- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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
incorporation or organization) Identification No.)
2840 MT. WILKINSON PARKWAY 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)
</Table>
(770) 444-5300
Registrant's telephone number, including area code:
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<Table>
<Caption>
TITLE OF CLASS SHARES OUTSTANDING AT AUGUST 9, 2002
-------------- ------------------------------------
Common Stock $0.01 Par Value 30,083,527 shares
Non-voting Common Stock $0.01 Par Value 0 Shares
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER-SE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 2002
<Table>
<Caption>
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and December
31, 2001.................................................... 2
Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001......................... 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001................................ 4
Notes to Consolidated Financial Statements.................. 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
PART II: OTHER INFORMATION
Item 1: Legal Proceedings........................................... 23
Item 4: Submission of Matters to a Vote of Security Holders......... 23
Item 6: Exhibits and Reports on Form 8-K............................ 23
</Table>
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 27,914 $ 36,493
Restricted cash........................................... 4,711 4,419
--------- ---------
Total cash........................................ 32,625 40,912
Accounts receivable, billed (less allowances of $4,091 and
$5,144, respectively).................................. 52,465 45,719
Accounts receivable, unbilled (less allowances of $955 and
$1,345, respectively).................................. 7,395 4,150
Other..................................................... 7,955 5,000
--------- ---------
Total current assets.............................. 100,440 95,781
Property and equipment, net................................. 23,484 25,012
Other intangible assets..................................... 37,596 42,108
Goodwill.................................................... 37,457 35,160
Other....................................................... 4,295 4,830
--------- ---------
$ 203,272 $ 202,891
========= =========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 5,665 $ 6,085
Accrued compensation...................................... 20,102 23,884
Accrued expenses.......................................... 23,869 21,705
--------- ---------
49,636 51,674
Deferred revenue.......................................... 19,400 19,800
--------- ---------
Total current liabilities......................... 69,036 71,474
Long-term debt.............................................. 175,000 175,091
Other obligations........................................... 5,479 6,456
--------- ---------
Total liabilities................................. 249,515 253,021
--------- ---------
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
30,072 and 29,969 issued and outstanding as of June 30,
2002, and December 31, 2001, respectively.............. 301 300
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 775,590 774,983
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (823,629) (826,908)
--------- ---------
Total stockholders' deficit....................... (46,243) (50,130)
--------- ---------
$ 203,272 $ 202,891
========= =========
</Table>
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenue.............................................. $88,888 $83,483 $174,324 $163,779
------- ------- -------- --------
Salaries and wages................................... 51,613 50,612 101,340 100,652
Other operating expenses............................. 24,541 23,956 48,321 48,176
Depreciation......................................... 3,005 3,308 5,974 6,557
Amortization......................................... 2,972 3,192 5,819 6,369
Interest expense, net................................ 4,501 4,342 8,962 8,357
Process improvement project expenses................. -- 1,211 -- 2,176
Non-recurring and other expenses..................... -- (18) -- 623
------- ------- -------- --------
Total expenses............................. 86,632 86,603 170,416 172,910
------- ------- -------- --------
Income (loss) before income taxes.................... 2,256 (3,120) 3,908 (9,131)
Income tax expense................................... 234 177 486 353
------- ------- -------- --------
Income (loss) from continuing operations............. 2,022 (3,297) 3,422 (9,484)
------- ------- -------- --------
Income (loss) from discontinued operations, net of
tax................................................ -- 2,942 (101) 2,911
------- ------- -------- --------
Net income (loss).......................... $ 2,022 $ (355) $ 3,321 $ (6,573)
======= ======= ======== ========
Basic net income (loss) per common share:
Income (loss) from continuing operations........... $ 0.07 $ (0.11) $ 0.11 $ (0.32)
Income from discontinued operations, net of tax.... -- 0.10 -- 0.10
------- ------- -------- --------
Net income (loss).......................... $ 0.07 $ (0.01) $ 0.11 $ (0.22)
======= ======= ======== ========
Weighted average shares used in computing basic
earnings per share................................. 30,049 29,904 30,020 29,903
======= ======= ======== ========
Diluted net income (loss) per common share:
Income (loss) from continuing operations........... $ 0.06 $ (0.11) $ 0.11 $ (0.32)
Income from discontinued operations, net of tax.... -- 0.10 -- 0.10
------- ------- -------- --------
Net income (loss).......................... $ 0.06 $ (0.01) $ 0.11 $ (0.22)
======= ======= ======== ========
Weighted average shares used in computing diluted
earnings per share................................. 32,491 29,904 32,509 29,903
======= ======= ======== ========
</Table>
