estimated economic lives of the assets, which
are generally three to five years. The Company monitors the net realizable
value of all capitalized software development costs to ensure that the
investment will be recovered through margins from future sales.
DEFERRED TAXES
As of December 31, 2001 and 2000, the Company reassessed the recoverability
of its deferred tax asset. Based on its analysis, the Company determined a full
valuation allowance against the deferred tax asset of $246.2 million and $247.1
million was required as of December 31, 2001 and December 31, 2000,
respectively. Realization of the net deferred tax asset is dependent upon the
Company generating sufficient taxable income prior to the expiration of the
federal net operating loss carryforwards. When it becomes more likely than not
that the Company will generate sufficient taxable income to realize the deferred
tax asset, the Company will adjust this valuation allowance accordingly.
12
ACCRUED EXPENSES
The Company relies on estimates to determine the amounts that are recorded
in accrued expenses. Estimates of the legal activity and demands within our
business and industry are used to accrue legal expenses. Estimates of the
performance of Knowledgeable Healthcare Solutions, Inc., an acquisition made in
2000, are used to accrue the costs of businesses acquired. Income tax accruals
are made using estimates based on historical experience of the Company and the
current business environment. Restructuring and severance cost accruals are made
using estimates of the costs required to effect the desired change within the
Company.
BAD DEBT ESTIMATES
The Company relies on estimates to determine the bad debt expense and the
adequacy of the reserve for doubtful accounts receivable. These estimates are
based on the historical experience of the Company and the industry in which it
operates. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The Company actively reviews its accounts
receivable and believes any variation of actual results from the Company's
estimates would not have a material impact on the financial condition of the
Company.
OTHER
The Company does not have:
- material exposure to foreign exchange fluctuations;
- any derivative financial instruments;
- any material off-balance sheet arrangements other than its operating
leases disclosed in Note 10 of Notes to Financial Statements in Item 8;
or
- any material related party transactions.
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes.
YEARS ENDED DECEMBER 31, 2001 AND 2000
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $223,875 $225,102
Application Software........................................ 58,840 60,635
e-Health Solutions.......................................... 57,910 35,276
Eliminations................................................ (11,748) (11,005)
-------- --------
$328,877 $310,008
======== ========
</Table>
Revenue for the Physician Services division declined slightly in 2001
compared to 2000. The decline is due to a high level of client-initiated
discontinuances in 2000 of approximately 14%. The rampdown of revenue associated
with these clients adversely affected 2001 revenue by $27.1 million. This
decline was partially offset by the implementation of new sales from 2000 and
2001 which resulted in revenue recognized in 2001 of $16.0 million and revenue
growth related to existing customers of approximately
13
10%. Revenue stability in 2001 was a result of the Company's intense focus on
client satisfaction that resulted in client retention of 95% on a full year
basis.
Revenue for the Application Software division decreased slightly in 2001.
Although new sales increased approximately $20.7 million, revenue decreased due
to client delays in implementations, which impact revenue recognition under
percentage-of-completion accounting, and to the low backlog that was in place at
the beginning of 2001. As a result, the backlog in the division increased from
$28.9 million at December 31, 2000 to $43.0 million at December 31, 2001, an
increase of approximately 49%. Backlog represents contracts that have been sold
and have yet to be completed.
The e-Health Solutions division experienced significant growth during 2001
with revenues increasing $22.6 million or approximately 64% over 2000. The
increase is largely due to the acquisitions of Health Data Services, Inc. and
Patient Account Management Services, Inc. ("HDS/PAMS") (December 2000), Virtual
Information Systems, Inc. ("VIS") and OfficeMed.com LLC ("OfficeMed") (April
2001) as well as organic growth of 20% over the prior year.
Segment Operating Margin. Segment operating margin, which is net
income/(loss) excluding net interest expense, the process improvement project
costs, litigation settlements, non-recurring, restructuring and other expenses,
income taxes and discontinued operations net of taxes, classified by the
Company's divisions is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $ 12,470 $ 4,267
Application Software........................................ 5,473 2,859
e-Health Solutions.......................................... 5,228 3,401
Corporate................................................... (11,614) (14,522)
-------- --------
$ 11,557 $ (3,995)
======== ========
</Table>
Physician Services' segment operating margin increase of $8.2 million or
192% is due to cost savings realized from the productivity initiatives in the
division such as the Process Improvement Project (see "Process Improvement
Project" below and Note 5 of Notes to Financial Statements in Item 8).
In 2001, Application Software's segment operating margin increased $2.6
million or 91% compared to 2000. The increase is attributable to reduced
operating expenses that resulted from management's continued focus on
productivity improvements related to implementations and on cost containment.
Specific improvements occurred in salaries and wages, contract labor and travel
expenses.
The e-Health Solutions segment experienced growth in segment operating
margin of $1.8 million or 53% in 2001 compared to 2000. The increase in segment
profit is attributable to the growth from recent acquisitions, which contributed
$1.1 million of the increase and increased volume from existing customers, which
contributed $0.7 million.
The Company's corporate overhead expenses declined 20% in 2001 compared to
2000. The decrease is attributable to management's efforts to control expenses
and create a corporate support structure that has a more normalized level of
expense. Specific improvements included a 15% decrease in salaries and wages and
a 58% decrease in depreciation expense due to a major financial system becoming
fully depreciated as of December 31, 2000.
Interest. Net interest expense increased 18% from $14.5 million in 2000 to
$17.2 million in 2001. The increase is attributable to a reduction in interest
income due to lower cash balances in 2001 combined with a decrease in investment
rates available. The lower cash balance resulted from the Company's strategic
acquisitions during 2001.
Process Improvement Project. The Company incurred approximately $3.4
million and $0.5 million of expense in 2001 and 2000, respectively, associated
with the implementation of a process improvement
14
project within the Physician Services division (the "Project"). The Project
installs a formalized set of productivity and quality measures, workflow
processes and a management operating system in certain of the Company's major
processing centers. The Project focuses on productivity improvements that result
in both improved client service as well as improved profitability for the
division. The costs associated with the Project primarily consist of
professional fees paid to outside consultants retained exclusively for
implementation of the Project. The first phase of the Project, which involved
implementation in twelve of the division's larger processing centers, was
completed in the third quarter of 2001 with all costs for this phase incurred as
of September 30, 2001. Annualized cost savings resulting from phase one are
expected to be $6.0 million, of which, $4.0 million were realized in 2001. In
the first quarter of 2002, the Company began the second phase of the Project,
which will implement the productivity improvement model into fifteen additional
offices. This phase of the Project will be implemented with internal resources,
and the Company will not incur external project costs going forward. Estimated
annualized cost savings for phase two of the Project are forecasted at $2.0 to
$2.5 million, of which, $1.0 to $1.5 million should be realized in 2002.
Litigation Settlements. There were no material litigation settlements in
2001. In December 2000, the Company recorded an estimated litigation settlement
expense of $1.15 million related to a lawsuit that was pending against Medical
Management Sciences, Inc. ("MMS") when the Company acquired MMS in December
1995, but which was not resolved until December 2000. In February 2001, the
Company paid the full amount of the net award of $1.15 million.
Non-recurring, Restructuring and Other Expenses. During the first quarter
of 2001, the Company recorded severance expense of approximately $0.6 million
associated with former executive management.
In December 2000, the Company recorded $1.4 million of non-recurring
expenses related to e-Health Solutions' retirement of a software product that
was replaced by a superior software product at Health Data Services, Inc. and
Patient Account Management Services, Inc. ("HDS/PAMS"), companies acquired by
the Company in December 2000. In connection with the retirement of the software
product, the Company also recorded $0.4 million of severance for approximately
20 employees associated with the retired software product that had been notified
of their termination.
The Company recorded a net expense of $0.6 million for the period ended
December 31, 2000 for severance costs associated with former executive
management. The expense includes a $0.3 million reduction of a prior period
severance cost associated with former executive management.
Income Taxes. Income tax expense, which was primarily related to state
income taxes, was $0.6 million in 2001 compared to an income tax benefit of $0.7
million in 2000 related to a state income tax refund.
As of December 31, 2001 and 2000, the Company reassessed the recoverability
of its deferred tax asset. Based on its analysis, the Company determined a full
valuation allowance against the deferred tax asset of $246.2 million and $247.1
million was required as of December 31, 2001 and December 31, 2000,
respectively. Realization of the net deferred tax asset is dependent upon the
Company generating sufficient taxable income prior to the expiration of the
federal net operating loss carryforwards. When it becomes more likely than not
that the Company will generate sufficient taxable income to realize the deferred
tax asset, the Company will adjust this valuation allowance accordingly. At
December 31, 2001, the Company had federal net operating loss carryforwards
("NOLs") for income tax purposes of approximately $386.4 million. The NOLs will
expire at various dates between 2002 and 2020.
Discontinued Operations. In 1999, the Company completed the sale of both
divisions of Impact Innovations Group ("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. Final CBSI
post acquisition matters were resolved in the third quarter of 2000 resulting in
an additional charge to discontinued operations of $0.4 million. The government
division of Impact was sold on December 17, 1999 to J3 Technology Services Corp.
for $46.5 million, including a purchase price adjustment of $1.5 million
15
received on March 30, 2000 based on the division's tangible net worth at
closing. The purchase price adjustment resulted in the recognition of an
additional gain of $1.5 million through discontinued operations. Additionally,
the sale agreement stipulated that $1.0 million of the purchase price be put in
escrow to pay potential claims. The term of the escrow expired on September 30,
2001. In October of 2001, the Company received $1.0 million in cash, which was
recognized through discontinued operations.
The Company accrued $5.3 million for the period ended September 30, 1999
through discontinued operations as a result of an agreement with SCI Management
Corporation ("SCI"), a former client of the commercial division of Impact. SCI
filed a complaint against the commercial division of Impact in January of 1998
seeking recovery for alleged damages in connection with work performed by Impact
under a consulting contract. Although the commercial division of Impact was sold
effective April 15, 1999, the Company remained responsible for the SCI
complaint. The Company paid $3.2 million to SCI on November 4, 1999. The Company
issued a promissory note for the balance of $2.1 million bearing interest at
8.25%, which was paid on October 31, 2000. In May of 2001, the Company received
an insurance settlement related to the SCI matter of approximately $3.0 million,
which was recognized through discontinued operations.
On November 30, 1998, the Company completed the sale of Medaphis Services
Corporation ("Hospital Services") to NCO Group, Inc. ("NCO") for initial
consideration of $107.5 million. During the first quarter of 1999, the Company
received additional consideration of $0.8 million based on the Hospital
Services' final closing balance sheet and payment on certain Hospital Services'
accounts receivable retained by the Company. The additional consideration
resulted in the recognition of an additional gain of $0.5 million, net of tax of
$0.3 million, which was recognized through discontinued operations. In addition,
the Company received a purchase price adjustment of $10.0 million in cash from
NCO on May 5, 2000 based on Hospital Services' achievement of various
operational targets in 1999. The purchase price adjustment resulted in the
recognition of an additional gain of approximately $9.2 million in the quarter
ended June 30, 2000 through discontinued operations.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $225,102 $240,200
Application Software........................................ 60,635 62,145
e-Health Solutions.......................................... 35,276 31,343
Eliminations................................................ (11,005) (11,559)
-------- --------
$310,008 $322,129
======== ========
</Table>
Revenue for the Physician Services division decreased 6% in 2000 compared
to 1999. The revenue decline is primarily attributable to Company-initiated and
client-initiated discontinuances throughout 1999 and 2000. Company-initiated
discontinuances were a result of management's ongoing review and evaluation of
marginally profitable and unprofitable clients that yield returns unacceptable
to management. These discontinuances are partially offset by the addition of new
business in 2000 and 1999.