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 3,321 $ (6,573)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 11,793 12,926
(Loss) income from discontinued operations................ 101 (2,911)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ 13 (1,382)
Accounts receivable, billed............................ (6,271) 3,689
Accounts receivable, unbilled.......................... (3,245) 245
Accounts payable....................................... (420) (5,009)
Accrued compensation................................... (3,308) 1,087
Accrued expenses....................................... 1,542 (1,718)
Accrued litigation settlements......................... -- (1,602)
Deferred revenue....................................... 32 1,487
Other, net............................................. (2,998) 252
------- --------
Net cash provided by continuing operations........... 560 491
Net cash (used for) provided by discontinued
operations.......................................... (101) 2,942
------- --------
Net cash provided by operating activities............ 459 3,433
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,547) (1,521)
Software development costs.................................. (3,505) (3,099)
Proceeds from sale of property and equipment................ 45 1,523
Acquisitions, net of cash acquired.......................... (1,603) (10,780)
Other....................................................... -- (31)
------- --------
Net cash used for investing activities............... (9,610) (13,908)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options................. 607 --
Payments of debt............................................ (35) (38)
Deferred financing costs.................................... -- (228)
------- --------
Net cash provided by (used for) by financing
activities.......................................... 572 (266)
------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (8,579) (10,741)
Balance at beginning of period.............................. 36,493 30,970
------- --------
Balance at end of period.................................... $27,914 $ 20,229
======= ========
</Table>
See notes to consolidated financial statements.
4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Per-Se Technologies, Inc. (the "Company") are presented in accordance with the
requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 2001, included in the Company's Annual Report on Form 10-K filed
March 27, 2002, with the Securities and Exchange Commission.
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Activity related to the Medaphis Services Corporation ("Hospital Services")
and Impact Innovations Group ("Impact") businesses, which were sold in 1998 and
1999, respectively, has been presented as discontinued operations for all
periods presented.
NOTE 2 -- EARNINGS (LOSS) PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
from common shares issuable through stock options and warrants. The following
sets forth the computation of basic and diluted earnings (loss) per share for
the three-month and six-month periods ended June 30, 2002 and 2001 (in
thousands, except per share data):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2002 2001 2002 2001
-------- -------- ------- --------
Net income (loss)........................... $ 2,022 $ (355) $ 3,321 $ (6,573)
======= ======= ======= ========
Common shares outstanding:
Weighted average shares used in computing
basic earnings per share............... 30,049 29,904 30,020 29,903
Effect of potentially dilutive stock
options................................ 2,442 --(1) 2,489 --(1)
------- ------- ------- --------
Weighted average shares used in computing
diluted earnings per share............. 32,491 29,904 32,509 29,903
======= ======= ======= ========
Earnings (loss) per common share:
Basic..................................... $ 0.07 $ (0.01) $ 0.11 $ (0.22)
======= ======= ======= ========
Diluted................................... $ 0.06 $ (0.01) $ 0.11 $ (0.22)
======= ======= ======= ========
</Table>
- ---------------
(1) The Company has excluded all stock options and warrants from the diluted
loss per common share because all such securities are antidilutive for 2001.
Options and warrants to purchase 2.9 million shares of common stock
outstanding during the three and six months ended June 30, 2002, respectively,
were excluded from the computation of diluted earnings per
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
share because the options' and warrants' exercise prices were greater than the
average market price of the common shares, and therefore, the effect would have
been antidilutive.
Options and warrants to purchase 2.5 million and 2.1 million shares of
common stock outstanding during the three and six months ended June 30, 2001,
respectively, were excluded from the computation of diluted earnings per share
due to their antidilutive effect as a result of the Company's loss from
continuing operations for the period.
NOTE 3 -- RESTRICTED CASH
At June 30, 2002, restricted cash principally represented restrictions on
the Company's cash as security for letters of credit.
NOTE 4 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires goodwill and
indefinite lived intangible assets to be reviewed periodically for impairment
and no longer amortized. The Company adopted SFAS No. 142 on January 1, 2002.
SFAS No. 142 required companies with goodwill and indefinite lived intangible
assets to complete an impairment test by June 30, 2002. The Company completed
the impairment test of its goodwill and other indefinite lived intangible assets
by June 30, 2002.
The Company did not identify an asset impairment as a result of the
impairment test. The Company will continue to review its goodwill and other
indefinite lived intangible assets annually for impairment.
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill and indefinite lived intangible assets effective January 1, 2002.