Revenue for the Application Software division decreased 2% from 1999 to
2000. The decline in revenue is primarily attributable to decreased consulting
revenue due to fewer conversion services being performed related to the date
change to the year 2000. The decrease in consulting revenue is partially offset
by an increase in recurring maintenance revenue due to an increase in the
customer base.
e-Health Solutions revenue increased 13% in 2000 as compared with 1999. The
increase is attributable to an increase in volume from existing customers in
addition to volume from new customers in the Company's electronic statement
processing center.
16
Segment Operating Margin. Segment operating margin, which is net loss
excluding net interest expense, the process improvement project costs,
litigation settlements, non-recurring, restructuring and other expenses, income
taxes, discontinued operations net of taxes and cumulative effect of accounting
change net of tax, classified by the Company's divisions is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $ 4,267 $ (5,541)
Application Software........................................ 2,859 (1,071)
e-Health Solutions.......................................... 3,401 (190)
Corporate................................................... (14,522) (17,671)
-------- --------
$ (3,995) $(24,473)
======== ========
</Table>
Physician Services experienced a growth in operating margin of $9.8 million
in 2000 as compared to 1999. The improvement is attributable to workforce
reductions, productivity enhancements and management's focus on discontinuing
marginally profitable and unprofitable customer engagements.
Application Software experienced a growth in operating margin of $3.9
million in 2000 as compared to 1999. The improvement in operating profit is
attributable to management's continued focus on cost containment, specifically
in the areas of salaries and wages, outside services, travel and marketing
expenses.
The year 2000 was e-Health Solutions' first full year of operation as a
separate, externally focused business segment and the division experienced a
growth in operating margin of $3.6 million in 2000 compared to 1999. The
increase in operating profit is attributable to the previously mentioned revenue
increase while operational expenses remained stable.
The Company's corporate overhead costs decreased by 18% in 2000 compared to
1999. The reduction is due to management's efforts to create a normalized
corporate support structure. Specific improvements included an 11% decrease in
salaries and wages, and a 40% decline in depreciation expense due to equipment
becoming fully depreciated.
Interest. Net interest expense was $14.5 million for the year ended
December 31, 2000 as compared to $16.1 million in the same period in 1999. The
decrease is primarily related to interest income of $3.8 million generated from
the short-term investment of cash during 2000.
Process Improvement Project. The Company incurred $0.5 million of expense
in the period ended December 31, 2000 for a process improvement project within
the Physician Services division. The Project is an effort to improve
productivity in certain of the division's processing centers. In the fourth
quarter of 2000, the Project produced a formalized set of productivity and
quality measures, workflow processes as well as a management operating system
within one of the processing centers which served as the Project's pilot.
Litigation Settlements. In December 2000, the Company recorded an
estimated litigation settlement expense of $1.15 million related to a lawsuit
that was pending against MMS when the Company acquired MMS in December 1995, but
which was not resolved until December 2000. In February 2001, the Company paid
the full amount of the net award of $1.15 million.
In June 1999, the Company recorded an estimated litigation settlement
liability of $21.5 million related to the Company's legal dispute with a former
shareholder of Health Data Sciences Corporation, arising from the Company's June
1996 acquisition. The estimated liability was based upon an agreement in
principle with this former shareholder. When the agreement was finalized in
October 1999, the cost to the Company was reduced to $17.0 million and, as a
result, the litigation settlement liability was reduced by $4.4 million.
17
Also in June 1999, the Company recorded litigation settlement expenses of
$6.0 million related to litigation arising from the Company's December 1995
acquisition of 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.) which arose in January 1998 in the ordinary course of business.
Non-recurring, Restructuring and Other Expenses. In December 2000, the
Company recorded $1.4 million of non-recurring expenses related to e-Health
Solutions' retirement of a software product that was replaced by a superior
software product at Health Data Services, Inc. and Patient Account Management
Services, Inc., companies acquired by the Company in December 2000. In
connection with the retirement of the software product, the Company also
recorded $0.4 million of severance for approximately 20 employees associated
with the retired software product that had been notified of their termination.
In addition, the Company recorded a net expense of $0.6 million for the
period ended December 31, 2000 for severance costs associated with former
executive management. The expense includes a $0.3 million reduction of a prior
period severance cost associated with former executive management.
In 1999, the Company evaluated 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.
Income Taxes. As of December 31, 2000 and 1999, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a full valuation allowance against the deferred tax asset of $247.1
million and $236.8 million was required as of December 31, 2000 and December 31,
1999, respectively. The increase in the valuation allowance from December 31,
1999 is primarily related to the elimination of the Company's unbilled accounts
receivable (see Cumulative Effect of Accounting Change discussion below) and as
such, $15.0 million was recorded against the cumulative effect of accounting
change. The increase was offset by an adjustment to the Company's net operating
loss carryforwards based on 1999 actual tax returns. When it becomes more likely
than not that the Company will generate sufficient taxable income to realize the
deferred tax asset, the Company will adjust this valuation allowance
accordingly.
Discontinued Operations. Summarized financial information for the
discontinued operations for the year ended December 31, 1999 is as follows:
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31, 1999
IMPACT
------------------
(IN THOUSANDS)
Revenue..................................................... $54,916
=======
Income from discontinued operations before taxes............ 3,958
Income tax expense.......................................... 555
-------
Income from discontinued operations, net of tax............. $ 3,403
=======
</Table>
In 1998, 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 Solutions. Management
began to seek alternatives for the remaining non-core business segments:
Medaphis Services Corporation ("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. The
18
results of operations for Impact have been classified as discontinued operations
for the year ended December 31, 1999.
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. for initial consideration of $107.5 million. During the first
quarter of 1999, the Company received additional consideration of $0.8 million
based on the Hospital Services' final closing balance sheet and payment on
certain Hospital Services' accounts receivable retained by the Company. The
additional consideration resulted in the recognition of an additional gain of
$0.5 million, net of tax of $0.3 million, which was recognized through
discontinued operations.
In addition, the Company received a purchase price adjustment of $10.0
million in cash from NCO on May 5, 2000 based on Hospital Services' achievement
of various operational targets in 1999. The purchase price adjustment resulted
in the recognition of an additional gain of approximately $9.2 million through
discontinued operations for the year ended December 31, 2000.
In 1999, the Company completed the sale of both divisions of Impact. The
Company sold the commercial division of Impact to Complete Business Solutions,
Inc. 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. Final
CBSI post acquisition matters were resolved in the third quarter of 2000
resulting in an additional charge to discontinued operations of $0.4 million.
The government division of Impact was sold on December 17, 1999 to J3 Technology
Services Corp. for $46.5 million, including a purchase price adjustment of $1.5
million received on March 30, 2000 based on the division's tangible net worth at
closing. The purchase price adjustment resulted in the recognition of an
additional gain of $1.5 million through discontinued operations.
The Company accrued $5.3 million for the period ended September 30, 1999
through discontinued operations as a result of an agreement with SCI Management
Corporation, a former client of the commercial division of Impact. SCI filed a
complaint against the commercial division of Impact in January of 1998 seeking
recovery for alleged damages in connection with work performed by Impact under a
consulting contract. Although the commercial division of Impact was sold
effective April 15, 1999, the Company remained responsible for the SCI
complaint. The Company paid $3.2 million to SCI on November 4, 1999. The Company
issued a promissory note for the balance of $2.1 million bearing interest at
8.25%, which was paid on October 31, 2000. In May of 2001, the Company received
an insurance settlement related to the SCI matter of approximately $3.0 million,
which was recognized through discontinued operations.
Cumulative Effect of Accounting Change. 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. Therefore, consistent
with the Commission's guidance and changing industry practice, the Company began
recognizing revenue in its Physician Services segment on an "as billed" basis
January 1, 2000.
The change in accounting method resulted in the elimination of $37.7
million of unbilled accounts receivable. The one-time, cumulative non-cash
expense in the Company's statement of operations for the year ended December 31,
2000 reflects the $22.7 million elimination of the unbilled accounts receivable
on a net of tax basis and a corresponding $15.0 million increase in the
Company's deferred tax valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company had working capital of $24.3 million
compared to $27.2 million at December 31, 2000. Restricted cash totaled $4.4
million as of December 31, 2001 compared to $7.4 million at December 31, 2000.
Restricted cash principally represents restrictions on the
19
Company's cash as security for the Company's letters of credit. Cash and cash
equivalents totaled $36.5 million at December 31, 2001, an increase of $5.5
million compared to 2000.
Cash provided by continuing operations was $22.0 million in 2001 compared
to cash used by continuing operations in 2000 of $8.7 million. This improvement
in cash flow was driven by improvements in operations, net of depreciation and
amortization that resulted in the loss before cumulative effect of accounting
change of $6.3 million in 2001 versus a loss before cumulative effect of
accounting change of $10.5 million in 2000. Also, improvements in the collection
of accounts receivable generated cash of $8.5 million in 2001 compared to a use
of $6.3 million in 2000.
During 2002, the Company expects to fund its working capital needs through
cash provided by operations.
The Company used $20.1 million in cash for investing activities during 2001
compared to $33.1 million during 2000. The improvement was primarily driven by
$14.0 million lower capital expenditures in 2001, as well as a $14.3 million
reduction in investments in strategic acquisitions during 2001. These
improvements were offset by $11.3 million in proceeds received in 2000 for the
sale of subsidiaries in 1999 and 1998.
Cash used by financing activities was $0.3 million in 2001 compare to cash
provided of $0.6 million in 2000. These amounts were primarily attributable to
deferred financing costs in 2001 compared to proceeds from the issuance of
common stock and the exercise of stock options in 2000.
On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due on February 15, 2005 (the "Notes"), which 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. The Notes are redeemable at the option of the
Company, in whole or in part, at any time at a declining premium to par until
2004 and at par thereafter, plus accrued and unpaid interest.
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
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.
Under the Indenture governing the Notes, the balance of net proceeds, as
defined, from the sale of any 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. The Company may use the net proceeds for
capital expenditures, to acquire long-term assets, to repay debt and/or to
acquire a controlling interest in another company. To the extent that such net
proceeds are not invested within 360 days, such amount constitutes "excess
proceeds." If the aggregate of excess proceeds is greater than $10.0 million,
the Company is required to offer to repurchase the Notes at par with such excess
proceeds. As of December 31, 2001, the Company did not have excess proceeds
greater than $10 million.
The Company entered into a $50 million credit facility (the "Credit
Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a borrowing base calculated based on eligible billed accounts
receivable of the Borrowing Base Parties, as defined in the Credit Facility. The
Company has the option of entering into "LIBOR" based loans or "index rate"
loans under the Credit Facility. LIBOR based loans bear interest at LIBOR plus
amounts ranging from 1.85% to 2.65% based on the Company's leverage ratio, as
defined in the Credit Facility, after the first year. Index rate loans bear
interest at rates approximating Prime plus amounts ranging from 0.35% to 1.15%
based on the Company's leverage ratio, as defined, after the first year. LIBOR
based loans bear interest at LIBOR plus 2.50% and index rate loans bear interest
at rates approximating Prime plus 1.0% for the first twelve months of the Credit
Facility. In addition, the Company pays a quarterly commitment fee on the unused
portion of the Credit Facility of 0.375% per annum.
20
The Credit Facility contains financial and other restrictive covenants,
including, without limitation, those restricting the incurrence of additional
indebtedness, creation of liens, payment of dividends, sales of assets, stock
offerings, capital expenditures and prepayment of the Notes and those requiring
maintenance of minimum EBITDA, as defined, and minimum fixed charge coverage, as
defined. The initial term of the Credit Facility is 42 months expiring on
October 6, 2004. The Company and the lender can mutually agree to extend this
term by 18 months if certain conditions have been met. There are no outstanding
borrowings under the Credit Facility.
The level of the Company's indebtedness could adversely impact the
Company's ability to obtain additional financing. A substantial portion of the
Company's cash flow from operations could be dedicated to the payment of
principal and interest on its indebtedness. The Company believes that its
current cash flow will be sufficient to meet working capital needs and capital
expenditures for the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
As discussed under the caption "Forward-Looking Statements" in Item 1,
Per-Se provides the following risk factor disclosures in connection with its
continuing efforts to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include, but are not limited to, the following:
Competition with Business Management Outsourcing Services Companies and
In-house Providers
The business management outsourcing business, especially surrounding the
areas of billings and collections, is highly competitive. The Company competes
with regional physician reimbursement organizations, national information and
data processing organizations, and physician groups that provide their own
business management services. Successful competition within this industry is
dependent on numerous industry and market conditions.
Potential industry and market changes that could adversely affect the
Company's ability to compete for business management outsourcing services
include an increase in the number of competitors providing comparable services,
and new alliances between healthcare providers and third-party payers in which
healthcare providers are employed by such third-party payers.
Competition with Information Technology Companies
The business of providing application software, information technology and
consulting services is also highly competitive. The Company competes with
national and regional companies in this regard. Some competitors have longer
operating histories and greater financial, technical and marketing resources
than that of the Company. The Company's successful competition within this
industry is dependent on numerous industry and market conditions.
Major Client Projects
The Company's Application Software division involves projects designed to
reengineer customer operations through the strategic use of imaging,
client/server and other advanced technologies. Failure to meet customers'
expectations with respect to a major project could, possibly, have the following
consequences: damage the Company's reputation and standing in this marketplace;
impair its ability to attract new client/server information technology business;
and inhibit its ability to collect for services performed on a project.
Changes in the Healthcare Industry
The markets for the Company's software and e-commerce products and services
as well as our business management outsourcing services are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with
21
changes in the healthcare industry may be dependent on a variety of factors,
including its ability to enhance existing products and services; introduce new
products and services quickly and cost effectively; achieve market acceptance
for new products and services; and respond to emerging industry standards and
other technological changes.
Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing our software and billing
systems going forward. The costs associated with refining, enhancing and
developing its software and billing systems may increase significantly in the
future. Existing software and technology may become obsolete as a result of
ongoing technological developments in the marketplace.
Consolidation in the Marketplace
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.
Continued consolidation of management and billing services through
integrated delivery systems may result in a decrease in demand for the Company's
business management outsourcing services for particular physician practices.
Government Regulations
As discussed in Item 1 under the captions "Healthcare Industry" and
"Regulation," the healthcare industry is highly regulated and is subject to
changing political, economic and regulatory influences. Federal and state
legislatures have periodically considered programs to reform or amend the U.S.
healthcare system at both the federal and state level and to change healthcare
financing and reimbursement systems, such as the Balanced Budget Act. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Current or future government
regulations or healthcare reform measures may affect our business. Healthcare
industry participants may respond by reducing their investments or postponing
investment decisions, including investments in the Company's products and
services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid and/or other government funded healthcare programs.
In the past, the Company has been the subject of federal investigations,
and it may become the subject of false claims litigation or additional
investigations relating to its billing and collection activities. Any such
proceeding or investigation could have a material adverse effect on the
Company's business.
The final HIPAA rules for the standards for electronic transactions and
standards of privacy of individually identifiable health information were
published in 2000. The implementation deadline for the standards for electronic
transactions is October 2002 with the possibility of a one year delay for
healthcare providers, healthcare clearinghouses and large health plans upon
filing an extension. The implementation deadline for the standards of privacy is
April 2003. These rules set new or higher standards for the healthcare industry
as to handling healthcare transactions and information and will require changes
to the manner in which the industry handles such information. One of the most
contentious areas of HIPAA reform is in the area of privacy and security.
22
Currently in the area of privacy and security of health information,
numerous federal and state civil and criminal laws govern the collection, use,
storage and disclosure of health information. Penalties for noncompliance, both
criminal and civil, may be brought by federal or state governments. Persons who
believe their health information has been misused or disclosed improperly may
bring claims and payers who believe instances of noncompliance with privacy and
security standards have occurred may bring administrative sanctions or remedial
actions against offending parties.
Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that healthcare reform will continue to be widely debated. The
Company also expects that the federal government as well as state governments
will pass laws and issue regulations addressing healthcare issues and
reimbursement of healthcare providers. The Company cannot predict whether new
legislation and regulations will be enacted and, if enacted, whether such new
developments will affect its business.
Debt
The Company has a significant amount of long-term indebtedness and, as a
result, obligations to make interest payments on that debt. If unable to make
the required debt payments, the Company could be required to reduce or delay
capital expenditures, sell certain assets, restructure or refinance its
indebtedness, or seek additional equity capital. The Company's ability to make
payments on its debt obligations will depend on future operating performance,
which will be affected by certain conditions that are beyond the Company's
control.
Litigation
The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of our business. The Company has also received written demands from
customers and former customers that have not yet resulted in legal action. Many
of the Company's software products provide data for use by healthcare providers
in providing care to patients. Although no claims have been brought against the
Company to date regarding injuries related to the use of its products, such
claims may be made in the future.
The Company may not be able to successfully resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, there is the risk that its insurance coverage,
product liability coverage or otherwise, may not fully cover any damages
assessed against the Company. Although the Company maintains all insurance
coverage in amounts that it believes is sufficient for its business, there can
be no assurance that such coverage will prove to be adequate or that such
coverage will continue to remain available on acceptable terms, if at all. A
successful claim brought against the Company, which is uninsured or
under-insured, could materially harm its business, results of operations of
financial condition.
Stock Price Volatility
The trading price of the Company's common stock may be volatile. The market
for the Company's common stock may experience significant price and volume
fluctuations in response to a number of factors including actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments
and other factors, many of which are beyond the Company's control. Furthermore,
the stock market in general and the market for software, healthcare and high
technology companies in particular, has experienced extreme volatility that
often has been unrelated to the operating performance of particular companies.
These broad market and industry fluctuations may adversely affect the trading
price of the company's common stock, regardless of actual operating performance.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company occasionally invests excess cash in commercial paper, money
market funds and other highly liquid short-term investments. Due to the limited
amounts of these investments and their short-term nature, any fluctuation in the
prevailing interest rates is expected to have an immaterial effect on the
Company's financial statements.
The Company has the option of entering into loans based on LIBOR or index
rates under the Credit Facility. If the Company were to borrow amounts under the
Credit Facility, the Company could experience fluctuations in the indexed rates.
The Company has never incurred borrowings under the Credit Facility.
EXCHANGE RATE SENSITIVITY
The majority of the Company's sales and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains and losses to date. The Company conducts only limited
transactions in foreign currencies and does not expect material foreign exchange
gains or losses in the future. The Company does not engage in any foreign
exchange hedging activities.
ITEM 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
On June 14, 2001, following a competitive review and request for proposal
process in which a number of nationally recognized accounting firms were
requested to participate, the Registrant dismissed PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") as the Registrant's principal accountants and engaged
Ernst & Young LLP as the Registrant's new principal accountants. The decision to
change accountants was recommended by the Audit Committee of the Registrant's
Board of Directors (the "Board") and approved by the Board. This information is
also included in the Company's report filed on Form 8-K on June 21, 2001, and is
incorporated herein by reference.
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 this Form 10-K, is included in the sections entitled
"Management of the Company" and "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 2, 2002, 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 2, 2002, and
is incorporated herein by reference.
24
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 2, 2002, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the section entitled
"Certain Relationships and Related Transactions" of the Proxy Statement for the
Annual Meeting of Stockholders to be held on May 2, 2002, and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Reports of Independent Auditors;
Consolidated Balance Sheets -- as of December 31, 2001 and 2000;
Consolidated Statements of Operations -- years ended December 31, 2001,
2000 and 1999;
Consolidated Statements of Cash Flows -- years ended December 31, 2001,
2000 and 1999;
Consolidated Statements of Stockholders' (Deficit) Equity -- years ended
December 31, 2001, 2000 and 1999; and
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Reports of Independent Auditors on Financial Statement Schedule;
Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 2001, 2000 and 1999
Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.
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:
<Table>
<Caption>
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).
</Table>
25
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
2.4 -- Stock Purchase Agreement dated as of December 8, 2000, among
Registrant, Health Data Services, Inc., Patient Account
Management Services, Inc., and Marc Saltzberg, Raymond
DelBrocco, Charles Moore, and Larry Shaw (incorporated by
reference to Exhibit 2.1 to Current Report on Form 8-K filed
on December 20, 2000).
2.5 -- Asset Purchase Agreement dated as of April 27, 2001, among
Registrant, Health Data Services, Inc., Virtual Information
Systems, Inc., and Paul M. Helmick and William T. Adams
(incorporated by reference to Exhibit 2.5 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001).
2.6 -- Asset Purchase Agreement dated as of April 27, 2001, among
Registrant, Per-Se Transaction Services, Inc., officemed.com
LLC, SoftLinc, Inc., and Daniel Mansfield (incorporated by
reference to Exhibit 2.6 to Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001).
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K")).
3.2 -- Restated By-laws of Registrant (incorporated by reference to
Exhibit 3.2 to the 1999 Form 10-K).
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1999 Form 10-K).
4.2 -- Form of Option Agreement relating to Registrant's Second
Amended and Restated Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the 1999 Form
10-K).
4.3 -- 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).
4.4 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 4.5 to the 1999 Form 10-K).
4.5 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees
(incorporated by reference to Exhibit 4.6 to the 1999 Form
10-K).
4.6 -- 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 year ended December 31,
1995 (the "1995 Form 10-K")).
4.7 -- 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).
4.8 -- 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).
4.9 -- Settlement Agreement dated as of June 24, 1999, by and among
Lori T. Caudill, William J. DeZonia, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust, Paulanne H. Thacker Retained Annuity
Trust and Borrower (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.10 -- 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 -- First Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of May 4, 2000 (incorporated by
reference to Exhibit 4.4 to Quarterly Report of Form 10-Q
for the quarter ended March 31, 2000).
</Table>
26
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
4.12 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002.
10.1 -- Credit Agreement dated as of April 6, 2001, among the
Registrant, as Borrower, certain subsidiaries of the
Registrant, as the other Credit Parties, the lenders
signatory thereto from time to time, as Lenders, and General
Electric Capital Corporation, as Agent and Lender
(incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed on April 23, 2001).
10.2 -- Second Amended and Restated Per-Se Technologies, Inc.
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.1 to the 1999 Form 10-K).
10.3 -- First Amendment to Second Amended and Restated Per-Se
Technologies, Inc. Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.45 to the 1999 Form
10-K).
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 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 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 (incorporated by
reference to Exhibit 10.12 to the 1999 Form 10-K).
10.13 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by.
reference to Exhibit 10.12 to Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K")).