For the three months and six months ended June 30, 2002, the Company had a
reduction in amortization expense of approximately $0.4 million and $0.9
million, respectively, related to the adoption of SFAS No. 142. For the three
months and six months ended June 30, 2001, a reconciliation has been provided of
previously reported net loss and net loss per share amounts. These amounts
exclude the amortization expense recognized related to goodwill and intangible
assets that are no longer amortized (in thousands, except per share data):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2002 2001 2002 2001
------- ------- ------ -------
Reported net income (loss)....................... $2,022 $ (355) $3,321 $(6,573)
Add back:
Goodwill amortization, net of tax.............. -- 604 -- 1,177
Trademark amortization, net of tax............. -- 16 -- 30
Workforce amortization, net of tax............. -- 12 -- 23
------ ------ ------ -------
Adjusted net income (loss)....................... $2,022 $ 277 $3,321 $(5,343)
====== ====== ====== =======
Basic earnings (loss) per share:
Reported net income (loss)....................... $ 0.07 $(0.01) $ 0.11 $ (0.22)
Goodwill amortization, net of tax.............. -- 0.02 -- 0.04
Trademark amortization, net of tax............. -- -- -- --
Workforce amortization, net of tax............. -- -- -- --
------ ------ ------ -------
Adjusted net income (loss)....................... $ 0.07 $ 0.01 $ 0.11 $ (0.18)
====== ====== ====== =======
</Table>
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2002 2001 2002 2001
------- ------- ------ -------
Diluted earnings (loss) per share:
Reported net income (loss)....................... $ 0.06 $(0.01) $ 0.11 $ (0.22)
Goodwill amortization, net of tax.............. -- 0.02 -- 0.04
Trademark amortization, net of tax............. -- -- -- --
Workforce amortization, net of tax............. -- -- -- --
------ ------ ------ -------
Adjusted net income (loss)....................... $ 0.06 $ 0.01 $ 0.11 $ (0.18)
====== ====== ====== =======
</Table>
In December 2001, the FASB's Emerging Issues Task Force ("EITF") issued
EITF 01-14, Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred ("EITF 01-14"). The Company adopted EITF 01-14
on January 1, 2002. EITF 01-14 requires companies that provide services as part
of their central ongoing operations to characterize the reimbursement of out-of-
pocket expenses related to those services as revenue. In prior year periods,
reimbursed out-of-pocket expenses were recorded as a reduction to other
operating expenses. In accordance with EITF 01-14, the Company reclassified $0.3
million and $0.6 million of reimbursed out-of-pocket expenses in the Application
Software division for the three months and six months ended June 30, 2001,
respectively, from other operating expenses to revenue.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144 supersedes SFAS
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. There has been no asset impairment as a result of adoption.
NOTE 5 -- 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 provided 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. As of December 31, 2001, the
Company had recorded the purchase price adjustment of $1.5 million. During the
first quarter of 2002, VIS met the financial targets in the purchase agreement.
On May 10, 2002, the payment for the purchase price adjustment of $1.5 million
was paid. VIS's core product, Virtual Processing Systems, is an automated
remittance processing solution for hospitals, which ensures accurate and
efficient processing of cash collections and payment of denial management codes.
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,
which gives healthcare and payer organizations the ability to perform secure,
realtime benefits inquiries against patients' insurance plans, ensuring
eligibility at the point of care.
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Both the VIS and OfficeMed acquisitions were 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 $5.0 million of the combined
purchase price was allocated to goodwill and other indefinite-lived assets that
are not being amortized. Approximately $5.2 million of the combined purchase
price was allocated to finite-lived assets with lives ranging from 5 to 10
years. The additional $1.5 million VIS purchase price adjustment was allocated
to goodwill and is not being amortized. The operating results of VIS and
OfficeMed are included in the Company's Consolidated Statements of Operations
from the date of acquisition in the e-Health Solutions division.
NOTE 6 -- 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 to seek alternatives for the remaining non-core business segments:
Hospital Services and Impact. On November 30, 1998, the Company completed the
sale of Hospital Services. In 1999, the Company completed the sale of both
divisions of Impact.
In January of 1998, SCI Management Corporation ("SCI") filed a complaint
against the commercial division of Impact. The Company paid a total of $5.3
million in settlement of the complaint. The Company paid $3.2 million to SCI in
November 1999 and issued a promissory note for the remaining balance of $2.1
million bearing interest at 8.25%, which was paid in October 2000. In May of
2001, the Company received an insurance settlement related to the SCI matter of
approximately $3.0 million. The Company continues to pursue claims against a
former vendor of this division for damages incurred in the SCI matter.