10.14 -- 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).
10.15 -- First Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.25 to
the 1998 Form 10-K).
10.16 -- 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).
10.17 -- Third Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.16 to
the 1999 Form 10-K).
</Table>
27
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.18 -- Fourth Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.46 to
the 1999 Form 10-K).
10.19 -- Registrant's Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 to the 1996 Form 10-K).
10.20 -- 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).
10.21 -- 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 year
ended December 31, 1997 (the "1997 Form 10-K")).
10.22 -- 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).
10.23 -- 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).
10.24 -- 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).
10.25 -- 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).
10.26 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.24 to the 1999 Form 10-K).
10.27 -- Eighth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.26 to the 2000 Form 10-K).
10.28 -- 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).
10.29 -- The Per-Se Technologies Employees' Retirement Savings Plan
(incorporated by reference to Exhibit 10.26 to the 1999 Form
10-K).
10.30 -- First Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.29 to the 2000 Form 10-K).
10.31 -- Second Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001).
10.32 -- Third Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001).
10.33 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.34 -- Registrant's Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.35 -- 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).
10.36 -- 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).
10.37 -- Third Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.76 to the 1997 Form
10-K).
10.38 -- Fourth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.32 to the 1999 Form
10-K).
</Table>
28
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.39 -- Fifth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.36 to the 2000 Form
10-K).
10.40 -- Per-Se Technologies, Inc. Executive Deferred Compensation
Plan effective as of January 1, 2002.
10.41 -- Written description of Registrant's Non-Employee Director
Compensation Plan.
10.42 -- 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).
10.43 -- First Amendment to Registrant's Non-Employee Director
Deferred Stock Credit Plan.
10.44 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan.
10.45 -- 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).
10.46 -- 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).
10.47 -- Amendment Number 1 to Employment Agreement between
Registrant and David E. McDowell, dated October 20, 1999
(incorporated by reference to Exhibit 10.37 to the 1999 Form
10-K).
10.48 -- Employment Agreement dated as of November 13, 2000, between
Registrant and Philip M. Pead (incorporated by reference to
Exhibit 10.42 to the 2000 Form 10-K).
10.49 -- Employment Agreement dated April 14, 2000, between
Registrant and Chris E. Perkins (incorporated by reference
to Exhibit 10.43 to the 2000 Form 10-K).
10.50 -- Amendment Number 1 to Employment Agreement between
Registrant and Chris E. Perkins, dated as of February 7,
2001 (incorporated by reference to Exhibit 10.44 to the 2000
Form 10-K).
10.51 -- Employment Agreement dated January 30, 1998, between
Registrant and William Dagher (incorporated by reference to
Exhibit 10.45 to the 2000 Form 10-K).
10.52 -- Employment Agreement dated June 5, 1998, between Registrant
and Frank B. Murphy (incorporated by reference to Exhibit
10.46 to the 2000 Form 10-K).
10.53 -- Employment Agreement dated as of March 22, 2001, between
Registrant and Karen B. Andrews (incorporated by reference
to Exhibit 10.48 to the 2000 Form 10-K).
10.54 -- 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).
21 -- Subsidiaries of Registrant.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
</Table>
- ---------------
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
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 2001.
29
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/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
/s/ MARY C. CHISHOLM
------------------------------------
Mary C. Chisholm
Vice President and Controller
(Principal Accounting Officer)
Date: March 26, 2002
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.
<Table>
/s/ DAVID E. MCDOWELL Chairman and Director March 26, 2002
------------------------------------------------
David E. McDowell
/s/ PHILIP M. PEAD President, Chief Executive March 26, 2002
------------------------------------------------ Officer, and Director
Philip M. Pead
/s/ CHRIS E. PERKINS Executive Vice President and Chief March 26, 2002
------------------------------------------------ Financial Officer
Chris E. Perkins
/s/ MARY C. CHISHOLM Vice President and Controller March 26, 2002
------------------------------------------------ (Principal Accounting Officer)
Mary C. Chisholm
/s/ CRAIG MACNAB Director March 26, 2002
------------------------------------------------
Craig Macnab
/s/ DAVID R. HOLBROOKE, M.D. Director March 26, 2002
------------------------------------------------
David R. Holbrooke, M.D.
</Table>
30
<Table>
/s/ STEPHEN A. GEORGE, M.D. Director March 26, 2002
------------------------------------------------
Stephen A. George, M.D.
/s/ JOHN C. POPE Director March 26, 2002
------------------------------------------------
John C. Pope
/s/ C. CHRISTOPHER TROWER Director March 26, 2002
------------------------------------------------
C. Christopher Trower
</Table>
31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Per-Se Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Per-Se
Technologies, Inc. (the "Company") as of December 31, 2001, and the related
consolidated statements of operations, stockholders' (deficit) equity, and cash
flows for the year ended December 31, 2001. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Per-Se
Technologies, Inc. at December 31, 2001, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 4, 2002
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Per-Se Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' (deficit) 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, 2000 and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 5, 2001
F-2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PAR
VALUE DATA)
Current Assets:
Cash and cash equivalents................................. $ 36,493 $ 30,970
Restricted cash........................................... 4,419 7,352
--------- ---------
Total cash and cash equivalents................... 40,912 38,322
Accounts receivable, billed (less allowances of $5,144 and
$7,635, respectively).................................. 45,719 53,309
Accounts receivable, unbilled (less allowances of $1,345
and $4,338, respectively).............................. 4,150 5,786
Other..................................................... 5,000 5,793
--------- ---------
Total current assets.............................. 95,781 103,210
Property and equipment, net................................. 25,012 32,813
Intangible assets........................................... 77,268 72,695
Other....................................................... 4,830 5,408
--------- ---------
$ 202,891 $ 214,126
========= =========
Current Liabilities:
Accounts payable.......................................... $ 6,085 $ 11,002
Accrued compensation...................................... 23,884 18,652
Accrued expenses.......................................... 21,705 21,712
Accrued litigation settlements............................ -- 1,602
--------- ---------
51,674 52,968
Deferred revenue.......................................... 19,800 23,063
--------- ---------
Total current liabilities......................... 71,474 76,031
Long-term debt.............................................. 175,091 175,000
Other obligations........................................... 6,456 7,231
--------- ---------
Total liabilities................................. 253,021 258,262
--------- ---------
Commitments and Contingencies (Notes 10 and 11)............. -- --
Stockholders' Deficit:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
29,969 and 29,902 issued and outstanding as of December
31, 2001 and December 31, 2000, respectively........... 300 299
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 774,983 774,603
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (826,908) (820,533)
--------- ---------
Total stockholders' deficit....................... (50,130) (44,136)
--------- ---------
$ 202,891 $ 214,126
========= =========
</Table>
See notes to consolidated financial statements.
F-3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue..................................................... $328,877 $310,008 $322,129
-------- -------- --------
Salaries and wages.......................................... 199,254 193,952 212,940
Other operating expenses.................................... 92,421 94,364 104,192
Depreciation................................................ 12,401 15,562 20,177
Amortization................................................ 13,245 10,125 9,293
Interest expense, net....................................... 17,159 14,525 16,102
Process improvement project................................. 3,423 501 --
Litigation settlements...................................... -- 1,147 24,811
Non-recurring, restructuring and other expenses............. 593 2,382 --
-------- -------- --------
Total expenses.................................... 338,496 332,558 387,515
-------- -------- --------
Loss before income taxes.................................... (9,619) (22,550) (65,386)
Income tax expense (benefit)................................ 607 (695) (610)
-------- -------- --------
Loss from continuing operations............................. (10,226) (21,855) (64,776)
-------- -------- --------
Discontinued operations, net of tax......................... 3,888 11,337 31,074
-------- -------- --------
Loss before cumulative effect of accounting change.......... (6,338) (10,518) (33,702)
Cumulative effect of accounting change, net of tax.......... -- (37,684) --
-------- -------- --------
Net loss.......................................... $ (6,338) $(48,202) $(33,702)
======== ======== ========
Basic and diluted net loss per share:
Loss from continuing operations........................... $ (0.34) $ (0.74) $ (2.31)
Discontinued operations, net of tax....................... 0.13 0.38 1.11
Cumulative effect of accounting change, net of tax........ -- (1.26) --
-------- -------- --------
Net loss.......................................... $ (0.21) $ (1.62) $ (1.20)
======== ======== ========
Weighted average shares outstanding used in basic and
diluted net loss per share................................ 29,915 29,852 28,097
======== ======== ========
</Table>
See notes to consolidated financial statements.
F-4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net loss.................................................. $ (6,338) $(48,202) $(33,702)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization........................... 25,646 25,687 29,470
Discontinued operations................................. (3,888) (11,337) (31,400)
Impairment loss (gain) on long-lived assets............. -- 1,185 (4,772)
Cumulative effect of accounting change.................. -- 37,684 --
Non-cash litigation settlement costs.................... -- -- 16,433
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash...................................... 2,008 (1,002) (572)
Accounts receivable, billed.......................... 6,883 (5,834) 8,703
Accounts receivable, unbilled........................ 1,637 (503) 3,863
Accounts payable..................................... (4,929) 760 1,455
Accrued compensation................................. 5,232 (3,207) 608
Accrued expenses..................................... (1,699) (6,650) (6)
Accrued litigation settlements....................... (1,602) (2,441) (11,971)
Deferred revenue..................................... (2,436) 2,667 2,107
Other, net........................................... 1,520 2,477 820
-------- -------- --------
Net cash provided by (used for) continuing
operations......................................... 22,034 (8,716) (18,964)
Net cash provided by (used for) discontinued
operations......................................... 3,919 (2,100) (2,942)
-------- -------- --------
Net cash provided by (used for) operating
activities...................................... 25,953 (10,816) (21,906)
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (4,836) (18,801) (10,418)
Software development costs................................ (5,940) (6,137) (7,498)
Proceeds from sale of property and equipment.............. 1,537 5,658 12,003
Net proceeds from sale of subsidiaries.................... -- 11,337 47,986
Acquisitions, net of cash acquired........................ (10,846) (25,193) (32)
Other..................................................... (31) -- --
-------- -------- --------
Net cash (used for) provided by investing
activities...................................... (20,116) (33,136) 42,041
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of stock........................... -- 298 920
Proceeds from the exercise of stock options............... 299 379 217
Payments of debt.......................................... (74) (38) (1,042)
Deferred financing costs/debt issuance costs.............. (539) (71) (285)
-------- -------- --------
Net cash (used for) provided by financing
activities...................................... (314) 568 (190)
-------- -------- --------
Cash and Cash Equivalents:
Net change................................................ 5,523 (43,384) 19,945
Balance at beginning of period............................ 30,970 74,354 54,409
-------- -------- --------
Balance at end of period.................................. $ 36,493 $ 30,970 $ 74,354
======== ======== ========
</Table>
See notes to consolidated financial statements.
F-5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<Table>
<Caption>
COMMON PREFERRED TREASURY
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT WARRANTS AMOUNT
------- ------ --------- --------- -------- ----------- -------- --------
(IN THOUSANDS)
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 (see
Note 12)......................... (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 --
Issuance of common stock........... 42 -- -- -- 298 -- -- --
Issuance of common stock in
acquisitions..................... 236 2 -- -- 1,998 -- -- --
Exercise of stock options.......... 48 1 -- -- 378 -- -- --
Net loss........................... -- -- -- -- -- (48,202) -- --
Other.............................. 1 -- -- -- 65 (116)
------- ----- --- ---- -------- --------- ------ ----
BALANCE AT DECEMBER 31, 2000....... 29,902 299 -- -- 774,603 (820,533) 1,495 --
Issuance of common stock........... -- -- -- -- -- -- -- --
Issuance of common stock in
acquisitions..................... 5 -- -- -- 35 -- -- --
Exercise of stock options.......... 62 1 -- -- 295 -- -- --
Net loss........................... -- -- -- -- -- (6,338) -- --
Other.............................. -- -- -- -- 50 (37) -- --
------- ----- --- ---- -------- --------- ------ ----
BALANCE AT DECEMBER 31, 2001....... 29,969 $ 300 -- $ -- $774,983 $(826,908) $1,495 $ --
======= ===== === ==== ======== ========= ====== ====
<Caption>
TOTAL
STOCKHOLDERS'
(DEFICIT) EQUITY
----------------
(IN THOUSANDS)
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 (see
Note 12)......................... (24)
Net loss........................... (33,702)
Other.............................. (15)
--------
BALANCE AT DECEMBER 31, 1999....... 1,440
Issuance of common stock........... 298
Issuance of common stock in
acquisitions..................... 2,000
Exercise of stock options.......... 379
Net loss........................... (48,202)
Other.............................. (51)
--------
BALANCE AT DECEMBER 31, 2000....... (44,136)
Issuance of common stock........... --
Issuance of common stock in
acquisitions..................... 35
Exercise of stock options.......... 296
Net loss........................... (6,338)
Other.............................. 13
--------
BALANCE AT DECEMBER 31, 2001....... $(50,130)
========
</Table>
See notes to consolidated financial statements.
F-6
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"). The e-Health Solutions division revenue includes intersegment
revenues for services provided to the Physician Services division, which has
been eliminated in total consolidated revenue. 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 Impact Innovations
Group ("Impact") in 1999. The results of Impact are classified as discontinued
operations for the year ended December 31, 1999. See Note 3 for further
discussion of the Company's discontinued operations.
Recent Accounting Pronouncements. In June 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
141 Business Combinations ("SFAS No. 141"), which eliminates the pooling method
of accounting for all business combinations initiated after June 30, 2001, and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. The Company adopted SFAS
No. 141 for business combinations initiated after June 30, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 Goodwill and Other Intangible Assets ("SFAS No. 142"). Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually for impairment. The Company adopted the standard on
January 1, 2002. As part of the adoption of SFAS No. 142, the Company
re-examined the purchase price allocation of its most recent acquisitions, with
a portion of the amount previously allocated to goodwill being re-allocated to
finite-lived intangible assets. As required by SFAS No. 142, the Company will
complete the impairment test of its goodwill by June 30, 2002. No asset
impairment write-downs are expected as a result of adoption.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"). SFAS No. 144 replaces Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS No. 121"). SFAS No. 144 requires that long-lived
assets to be disposed of by sale, including those of discontinued operations, be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet been incurred. SFAS No.
144 also broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted the standard on January 1,
2002. No asset impairment is expected to occur as a result of adoption.
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. The Company's revenue is derived from products and
services delivered to the healthcare industry through its three operating
divisions:
Physician Services provides business management outsourcing services
to hospital-affiliated physicians, physicians in academic settings and
other large physician practices. Fees for these services are primarily
based on a percentage of net collections on our clients' accounts
receivable. Revenue is
F-7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized when our customers receive payment on those accounts receivable.
The Physician Services division does not rely, to any material extent, on
estimates in the recognition of this revenue.
Application Software provides enterprise-wide financial, clinical and
administrative software to acute care healthcare organizations. For
contracts under which the division is required to make significant
production, modification or customization changes, revenue from software
licenses and services is recognized using the percentage-of-completion
method over the implementation period. 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. An unbilled
receivable is recorded if the Company can recognize revenue on the
percentage-of-completion basis prior to achieving a contracted billing
milestone. For minor add-on software license sales where no significant
customization remains outstanding, the fee is fixed, an agreement exists
and collectibility is probable, the division recognizes revenue upon
shipment. Software maintenance payments received in advance are deferred
and recognized ratably over the term of the maintenance agreement, which is
typically one year.
The Application Software division relies on estimates of work to be
completed when recognizing revenue on contracts using
percentage-of-completion accounting. Because revenue could be impacted if
the estimates of the extent of completion differ from actual results,
periodic reviews of the estimated hours or days to complete major projects
are made by the Application Software division and compared to budgeted
hours or days to support the revenue recognized on that project.
e-Health Solutions delivers private and internet-based
business-to-business solutions that help healthcare providers, payers and
patients reduce administrative inefficiencies. Revenue related to
electronic claims and remittance advice processing and real-time
eligibility verification is recognized on a per transaction basis net of
electronic claims rebates. Revenue related to high-speed print and mail
services is billed and recognized when the services are delivered and
includes all costs of delivering the product; the division includes all
costs of delivering the product in operating expenses. For software
contracts under which the division is required to make significant
production, modification or customization changes, revenue from software
licenses and services is recognized using the percentage-of-completion
method over the implementation period. Revenue related to the ASP physician
practice management system is recognized as monthly subscription revenue
Cash and Cash Equivalents. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months at the
date of purchase.
Restricted Cash. As of December 31, 2001, restricted cash principally
represents restrictions on the Company's 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, less accumulated depreciation. 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 of goodwill, client
lists, workforce, trademark, developed technology and software development
costs. The Company periodically evaluates whether changes have occurred that
would require revision of the remaining estimated useful lives of the
intangible. Additionally under SFAS No. 121, the Company evaluates whether there
have been any changes that would render its intangibles impaired. Conditions
that may indicate an impairment issue exists include an economic downturn or
change in future operations. In the event a condition is identified that
indicates an impairment might exist, an assessment is performed using a variety
of methodologies including cash flow
F-8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
analysis, estimates of sales proceeds and independent appraisals. Where
applicable, an appropriate interest rate is utilized based on appropriate
borrowing rates.
Goodwill. Goodwill represents the excess of the cost of businesses
acquired in the e-Health Solutions division from 1995 to 2001, over the fair
market value of their identifiable net assets. Prior to the adoption of SFAS No.
142 on January 1, 2002, the Company amortized its goodwill over its estimated
useful life of no greater than twenty years. Under SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment.
Client Lists. Client lists represent the value of clients acquired in the
Physician Services division from 1992 to 1996 and the e-Health Solutions
division from 1995 to 2001. Client lists are being amortized over their
estimated useful lives, which range from five to ten years.
Other Intangibles. Developed Technology represents the value of the
systems acquired in the e-Health Solutions division from 2000 to 2001. These
intangible assets are being amortized over their estimated useful lives of five
years. Trademark represents the value of the trademarks acquired in the e-Health
Solutions division from 2000 to 2001. Under SFAS No. 142, this indefinite lived
intangible asset will not be amortized.
Software Development Costs. Software development includes costs incurred
in the development or the enhancement of software developed by the Application
Software and e-Health Solutions divisions 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 over the
greater of the ratio that current revenues bear to total and anticipated future
revenues for the applicable product or straight-line method over the estimated
economic lives of the assets, which are generally three to five years. The
Company monitors the net realizable value of all capitalized software
development costs to ensure that the investment will be recovered through
margins from future sales.
In December 2000, the Company recorded $1.4 million of non-recurring
expenses related to the e-Health Solutions' retirement of a software product
that was replaced by a superior software product at Health Data Services, Inc.
and its affiliate company, Patient Account Management Services, Inc. ("HDS/
PAMS"), a company acquired by Per-Se in December 2000.
Research and Development Costs. Research and development costs are
expensed as incurred. The Company recorded research and development costs of
approximately $11.3 million, $9.5 million and $9.2 million in 2001, 2000 and
1999, respectively.
Advertising Costs. Advertising costs are expensed as incurred. The Company
recorded advertising costs of approximately $0.6 million, $0.5 million and $0.7
million in 2001, 2000 and 1999, respectively.
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 14, 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 that elect to not account for stock-based compensation
as prescribed by that statement shall disclose, among other things, the pro
forma effects on net income (loss) and net income (loss) per share as if SFAS
No. 123 had been adopted.
Legal Costs. Legal and administrative fees, costs and expenses are
expensed as incurred. Damages or settlement losses that the Company determines
to be probable are accrued at such time when they are estimable.
F-9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
See Note 15 where the Company discusses the realizability of the deferred tax
assets.
Net Loss per Share. Basic net loss per common share is based on the
weighted average number of shares of common stock outstanding during the period.
The Company has excluded all stock options and warrants from the calculation of
diluted loss per common share because all such securities are anti-dilutive for
all periods presented. The total number of shares excluded from the calculation
of diluted loss per share was 6.9 million in 2001, 4.4 million in 2000, and 3.1
million in 1999.
Diluted earnings per share is shown for the fourth quarter in Note
19 -- Quarterly Financial Information. The potential dilution that would occur
if stock options and warrants were exercised is reconciled to the average
outstanding shares used as follows:
<Table>
<Caption>
QUARTER ENDED
DECEMBER 31, 2001
-----------------
(IN THOUSANDS)
Weighted average shares outstanding (basic)................. 29,939
Effect of dilutive securities:
Stock options............................................. 1,496
------
31,435
======
</Table>
Cumulative Effect of Accounting Change. 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 unbilled accounts receivable and
related revenue recognition. Consistent with the Commission's guidance and
changing industry practice, the Company began recognizing revenue in its
Physician Services segment on an "as billed" basis January 1, 2000.
The change in accounting method resulted in the elimination of $37.7
million of unbilled accounts receivable. The one-time, cumulative non-cash
expense in the Company's statement of operations for the year ended December 31,
2000 reflects the $22.7 million elimination of the unbilled accounts receivable
on a net of tax basis and a corresponding $15.0 million increase in the
Company's deferred tax valuation allowance.
Derivative Instruments and Hedging Activities. In June 1998, the FASB
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to record derivatives as assets or
liabilities and measure those instruments at fair value. Gains or losses
resulting from changes in the values of those derivatives will be recorded
either in current earnings or as a component of comprehensive income. The
Company adopted SFAS No. 133 effective January 1, 2001. It had no impact on the
Company's Consolidated Statements of Operations. The majority of the Company's
international contracts are denominated in U.S. dollars.
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.
F-10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
On April 27, 2001, the Company acquired all of the assets of Virtual
Information Systems, Inc. ("VIS") for consideration of $7.0 million in cash. The
purchase agreement also provides for a purchase price adjustment of up to $1.5
million payable in cash should VIS meet certain financial targets over the
twelve months following the date of acquisition. The Company anticipates VIS
will meet these financial targets and therefore has recorded a purchase price
adjustment of $1.5 million as of December 31, 2001. VIS's core product, Virtual
Remittance Processing System, is an automated remittance processing solution,
which ensures accurate and efficient processing of cash collections.
Additionally, on April 27, 2001, the Company acquired all of the assets of
OfficeMed.com LLC ("OfficeMed") for consideration of $3.25 million in cash.
OfficeMed offers a web-based application service provider (ASP) solution that
gives healthcare and payer organizations the ability to perform secure, real-
time benefits inquiries against patients' insurance plans ensuring eligibility
at the point-of-care.
On December 8, 2000, the Company acquired all the issued and outstanding
shares of capital stock of HDS/PAMS for consideration of approximately $25.0
million. HDS/PAMS offer fully integrated electronic medical claims clearing and
other services for hospitals and integrated delivery networks.