During the six months ended June 30, 2002, and June 30, 2001, the Company
incurred expenses, primarily legal costs, associated with these discontinued
business segments. Pursuant to Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, the consolidated financial statements of the Company
have been presented to reflect the activity associated with Hospital Services
and Impact as discontinued operations for all periods presented.
NOTE 7 -- LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
in the ordinary course of its business. Within the Company's industry, federal
and state civil and criminal laws govern medical billing and collection
activities. These laws provide for various fines, penalties, damages,
assessments and sanctions for violations, including possible exclusion from
federal and state healthcare programs.
In February 2002, the Company settled claims for alleged breach of contract
arising out of a 1997 contract for billing services provided by the Physician
Services division to a former client. The Company and its insurance carrier,
certain underwriters at Lloyd's of London (collectively "Lloyd's"), each paid
the plaintiff $2.0 million in cash in exchange for a release of all claims
asserted against the Company. Under the terms of its insurance policy with
Lloyd's, the Company is seeking reimbursement from Lloyd's for the $2.0 million
it paid in this settlement.
On May 30, 2002, the Company received a letter on behalf of Lloyd's
purporting to rescind various managed healthcare professional liability, or
errors and omissions ("E&O"), insurance policies and directors and officers and
company reimbursement ("D&O") insurance policies (collectively the "policies")
issued to the Company by Lloyd's. The E&O policies were for the term of December
31, 1998, through June 30, 2002, and the D&O policies were for the term of July
1, 2000, through June 30, 2002. The purported rescission was based on
allegations that the Company had failed to advise Lloyd's about the existence of
several lawsuits that
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
were alleged to be related to the risk covered under the policies, including the
lawsuit settled in February 2002 in which the Company and Lloyd's each paid the
plaintiff $2 million.
On May 31, 2002, Lloyd's filed a lawsuit against the Company seeking
rescission of the E&O and D&O policies based on the allegations in their letter
or a declaration that coverage is unavailable for the claim related to the
February 2002 settlement under the policies issued by Lloyd's, and restitution
of the $2.0 million paid by Lloyd's on behalf of the Company in that settlement.
This lawsuit is pending in the Circuit Court for Kent County, Michigan.
On June 5, 2002, the Company filed a lawsuit against Lloyd's seeking
damages for breach of contract and breach of obligations of good faith and fair
dealing, including punitive damages. The Company also seeks a declaratory
judgment to enforce the E&O and D&O policies according to their terms. This
lawsuit is pending in the Superior Court of the State of California for the
County of Los Angeles.
The Company believes that Lloyd's attempt to rescind the policies is
without merit, and the Company is prosecuting the matter vigorously and
asserting all appropriate claims against Lloyd's.
The Company's insurance coverage was due to be renewed as of June 30, 2002,
and the Company was in the process of actively pursuing new coverage with
insurance carriers, including Lloyd's, when the rescission notice was received
from Lloyd's. Due to the attempted rescission, the Company expedited its
insurance proposal process and in mid-June 2002 the Company secured new
insurance coverage. The Company believes it experienced a significant increase
in insurance premiums with its new policies as a result of Lloyd's actions. The
Company is also seeking reimbursement for a portion of the increased premium
costs and increased deductibles in its lawsuit against Lloyd's. Until the
litigation with Lloyd's is resolved, the Company will expense the increased
insurance premiums and deductibles in the Company's Consolidated Statements of
Operations.
The Company estimates insurance premium increases related to new insurance
coverage and the cost of pursuing litigation against Lloyd's to be approximately
$3 million for the year 2002, the majority of which will be incurred in the
second half of the year. At June 30, 2002, the Company had incurred
approximately $0.5 million of these costs and, accordingly, these costs have
been reflected in the Company's Consolidated Statements of Operations for the
three and six months ended June 30, 2002.
The Company has not received any D&O insurance claims since 1996. The
Company did receive E&O insurance claims during the term of the Lloyd's E&O
insurance policies in the ordinary course of business. Over the last five years,
the majority of E&O claims received by the Company were resolved with no or
nominal settlement.
Pending the outcome of the litigation with Lloyd's, the Company will
continue to vigorously defend, and will be required to fund the legal costs and
any litigation settlements covered by the Lloyd's E&O policies. The Company
expects to recover these costs from Lloyd's in accordance with the obligations
of Lloyd's under the E&O policies and, as such, has recorded and will record the
amounts as non-trade accounts receivable.
At June 30, 2002, the Company's Other Current Assets include non-trade
accounts receivable of $3.1 million related to legal costs and the interim
funding of legal settlements incurred by the Company in excess of the Lloyd's
E&O policies' deductible that are expected to be recovered from Lloyd's. This
amount includes $2.0 million paid to the former client in settlement and $1.1
million related to the interim funding of legal expenses.