The HDS/PAMS, VIS and OfficeMed acquisitions were recorded using the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based on their
estimated fair market value at the date of acquisition. Approximately $20.4
million of the purchase price was allocated to goodwill and prior to adoption of
SFAS No. 142 was being amortized using the straight-line method over twenty
years. In 2001, the Company finalized the purchase price allocation of these
acquisitions, and approximately $12.4 million previously allocated to goodwill
was reallocated to finite-lived intangible assets with lives ranging from 5 to
10 years. The operating results of HDS/PAMS, VIS and OfficeMed are included in
the Company's Consolidated Statements of Operations from the date of acquisition
in the e-Health Solutions division.
On February 9, 2000, the Company acquired the outstanding capital stock of
Knowledgeable Healthcare Solutions, Inc. ("KHS") for consideration of $3.1
million, consisting of $1.1 million cash and approximately 236,000 shares, or
$2.0 million, of the Company's Common Stock. In addition, the purchase agreement
provides for a purchase price adjustment of up to $6.0 million, that was
recorded in December 2000, payable in cash and the Company's Common Stock,
should KHS meet certain operational targets over the three years from the date
of acquisition. The Company was required under the purchase agreement to make a
purchase price adjustment in April 2001 totaling $0.1 million, 25% of which was
paid through the issuance of the Company's common stock.
The KHS acquisition was recorded using the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
the liabilities assumed based on their estimated fair market value at the date
of acquisition. Approximately $8.9 million of the purchase price was allocated
to goodwill and prior to adoption of SFAS No. 142 was being amortized using the
straight-line method over five years. The operating results of KHS are included
in the Company's Consolidated Statements of Operations from the date of
acquisition.
The pro-forma impact of these acquisitions was immaterial to the financial
statements of the Company and therefore has not been presented.
3. DISCONTINUED OPERATIONS AND DIVESTITURES
In 1998, 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 Solutions. Management
began
F-11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to seek alternatives for the remaining non-core business segments: Medaphis
Services Corporation ("Hospital Services") and Impact Innovations Group
("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. 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 Impact as discontinued operations for the year
ended December 31, 1999.
In 1999, the Company completed the sale of both divisions of 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. Final CBSI post acquisition matters were resolved in the third quarter of
2000 resulting in an additional charge to discontinued operations of $0.4
million. The government division of Impact was sold on December 17, 1999 to J3
Technology Services Corp. for $46.5 million, including a purchase price
adjustment of $1.5 million received on March 30, 2000 based on the division's
tangible net worth at closing. The purchase price adjustment resulted in the
recognition of an additional gain of $1.5 million, which was recognized through
discontinued operations. Additionally, the sale agreement stipulated that $1.0
million of the purchase price be put in escrow to pay potential claims. The term
of the escrow expired on September 30, 2001. In October of 2001, the Company
received $1.0 million in cash, which was recognized through discontinued
operations.
The Company accrued $5.3 million for the period ended September 30, 1999
through discontinued operations as a result of an agreement with SCI Management
Corporation ("SCI"), a former client of the commercial division of Impact. SCI
filed a complaint against the commercial division of Impact in January of 1998
seeking recovery for alleged damages in connection with work performed by Impact
under a consulting contract. Although the commercial division of Impact was sold
effective April 15, 1999, the Company remained responsible for the SCI
complaint. The Company paid $3.2 million to SCI on November 4, 1999. The Company
issued a promissory note for the balance of $2.1 million bearing interest at
8.25%, which was paid on October 31, 2000. In May of 2001, the Company received
an insurance settlement related to the SCI matter of approximately $3.0 million,
which was recognized through discontinued operations.
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. During
the first quarter of 1999, the Company received additional consideration of $0.8
million based on the Hospital Services' final closing balance sheet and payment
on certain Hospital Services' accounts receivable retained by the Company. The
additional consideration resulted in the recognition, in discontinued
operations, of an additional gain of $0.5 million, net of tax of $0.3 million.
In addition, the Company received a purchase price adjustment of $10.0 million
in cash from NCO on May 5, 2000 based on Hospital Services' achievement of
various operational targets in 1999. The purchase price adjustment resulted in
the recognition of an additional gain of approximately $9.2 million in the
quarter ended June 30, 2000 through discontinued operations.
The net operating results of these segments have been reported in the
Consolidated Statements of Operations as "Discontinued operations, net of tax"
and the net cash flows have been reported in the Consolidated Statements of Cash
Flows as "Net cash provided by (used for) discontinued operations" for the year
ended December 31, 1999.
F-12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information for the discontinued operations is as
follows:
<Table>
<Caption>
FOR THE YEAR ENDED
DECEMBER 31, 1999
-------------------
IMPACT
-------------------
(IN THOUSANDS)
Revenue..................................................... $54,916
=======
Income from discontinued operations before income taxes..... $ 3,958
Income tax expense.......................................... 555
-------
$ 3,403
=======
</Table>
4. NON-RECURRING, RESTRUCTURING AND OTHER EXPENSES
Components of non-recurring and other expenses are as follows:
<Table>
<Caption>
2001 2000 1999
---- ------ ----
(IN THOUSANDS)
Severance costs............................................. $593 $ 562 $ --
Other....................................................... -- 1,820 --
---- ------ ----
$593 $2,382 $ --
==== ====== ====
</Table>
Severance Costs. In 2001 and 2000, the Company recorded net expenses of
$0.6 million and $0.6 million, respectively, for severance costs associated with
former executive management. In 2000, the expense includes a $0.3 million
reduction of a prior period severance cost associated with former executive
management.
Other. In December 2000, the Company recorded $1.4 million of
non-recurring expenses related to the e-Health Solutions division's retirement
of a software product that was replaced by a superior software product at
HDS/PAMS, companies acquired by Per-Se in December 2000. In connection with the
retirement of the software product, the Company also recorded $0.4 million of
severance for approximately 20 employees associated with the retired software
product that had been notified of their termination.
Restructuring Expenses. Under Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring), ("EITF 94-3"),
the Company discloses certain information related to restructuring charges.
In early 1995, the Company initiated a reengineering program focused upon
its billing and accounts receivable management operations (the "Reengineering
Project"). As part of the Physician Services Restructuring Plan, the Company
recorded restructuring reserves in 1995 through 1996. In 1996, the Company
abandoned its Reengineering Project. The Company periodically reevaluates the
adequacy of the reserves established for the Physician Services Restructuring
Plan. In 1997 and 1999 the Company recorded an additional expense of $1.7
million and $0.3 million, respectively, for lease termination costs.
In 1997, the Company adopted a plan to combine the operations of its
software and consulting companies. 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
F-13
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 is as follows:
<Table>
<Caption>
RESERVE COSTS RESERVE COSTS RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE APPLIED BALANCE APPLIED BALANCE
JANUARY 1, AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31, AGAINST DECEMBER 31,
1999 RESERVE 1999 ADJUSTMENTS RESERVE 2000 RESERVE 2001
---------- -------- ------------ ----------- -------- ------------ ------- ------------
Lease termination
costs.................. $4,292 $ (764) $3,528 $ -- $(655) $2,873 $(535) $2,338
Severance................ 1,148 (875) 273 (273) -- -- -- --
------ ------- ------ ----- ----- ------ ----- ------
$5,440 $(1,639) $3,801 $(273) $(655) $2,873 $(535) $2,338
====== ======= ====== ===== ===== ====== ===== ======
</Table>
The terminated leases have various expiration dates through 2011.
5. PROCESS IMPROVEMENT PROJECT
The Company incurred approximately $3.4 million and $0.5 million of expense
in 2001 and 2000, respectively, associated with the implementation of a process
improvement project within the Physician Services division (the "Project"). The
Project installs a formalized set of productivity and quality measures, workflow
processes and a management operating system in certain of the Company's major
processing centers. The Project focuses on productivity improvements that result
in both improved client service for the division's clients as well as improved
profitability for the division. The costs associated with the Project primarily
consist of professional fees paid to outside consultants retained exclusively
for implementation of the Project. The first phase of the Project, which
involved implementation in twelve processing centers, was completed in the third
quarter with all costs for this phase incurred as of September 30, 2001.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Land........................................................ $ 590 $ 590
Buildings................................................... 2,751 2,750
Furniture and fixtures...................................... 16,497 16,353
Equipment................................................... 123,802 124,551
Leasehold improvements...................................... 5,629 9,628
-------- --------
149,269 153,872
Less accumulated depreciation............................... 124,257 121,059
-------- --------
$ 25,012 $ 32,813
======== ========
</Table>
F-14
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Goodwill.................................................... $44,749 $43,170
Client lists................................................ 44,308 39,681
Developed Technology........................................ 4,616 --
Trademark................................................... 1,313 --
Software development costs.................................. 54,574 49,718
------- -------
149,560 132,569
Less accumulated amortization............................... 72,292 59,874
------- -------
$77,268 $72,695
======= =======
</Table>
In accordance with Accounting Principles Board Opinion 16, Business
Combinations, the Company finalized the purchase price allocation of its most
recent acquisitions, with a portion of the amount previously allocated to
goodwill being reallocated to finite-lived intangible assets. The amounts
reallocated to finite-lived intangible assets totaled approximately $9.2
million. The amortization period of the amounts allocated to client lists ranges
from five to ten years. The amortization period of the amounts allocated to
developed technology is five years.
The Company adopted SFAS No. 142 on January 1, 2002. Under SFAS No. 142,
goodwill and indefinite lived intangible assets are no longer amortized but will
be reviewed annually for impairment.
Expenditures on capitalized software development costs were approximately
$5.9 million, $6.1 million and $7.5 million in 2001, 2000 and 1999,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $5.8 million, $4.7 million and $4.5 million in 2001, 2000 and
1999, respectively. The unamortized balance of software development costs at
December 31, 2001 and 2000 was $15.3 million and $15.5 million, respectively.
Software development costs are amortized over the greater of the ratio that
current revenues bear to total and anticipated future revenues for the
applicable product or straight-line method over the estimated useful lives of
the assets, which are generally three to five years.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)
Interest.................................................... $ 6,235 $ 6,668
Accrued restructuring and severance costs, current.......... 1,198 1,450
Accrued legal costs......................................... 762 469
Accrued taxes............................................... 1,237 725
Funds due clients........................................... 1,568 1,710
Accrued costs of businesses acquired........................ 3,958 2,861
Other....................................................... 6,747 7,829
------- -------
$21,705 $21,712
======= =======
</Table>
F-15
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
9 1/2% Senior Notes due February 15, 2005 (the "Notes")..... $175,000 $175,000
Capital lease obligations, weighted average effective
interest rate of 6.0% in 2001............................. 91 --
-------- --------
175,091 175,000
Less current portion........................................ -- --
-------- --------
$175,091 $175,000
======== ========
</Table>
On February 20, 1998, the Company issued 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 may be redeemed at the option of the Company, in whole or in
part, at any time at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest.
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
inconsequential individually and in the aggregate to the consolidated financial
statements.
Under the Indenture governing the Notes, the balance of net proceeds, as
defined, from the sale of any assets having a fair value in excess of $1.0
million must be invested in the Company's business within 360 days of receipt of
proceeds related to the sale or they become excess proceeds. If the aggregate of
excess proceeds is greater than $10.0 million, the Company is required to offer
to repurchase the Notes at par with such excess proceeds. As of December 31,
2001, the Company did not have excess proceeds (as defined by the Indenture
governing the Notes) related to the sale of non-core operations and other
assets.
At December 31, 2001, the estimated fair value of the Notes is
approximately $161.0 million, or 92% of par, 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 Company entered into a $50 million credit facility (the "Credit
Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a Borrowing Base calculated based on eligible billed accounts
receivable of the Company's Physician Services and e-Health Solutions divisions,
as defined in the Credit Facility. The Company has the option of making "LIBOR"
based loans or "index rate" loans under the Credit Facility. LIBOR based loans
bear interest at LIBOR plus amounts ranging from 1.85% to 2.65% based on the
Company's leverage ratio, as defined in the Credit Facility, after the first
year. Index rate loans bear interest at Prime plus amounts ranging from 0.35% to
1.15% based on the Company's leverage ratio, as defined, after the first year.
LIBOR based loans bear interest at LIBOR plus 2.50% and index rate loans bear
interest at Prime plus 1.0% for the first twelve months of the Credit Facility.
In addition, the Company pays a quarterly commitment fee on the unused portion
of the Credit Facility of 0.375% per annum.
The Credit Facility contains financial and other restrictive covenants,
including without limitation those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends,
F-16
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sales of assets, stock offerings, capital expenditures, and prepayment of the
Notes, those requiring maintenance of minimum EBITDA (as defined) and minimum
fixed charge coverage (as defined). The initial term of the Credit Facility is
42 months, expiring on October 6, 2004. The Company and the Lender can mutually
agree to extend this term by 18 months if certain conditions have been met. The
Company did not have any borrowings outstanding under the Credit Facility at
December 31, 2001. The Company intends to use the Credit Facility, as needed,
for future investments in its operations including capital expenditures,
acquisitions and other general corporate purposes.
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, on both the Notes and the Credit Facility, for
the years ended 2001, 2000 and 1999 were $1.3 million, $1.1 million and $1.2
million, respectively.
The Company's capital leases consisted principally of leases for equipment.
As of December 31, 2001, the net book value of equipment subject to capital
leases totaled $0.1 million.
The aggregate maturities of long-term debt are as follows (in thousands):
<Table>
2002........................................................ $ --
2003........................................................ 91
2004........................................................ --
2005........................................................ 175,000
Thereafter.................................................. --
--------
$175,091
========
</Table>
10. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, which expire at various dates through 2011. Rent expense was $16.6
million, $17.5 million and $16.7 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<Table>
2002........................................................ $16,215
2003........................................................ 14,325
2004........................................................ 12,364
2005........................................................ 6,454
2006........................................................ 3,397
Thereafter.................................................. 5,599
-------
$58,354
=======
</Table>
11. LEGAL MATTERS
PENDING LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not yet resulted in legal
action. Within the Company's industry, federal and state civil and criminal laws
govern medical billing and collection activities. These laws provide
F-17
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from federal and state healthcare
programs.
The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters; however, there can be no
assurance that such matters or any future legal matters will not have an adverse
effect on the Company. Since the Company is often unable to estimate a range of
awards or losses, if any, in pending legal matters, amounts thereof have not
been reflected in the financial statements unless estimable and probable.
SETTLED LEGAL MATTERS
In December 1995, the Company acquired Medical Management Sciences, Inc.
("MMS") (now a part of Physician Services). At acquisition, a lawsuit was
pending against MMS for the alleged breach of two related billing and asset
purchase contracts entered into by MMS in 1994. In November 1996, a jury in that
lawsuit returned a verdict that produced a net award to MMS of approximately
$900,000. The trial court reversed the net award to MMS and awarded the
plaintiffs approximately $1.2 million in 1998, which was reduced to $950,000 by
appeals court in May 2000. In July 2000, MMS was granted a stay of the judgment
against it pending a petition by MMS to the U.S. Supreme Court. MMS filed a
Petition for Writ of Certiorari with the U.S. Supreme Court in October 2000
seeking to overturn the decision of the appeals court and reinstate the jury
verdict in MMS favor. That petition was denied in December 2000, and the Company
accrued $1.1 million at December 31, 2000 for the estimated amount of the net
award. In February 2001, the Company paid the full amount of the net award of
$1.2 million in favor of the plaintiffs, and the matter was concluded.
On January 28, 1998, a former client 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 the plaintiff reached an agreement to refund $5.3
million to the plaintiff and on November 4, 1999, the Company paid $3.2 million
to the plaintiff and issued a promissory note for $2.1 million bearing interest
at 8.25%, which was paid on October 31, 2000. In May 2001, the Company and
American International Specialty Lines Insurance Company ("AISLIC") settled
litigation arising out of AISLIC's denial of coverage under an errors and
omissions insurance policy for damages incurred by the Company in connection
with this matter. The case was settled with the payment by AISLIC of $3 million
to the Company.
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 PST Emergency Medicine Services, Inc., a former subsidiary of the
Company then known as Gottlieb's Financial Services, Inc. (the "Emergency
Medicine division") to a former client. The Company paid the plaintiff $1.75
million in cash in exchange for a release of all claims against the Emergency
Medicine division for breach of contract.
On June 21, 1999, the Company finalized the settlement with the United
States government concerning its investigation of the Emergency Medicine
division, 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 was paid
in $0.9 million increments to the United States on March 31, 2000, July 3, 2000,
October 2, 2000 and January 2, 2001. The interest rate on the deferred portion
of the settlement payment was 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
F-18
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 24, 1999, the Company entered into a settlement agreement with the
former shareholders of 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 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 legal malpractice claim.
In October 1999, the Company and a former shareholder of Health Data
Sciences Corporation ("HDSC"), settled litigation arising out of Per-Se's
acquisition of HDSC in June of 1996. Pursuant to the settlement, the plaintiff
realized $25.0 million from its investment in HDSC, consisting of $3.6 million
from the sale of 325,590 shares of Per-Se Common Stock received by the plaintiff
in the June 1996 HDSC 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 the plaintiff of 1,333,333 shares of Per-Se Common Stock
issued to the plaintiff.
12. 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 were 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.
13. STOCKHOLDERS' RIGHTS PLAN
On January 21, 1999, the Board 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. Each right entitles the
registered holder to purchase from the Company a unit (a "Unit") consisting of
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
without par value, at a purchase price of $75 per Unit, as adjusted for the
Reverse Split.
Initially, the rights are deemed to be attached to certificates
representing all outstanding shares of Common Stock, and they are not
represented by separate rights certificates. Subject to certain exceptions
specified in the Rights Plan, the rights will separate from the Common Stock and
become exercisable upon the earlier to occur 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
F-19
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
more of the outstanding Common Stock or (ii) 10 business days following the
commencement of a tender offer for the Common Stock.
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 of the Company determine to be fair and otherwise in the best
interests of the Company and its stockholders (after receiving advice from one
or more investment banking firms), 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 (i.e., $150 per Unit).
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. As of December 31, 2001 and 2000, no rights have
become exercisable under this plan.
On May 4, 2000, the Company amended the Rights Plan to provide that the
meaning of the term "Acquiring Person" shall not include Basil P. Regan and
Regan Partners, L.P. (collectively, "Regan Fund Management"), so long as Regan
Fund Management does not become the beneficial owner of 20% or more of the
outstanding shares of Common Stock. Effective March 6, 2002, the Company amended
the Rights Plan to rescind the May 4, 2000 amendment, thereby making Regan Fund
Management subject to the 15% beneficial ownership threshold described above.
14. 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 option plans was approximately 1.6 million at
December 31, 2001.
The Company also has a Non-Qualified 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 10,000 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 10,000 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 future 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, 2001, the Company had 108,543 options available for future grant under this
plan.
The Company had a Senior Executive Non-Qualified Stock Option Plan that
permitted certain of the Company's former executive officers to purchase shares
of the Company's Common Stock. All options under this plan expired January 16,
2001.
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.
F-20
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, in connection with the settlement of a putative class action
lawsuit, the Company issued warrants to purchase 1,769,841 shares of Common
Stock. There are currently warrants outstanding to purchase 1,769,798 shares of
Common Stock resulting from this settlement. These warrants are currently
exercisable at an exercise price of $36.00 per share and will expire in 2003.
The Company has reserved 2.1 million shares for future issuance for the
warrants outstanding and the purchase price adjustment associated with the KHS
acquisition.
Activity related to all stock option plans is summarized as follows (shares
in thousands):
<Table>
<Caption>
2001 2000 1999
-------------------------- -------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ---------------- ------ ----------------
Options outstanding as
of January 1........ 4,449 $10.65 3,120 $16.00 3,705 $16.62
Granted............... 4,250 6.77 2,660 6.19 401 10.15
Exercised............. (62) 4.80 (48) 7.95 (53) 4.03
Canceled.............. (1,703) 11.73 (1,283) 13.64 (933) 16.65
------- ------- ------
Options outstanding as
of December 31...... 6,934 $ 8.07 4,449 $10.90 3,120 $16.00
======= ======= ======
Options exercisable as
of December 31...... 1,831 $12.00 1,685 $16.66 1,592 $17.23
======= ======= ======
Weighted-average fair
value of options
granted during the
year................ $ 3.10 $ 4.06 $ 6.31
======= ======= ======
</Table>
The following table summarizes information about stock options outstanding
and excercisable at December 31, 2001 (shares in thousands):
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE
- ------------------------ -------------- ----------- --------- -------------- ---------
$0.66 to $6.00............. 1,942 9.88 $5.12 268 $3.65
$6.02 to $13.05............ 4,160 9.76 7.47 757 8.59
$16.125 to $22.3125........ 771 6.02 16.82 745 16.84
$26.10 to $29.343.......... 49 6.88 28.80 49 28.80
$30.00 to $135.00.......... 12 5.07 45.97 12 46.37
----- -----
$0.66 to $135.00........... 6,934 9.35 8.07 1,831 12.00
===== =====
</Table>
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
F-21
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<Table>
<Caption>
2001 2000 1999
----- ----- -----
Expected life (years)....................................... 4.8 4.0 4.5
Risk-free interest rate..................................... 3.85% 6.23% 5.78%
Dividend rate............................................... 0.00% 0.00% 0.00%
Expected volatility......................................... 64.96% 80.88% 76.22%
</Table>
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:
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss:
As reported........................................ $ (6,338) $(48,202) $(33,702)
Pro forma -- for SFAS No. 123...................... $(11,339) $(53,020) $(38,840)
Basic net loss per share:
As reported........................................ $ (0.21) $ (1.62) $ (1.20)
Pro forma -- for SFAS No. 123...................... $ (0.38) $ (1.78) $ (1.38)
</Table>
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.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
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 as well as the Credit Facility entered into on April 6,
2001, contain restrictions on the Company's ability to declare or pay cash
dividends on its Common Stock.