The Company believes that it has meritorious defenses to the Lloyd's claims
and that a favorable outcome is probable in the Company's claims against
Lloyd's. The Company's insurance is on a "claims-made" basis, which means
insurance coverage is in place based on the date the claim is made, not the
date(s) the services were provided or products sold. In the event that the
Company is unsuccessful in the litigation with Lloyd's, certain claims presently
pending against the Company would not be covered by the Company's
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
new E&O insurance. Regardless of the outcome of the litigation with Lloyd's, the
Company's new insurance coverage will not be affected. Although the Company
believes it will be successful in its litigation with Lloyd's, if it is not and
uninsured claims do exist, such claims could have a material adverse effect on
the Company's financial condition and results of operations.
The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters. There can be no assurance that
pending or future claims, government investigations or other 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.
NOTE 8 -- PROCESS IMPROVEMENT PROJECT
The Company is currently implementing 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 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 first phase of the Project during 2001
primarily consisted of professional fees paid to outside consultants retained
exclusively for implementation of the Project.
The Company incurred approximately $1.2 million and $2.2 million of expense
in the three months and six months ended June 30, 2001, respectively, during the
first phase of the Project, which involved implementation in twelve processing
centers. The first phase of the Project was completed in the third quarter of
2001 with all external project costs for this phase incurred as of September 30,
2001. The Company began the second phase of the Project in the first quarter of
2002. The second phase is being implemented with internal resources, and
therefore the Company will not incur any external project costs. As of June 30,
2002, the second phase had been implemented in ten of the projected fifteen
offices, with no external project costs. The second phase of the Project is
expected to be completed during 2002.
NOTE 9 -- NON-RECURRING AND OTHER EXPENSES
During the first quarter of 2001, the Company recorded a severance expense
of approximately $0.6 million associated with former executive management.
NOTE 10 -- LONG-TERM DEBT
Under the Indenture governing the $175 million of 9 1/2% Senior Notes due
2005 (the "Notes"), the balance of net proceeds, as defined by the Indenture
governing the Notes, from the sale of any assets having a fair value in excess
of $1.0 million must be invested in the Company's business within 360 days of
receipt of proceeds related to the sale or they become excess proceeds. If the
aggregate of excess proceeds is greater than $10.0 million, the Company is
required to offer to repurchase the Notes at par with such excess proceeds. As
of June 30, 2002, the Company did not have excess proceeds (as defined by the
Indenture governing the Notes) in excess of $10.0 million related to the sale of
non-core operations or other assets.
The Company entered into a $50 million credit facility (the "Credit
Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a borrowing base calculated based on eligible billed accounts
receivable of the Company's Physician Services and e-Health Solutions divisions,
as defined in the Credit Facility. The Company has the option of entering into
LIBOR based loans or index rate loans, each as defined in the Credit Facility.
LIBOR based loans bear interest at LIBOR plus amounts ranging from 1.85% to
2.65% based on the Company's leverage ratio, as defined in the Credit Facility.
Index rate loans bear interest at rates approximating Prime plus amounts ranging
from 0.35% to 1.15% based on the Company's
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
leverage ratio, as defined in the Credit Facility. In addition, the Company pays
a quarterly commitment fee on the unused portion of the Credit Facility of
0.375% per annum.
The Credit Facility contains financial 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 and minimum fixed charge coverage, each as defined
in the Credit Facility. The initial term of the Credit Facility is 42 months
expiring on October 6, 2004. The Company and the lender can mutually agree to
extend this term by 18 months if certain conditions have been met. The Company
intends to use the Credit Facility, as needed, for future investments in its
operations including capital expenditures, acquisitions and other general
corporate purposes. There are no outstanding borrowings under the Credit
Facility as of June 30, 2002.
NOTE 11 -- INCOME TAXES
As of June 30, 2002, the Company had a net deferred tax asset, which was
fully offset by a valuation allowance. Realization of the net deferred tax asset
is dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly, if during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.
NOTE 12 -- SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its
three operating divisions: Physician Services, Application Software and e-Health
Solutions.
The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services 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, including patient financial management
software, clinical information software and patient and staff scheduling
systems, to acute care healthcare organizations. These applications enable
healthcare organizations to simultaneously optimize the quality of care while
improving profitability and the efficiency of their business operations.
The e-Health Solutions division provides healthcare providers and payers
with connectivity and business intelligence solutions that help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice management software as an ASP to physician
practices and offers managed care solutions to payers in ASP, turnkey or
outsourced formats.