F-22
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<Table>
<Caption>
2001 2000 1999
----- ------- -------
(IN THOUSANDS)
Current:
Federal................................................. $ -- $ -- $ --
State................................................... 607 (695) (1,165)
Deferred:
Federal................................................. (823) (9,062) (5,806)
State................................................... (113) (1,243) (797)
Valuation allowance....................................... 936 10,305 6,603
----- ------- -------
Total income tax expense (benefit)........................ 607 (695) (1,165)
Income tax benefit on discontinued operations............. -- -- 555
----- ------- -------
Income tax expense (benefit) on continuing operations..... $ 607 $ (695) $ (610)
===== ======= =======
</Table>
A reconciliation between the amount determined by applying the federal
statutory rate to loss before income taxes and income tax expense (benefit) is
as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- --------
(IN THOUSANDS)
Income tax benefit at federal statutory rate........... $(1,136) $(9,453) $(11,582)
State taxes, net of federal benefit.................... 494 (1,296) (1,588)
Nondeductible goodwill amortization.................... 208 195 --
Nondeductible litigation settlement.................... -- -- 6,749
Valuation allowance.................................... 936 10,305 6,603
Other.................................................. 105 (446) (792)
------- ------- --------
$ 607 $ (695) $ (610)
======= ======= ========
</Table>
F-23
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001 and 2000
are as follows:
<Table>
<Caption>
2001 2000
--------- ---------
(IN THOUSANDS)
CURRENT:
Accounts receivable, unbilled............................... $ (523) $ (943)
Acquisition accruals........................................ 2,364 155
Accrued expenses............................................ 28,096 26,684
Valuation allowance......................................... (25,150) (23,686)
Other....................................................... (4,787) (2,210)
--------- ---------
$ -- $ --
========= =========
NONCURRENT:
Net operating loss carryforwards............................ $ 159,850 $ 153,742
Valuation allowance......................................... (221,054) (223,454)
Depreciation and amortization............................... 59,191 67,699
Other....................................................... 2,013 2,013
--------- ---------
$ -- $ --
========= =========
</Table>
At December 31, 2001, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $386.4 million,
which consist of $323.5 million of consolidated NOLs and $62.9 million of
separate return limitation year NOLs. The NOLs will expire at various dates
between 2002 and 2020 as follows:
<Table>
<Caption>
AMOUNTS
EXPIRING
-------------
(IN MILLIONS)
between 2002 and 2005....................................... $ 20.7
between 2006 and 2009....................................... 54.4
between 2010 and 2013....................................... 191.4
between 2014 and 2020....................................... 119.9
------
$386.4
======
</Table>
As of December 31, 2001, the Company has a net deferred tax asset of $246.2
million, which is offset by a valuation allowance of $246.2 million. Realization
of the net 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 net deferred tax asset, the Company will adjust this valuation
reserve accordingly.
16. 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 $1.6 million, $1.7 million and $1.8 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
F-24
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintained a noncontributory money purchase pension plan that
covered substantially all employees who were retained by the Company primarily
to service specific physician clients. Effective as of the close of business on
December 31, 2000, the Company's noncontributory money purchase pension plan was
terminated. The Company's contributions to the plan were $37,000 and $0.3
million for the years ended December 31, 2000 and 1999, 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.
17. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities are as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Additions to capital lease obligations................ $ 165 $ -- $ --
Liabilities assumed in acquisitions................... 311 7,672 --
Common Stock issued upon funding of litigation
settlements........................................ -- -- 30,266
Common Stock issued in acquisition.................... 35 2,000 --
Issuance of promissory note........................... -- -- 2,100
Issuance of stock warrants............................ -- -- 1,495
Cash paid for:
Interest.............................................. 16,731 16,987 16,956
Income taxes.......................................... 189 1,017 946
</Table>
18. SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its
three operating divisions: Physician Services, Application Software and e-Health
Solutions.
Physician Services provides business management outsourcing services to the
hospital-affiliated physician practice market, physicians in academic settings
and other large physician practices. Services include clinical data collection,
data input, medical coding, billing, contract management, cash collections and
accounts receivable management. These services are designed to assist healthcare
providers with the business management functions associated with the delivery of
healthcare services, allowing physicians to focus on providing quality patient
care. These services also assist physicians in improving cash flows and reducing
administrative costs and burdens.
The Application Software segment provides enterprise-wide financial,
clinical and administrative software to acute care healthcare organizations,
including patient financial management software, clinical information software
and patient and staff scheduling systems. These applications enable healthcare
organizations to simultaneously optimize the quality of care delivered and the
profitability of business operations.
The e-Health Solutions segment provides healthcare providers and payers
with connectivity and business intelligence solutions that help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice
F-25
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management software as an Application Service Provider ("ASP") to physician
practices and managed care solutions to payers in ASP, turnkey or outsourced
formats.
The Company evaluates each segment's performance based on segment operating
margin. The e-Health Solutions segment revenue includes intersegment revenues
for services provided to the Physician Services segment, which are shown in
Eliminations to reconcile to total consolidated revenue. Information concerning
the operations in these reportable segments is as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Revenue:
Physician Services................................. $223,875 $225,102 $240,200
Application Software............................... 58,840 60,635 62,145
e-Health Solutions................................. 57,910 35,276 31,343
Eliminations....................................... (11,748) (11,005) (11,559)
-------- -------- --------
$328,877 $310,008 $322,129
======== ======== ========
Segment operating expenses(1):
Physician Services................................. $211,405 $220,835 $245,741
Application Software............................... 53,367 57,776 63,216
e-Health Solutions................................. 52,682 31,875 31,533
Corporate.......................................... 11,614 14,522 17,671
Eliminations....................................... (11,748) (11,005) (11,559)
-------- -------- --------
$317,320 $314,003 $346,602
======== ======== ========
Segment operating margin(1):
Physician Services................................. $ 12,470 $ 4,267 $ (5,541)
Application Software............................... 5,473 2,859 (1,071)
e-Health Solutions................................. 5,228 3,401 (190)
Corporate.......................................... (11,614) (14,522) (17,671)
-------- -------- --------
$ 11,557 $ (3,995) $(24,473)
======== ======== ========
Interest expense, net................................ $ 17,159 $ 14,525 $ 16,102
======== ======== ========
Non-recurring, restructuring and other expenses
(including goodwill and client lists impairment,
process improvement project expenses and litigation
settlements):
Physician Services................................. $ 3,406 $ 1,793 $ 2,086
Application Software............................... -- (273) (336)
e-Health Solutions................................. -- 1,820 --
Corporate.......................................... 611 690 23,061
-------- -------- --------
$ 4,017 $ 4,030 $ 24,811
======== ======== ========
</Table>
F-26
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Loss before income taxes............................. $ (9,619) $(22,550) $(65,386)
======== ======== ========
Depreciation and amortization:
Physician Services................................. $ 11,246 $ 12,988 $ 15,674
Application Software............................... 7,210 7,295 6,793
e-Health Solutions................................. 6,071 2,716 2,429
Corporate.......................................... 1,119 2,688 4,574
-------- -------- --------
$ 25,646 $ 25,687 $ 29,470
======== ======== ========
Capital expenditures:
Physician Services................................. $ 2,055 $ 11,377 $ 7,422
Application Software............................... 407 2,996 1,242
e-Health Solutions................................. 1,958 2,987 882
Corporate.......................................... 416 1,441 872
-------- -------- --------
$ 4,836 $ 18,801 $ 10,418
======== ======== ========
</Table>
<Table>
<Caption>
2001 2000
-------- --------
(IN THOUSANDS)
Identifiable Assets:(2)
Physician Services........................................ $ 55,812 $ 70,241
Application Software...................................... 33,172 54,488
e-Health Solutions........................................ 65,713 44,033
Corporate................................................. 48,194 45,364
-------- --------
$202,891 $214,126
======== ========
</Table>
- ---------------
(1) Excludes net interest expense, Physician Services process improvement
project, litigation settlements, non-recurring, restructuring and other
expenses, and income taxes.
(2) Assets related to KHS of $9.1 million which were reflected in Application
Software in 2000, have been shown in the e-Health Solutions division in
2001.
F-27
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001(1)
Revenue......................................... $ 79,978 $83,233 $81,885 $83,781
(Loss) income from continuing operations........ (6,187) (3,297) (1,795) 1,053
Discontinued operations, net of tax............. (31) 2,942 1 976
Net (loss) income............................... (6,218) (355) (1,794) 2,029
Basic (loss) income per common share from
continuing operations......................... (0.21) (0.11) (0.06) 0.04
Discontinued operations, net of tax, per
common share............................... -- 0.10 -- 0.03
Net (loss) income per common share............ (0.21) (0.01) (0.06) 0.07
Basic weighted average shares outstanding..... 29,902 29,904 29,914 29,939
Diluted income per common share from continuing
operations.................................... (0.21) (0.11) (0.06) 0.03
Discontinued operations, net of tax, per
common share............................... -- 0.10 -- 0.03
Net income per share.......................... (0.21) (0.01) (0.06) 0.06
Diluted weighted average shares outstanding... 29,902 29,904 29,914 31,435
2000(2)
Revenue......................................... $ 78,829 $78,879 $75,381 $76,919
Loss from continuing operations................. (6,829) (1,821) (3,569) (9,636)
Discontinued operations, net of tax............. 1,654 9,241 (351) 793
(Loss) income before extraordinary item and
cumulative effect of accounting change........ (5,175) 7,420 (3,920) (8,843)
Cumulative effect of accounting change, net of
tax........................................... (37,684) -- -- --
Net (loss) income............................... (42,859) 7,420 (3,920) (8,843)
Basic and diluted loss per common share from
continuing operations......................... (0.23) (0.06) (0.12) (0.33)
Discontinued operations, net of tax, per common
share......................................... 0.06 0.31 (0.01) 0.03
(Loss) income before extraordinary item and
cumulative effect of accounting change per
common share.................................. (0.17) 0.25 (0.13) (0.30)
Cumulative effect of accounting change, net of
tax, per common share......................... (1.27) -- -- --
Basic and diluted net (loss) income per common
share......................................... (1.44) 0.25 (0.13) (0.30)
Weighted average shares outstanding........... 29,757 29,868 29,882 29,902
</Table>
- ---------------
(1) The quarterly periods ended March 31, 2001, June 30, 2001 and September 30,
2001 also included the impact of $1.6 million, $1.2 million and $1.2
million, respectively, of process improvement project and other
non-recurring expenses that are not shown in the above table.
(2) The quarterly period ended December 31, 2000 also included the impact of
$0.5 million of Physician Services' process improvement project, $1.1
million of litigation settlements and $2.4 million of non-recurring,
restructuring and other expenses that are not shown in the above table.
F-28
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SUBSEQUENT EVENTS
In February 2002, the Company settled claims for breach of contract arising
out of a 1997 contract for emergency room billing services to be provided by the
Emergency Medicine division to a former client. The Company and its insurance
carrier each paid the plaintiff $2.0 million in cash in exchange for a release
of all claims asserted against the Company. The Company expects reimbursement of
the $2.0 million by its insurance carrier during 2002.
F-29
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Per-Se
Technologies, Inc. as of December 31, 2001 and for the year then ended and have
issued our report thereon dated February 4, 2002 (included elsewhere in this
Annual Report on Form 10-K). Our audit also included the financial statement
schedule as of December 31, 2001 and for the year then ended listed in Item
14(a) of this Annual Report on Form 10-K. This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 4, 2002
F-30
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 5, 2001 appearing in the 2001 Annual Report to
Shareholders of Per-Se Technologies, Inc. (which report and consolidated
financial statements are incorporated by reference in this 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.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 5, 2001
F-31
PER-SE TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
ADDITIONS
---------------------
CHARGED
BALANCE AT CHARGED TO TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ---------- -------- ---------- -----------
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts......... $ 11,973 $ 1,995 -- $ (7,479) $ 6,489
Valuation allowance for deferred
taxes................................ 247,140 -- (936) 246,204
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts......... $ 14,501 $ 4,651 -- $ (7,179) $ 11,973
Valuation allowance for deferred
taxes................................ 236,835 10,305 -- 247,140
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
</Table>
F-32