The Company evaluates each division's performance based on segment
operating margin. The e-Health Solutions division revenue includes intersegment
revenue for services provided to the Physician Services division, which is shown
in Eliminations to reconcile to total consolidated revenue. Certain prior year
amounts have been reclassified to conform to current year presentation.
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Information concerning the Company's reportable operating segments is as
follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
Physician Services......................... $58,566 $57,311 $115,071 $112,452
Application Software....................... 16,476 14,790 32,484 29,976
e-Health Solutions......................... 17,057 14,141 32,842 26,823
Eliminations............................... (3,211) (2,759) (6,073) (5,472)
------- ------- -------- --------
$88,888 $83,483 $174,324 $163,779
======= ======= ======== ========
Segment operating expenses(1):
Physician Services......................... $53,052 $53,849 $104,974 $108,102
Application Software....................... 14,102 13,663 27,832 27,611
e-Health Solutions......................... 14,726 13,123 28,279 25,833
Corporate.................................. 3,462 3,192 6,442 5,680
Eliminations............................... (3,211) (2,759) (6,073) (5,472)
------- ------- -------- --------
$82,131 $81,068 $161,454 $161,754
======= ======= ======== ========
Segment operating margin(1):
Physician Services......................... $ 5,514 $ 3,462 $ 10,097 $ 4,350
Application Software....................... 2,374 1,127 4,652 2,365
e-Health Solutions......................... 2,331 1,018 4,563 990
Corporate.................................. (3,462) (3,192) (6,442) (5,680)
------- ------- -------- --------
$ 6,757 $ 2,415 $ 12,870 $ 2,025
======= ======= ======== ========
Interest expense, net........................ $(4,501) $(4,342) $ (8,962) $ (8,357)
======= ======= ======== ========
Non-recurring and other expenses (including
process improvement project expenses)
Physician Services......................... $ -- $(1,193) $ -- $ (2,158)
Corporate.................................. -- -- -- (641)
------- ------- -------- --------
$ -- $(1,193) $ -- $ (2,799)
======= ======= ======== ========
Income (loss) before income taxes............ $ 2,256 $(3,120) $ 3,908 $ (9,131)
======= ======= ======== ========
Depreciation and amortization:
Physician Services......................... $ 2,692 $ 2,936 $ 5,392 $ 5,866
Application Software....................... 1,552 1,763 3,188 3,606
e-Health Solutions......................... 1,501 1,521 2,756 2,841
Corporate.................................. 232 280 457 613
------- ------- -------- --------
$ 5,977 $ 6,500 $ 11,793 $ 12,926
======= ======= ======== ========
</Table>
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Capital expenditures:
Physician Services......................... $ 1,010 $ 184 $ 2,084 $ 635
Application Software....................... 469 15 646 180
e-Health Solutions......................... 651 295 1,496 699
Corporate.................................. 122 6 321 7
------- ------- -------- --------
$ 2,252 $ 500 $ 4,547 $ 1,521
======= ======= ======== ========
</Table>
<Table>
<Caption>
AS OF
-----------------------
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(IN THOUSANDS)
Identifiable Assets:
Physician Services........................................ $ 56,119 $ 55,812
Application Software...................................... 38,546 33,172
e-Health Solutions........................................ 66,814 65,713
Corporate................................................. 41,793 48,194
-------- --------
$203,272 $202,891
======== ========
</Table>
- ---------------
(1) Excludes process improvement project, non-recurring and other expenses and
net interest expense.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is a provider of
integrated business management outsourcing services, 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.
The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services focus on the
management of the 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, including patient financial management
software, clinical information software and patient and staff scheduling
systems, to acute care healthcare organizations. These applications enable
healthcare organizations to simultaneously optimize the quality of care while
improving profitability and the efficiency of their business operations.
The e-Health Solutions division provides healthcare providers and payers
with connectivity and business intelligence solutions that help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice management software as an application
service provider ("ASP") to physician practices and 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, including hospital-affiliated physician practices, integrated
healthcare delivery networks ("IDNs"), hospitals and office-based physicians.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002, AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2001
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $58,566 $57,311
Application Software........................................ 16,476 14,790
e-Health Solutions.......................................... 17,057 14,141
Eliminations................................................ (3,211) (2,759)
------- -------
$88,888 $83,483
======= =======
</Table>
Revenue for the Physician Services division increased approximately 2% in
the three months ended June 30, 2002, as compared to the same period in 2001.
The revenue increase is due to growth in the existing client base and new sales.
The Company continued to experience client retention in the mid - 90% range
during the three months ended June 30, 2002. Net backlog at June 30, 2002 was
approximately $1 million, compared to approximately $2 million at March 31,
2002. Net backlog represents the annualized revenue
14
related to new contracts signed with the business still to be implemented, less
the annualized revenue related to existing contracts where discontinuance
notification has been received.
Revenue for the Application Software division increased approximately 11%
for the three months ended June 30, 2002, as compared to the same period in
2001. Revenue in the division is recognized using the percentage-of-completion
method of accounting, and the increase over the prior year period was primarily
the result of implementations of clinical information and patient financial
management software that was sold in 2001. The division ended June 30, 2002,
with a backlog of approximately $41 million as compared to approximately $39
million at March 31, 2002.
Revenue for the e-Health Solutions division increased approximately 21% for
the three months ended June 30, 2002, as compared to the same period in 2001.
Excluding the impact of the April 2001 acquisitions of Virtual Information
Systems, Inc. ("VIS") and Officemed.com LLC ("OfficeMed"), the year-over-year
increase in revenue would have been approximately 19%. The increase in the base
business is due to increased market penetration as well as increased demand for
the division's hospital and physician transaction processing services in the
marketplace. The division ended the second quarter of 2002 with a backlog of
approximately $8 million as compared to approximately $7 million at March 31,
2002.
In December 2001, the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force ("EITF") issued EITF 01-14 Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred ("EITF 01-14"). The Company adopted EITF 01-14 on January 1, 2002. EITF
01-14 requires companies that provide services as part of their central ongoing
operations to characterize the reimbursement of out-of-pocket expenses related
to those services as revenue. In prior year periods, reimbursed out-of-pocket
expenses were recorded as a reduction to other operating expenses. In accordance
with EITF 01-14, the Company reclassified $0.3 million of reimbursed
out-of-pocket expenses in the Application Software division for the three months
ended June 30, 2001, from other operating expenses to revenue.
Segment Operating Margin. Segment operating margin is net income/(loss)
excluding net interest expense, income taxes and discontinued operations, net of
income taxes, for all periods presented. For the three months ended June 30,
2001, segment operating margin also excluded the process improvement project
expenses and non-recurring and other expenses. Segment operating margin,
classified by the Company's divisions, is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 5,514 $ 3,462
Application Software........................................ 2,374 1,127
e-Health Solutions.......................................... 2,331 1,018
Corporate................................................... (3,462) (3,192)
------- -------
$ 6,757 $ 2,415
======= =======
</Table>
Physician Services' segment operating margin increased $2.1 million in the
three months ended June 30, 2002, compared to the same period in 2001. The
increase is due to efficiencies and cost savings realized from the productivity
and other initiatives implemented as well as revenue gains in the division.
Application Software's segment operating margin increased $1.2 million in
the three months ended June 30, 2002, compared to the same period in 2001. The
increase is attributable to the revenue increase previously discussed, as well
as improved leverage on operating expenses that resulted from management's
continued focus on overall cost containment.
e-Health Solutions' segment operating margin increased $1.3 million in the
three months ended June 30, 2002, compared to the same period in 2001. This
increase is the result of an approximately 40% increase in transaction volume,
the impact of the VIS and OfficeMed acquisitions and the decrease in goodwill
15
amortization expense related to the Company's adoption of the FASB Statement of
Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets
("SFAS No. 142") on January 1, 2002 (for more information refer to "Note
4 -- New Accounting Pronouncements" in the Company's Notes to Consolidated
Financial Statements).
The Company's corporate overhead expenses increased $0.3 million in the
three months ended June 30, 2002, compared to the same period in 2001. The
increase is primarily attributable to increased insurance premiums and legal
expenses in the quarter related to Lloyd's attempt to rescind certain insurance
policies (refer to "Note 7 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information).
Interest. Net interest expense was $4.5 million for the three months ended
June 30, 2002, as compared to $4.3 million for the same period in 2001. The
increase is attributable to a reduction in interest income due to a decrease in
investment rates available.
Process Improvement Project. The Company is currently implementing 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 first phase of the Project during 2001 primarily consisted of
professional fees paid to outside consultants retained exclusively for
implementation of the Project.
The Company incurred approximately $1.2 million of expense in the three
months ended June 30, 2001 during the first phase of the Project, which involved
implementation in twelve processing centers. The first phase of the Project was
completed in the third quarter of 2001 with all external project costs for this
phase, amounting to approximately $3.4 million, incurred as of September 30,
2001. The Company began the second phase of the Project in the first quarter of
2002. The second phase is being implemented with internal resources, and
therefore the Company will not incur any external project costs. As of June 30,
2002, the second phase had been implemented in ten of the projected fifteen
offices, with no external project costs.
Non-recurring and Other Expenses. During the first quarter of 2001, the
Company recorded severance expense of approximately $0.6 million associated with
former executive management.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was $0.2 million for the three months ended June 30, 2002,
as compared to income tax expense of $0.2 million for the same period in 2001.
As of June 30, 2002, the Company had a net deferred tax asset, which was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.
SIX MONTHS ENDED JUNE 30, 2002, AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2001
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $115,071 $112,452
Application Software........................................ 32,484 29,976
e-Health Solutions.......................................... 32,842 26,823
Eliminations................................................ (6,073) (5,472)
-------- --------
$174,324 $163,779
======== ========
</Table>
16
Revenue for the Physician Services division increased approximately 2% in
the six months ended June 30, 2002, as compared to the same period in 2001.
There was one less business day in the six months ended June 30, 2002, as
compared to the six months ended June 30, 2001. Revenue per business day for the
six months ended June 30, 2002 increased by approximately 3% over the first six
months of the prior year. The Company continued to experience client retention
in the mid - 90% range during the six months ended June 30, 2002. Net backlog at
June 30, 2002, was approximately $1 million, compared to slightly negative
backlog at June 30, 2001.
Revenue for the Application Software division increased approximately 8%
for the six months ended June 30, 2002, as compared to the same period in 2001.
Revenue in the division is recognized using the percentage-of-completion method
of accounting, and the increase over the prior year period was primarily the
result of implementations of clinical information and patient financial
management software that was sold in 2001. The division ended June 30, 2002 with
a backlog of approximately $41 million as compared to approximately $38 million
at June 30, 2001.
Revenue for the e-Health Solutions division increased approximately 22% for
the six months ended June 30, 2002, as compared to the same period in 2001.
Excluding the impact of the April 2001 acquisitions of VIS and OfficeMed, the
year-over-year increase in revenue would have been approximately 20%. The
increase in the base business is due to demand for the division's hospital and
physician transaction processing services in the marketplace. The division ended
the second quarter of 2002 with a backlog of approximately $8 million as
compared to approximately $7 million at June 30, 2001.
In accordance with EITF 01-14, the Company reclassified $0.6 million of
reimbursed out-of-pocket expenses in the Application Software division for the
six months ended June 30, 2001, from other operating expenses to revenue.
Segment Operating Margin. Segment operating margin is net income/(loss)
excluding net interest expense, income taxes and discontinued operations, net of
income taxes, for all periods presented. For the six months ended June 30, 2001,
segment operating margin also excluded the process improvement project expenses
and non-recurring and other expenses. Segment operating margin, classified by
the Company's divisions, is as follows:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------
2002 2001
------- -------
(IN THOUSANDS)
Physician Services.......................................... $10,097 $ 4,350
Application Software........................................ 4,652 2,365
e-Health Solutions.......................................... 4,563 990
Corporate................................................... (6,442) (5,680)
------- -------
$12,870 $ 2,025
======= =======
</Table>
Physician Services' segment operating margin increased $5.7 million in the
six months ended June 30, 2002, compared to the same period in 2001. The
increase is due to efficiencies and cost savings realized from the productivity
and other initiatives implemented, as well as revenue gains in the division.
Application Software's segment operating margin increased $2.3 million in
the six months ended June 30, 2002, compared to the same period in 2001. The
increase is attributable to the revenue increase previously discussed, as well
as improved leverage on operating expenses that resulted from management's
continued focus on overall cost containment.
e-Health Solutions' segment operating margin increased $3.6 million in the
six months ended June 30, 2002, compared to the same period in 2001. This
increase is the result of approximately 40% increase in transaction volume, the
impact of the VIS and OfficeMed acquisitions and the decrease in goodwill
amortization expense related to the Company's adoption of the SFAS No. 142 (for
more information refer to
17
"Note 4 -- New Accounting Pronouncements" in the Company's Notes to Consolidated
Financial Statements).
The Company's corporate overhead expenses increased in the six months ended
June 30, 2002, compared to the same period in 2001. The increase was primarily
attributable to increased insurance premiums and legal expenses related to
Lloyd's attempt to rescind certain insurance policies (refer to "Note 7 -- Legal
Matters" in the Company's Notes to Consolidated Financial Statements for more
information).
Interest. Net interest expense was $9.0 million for the six months ended
June 30, 2002, as compared to $8.4 million for the same period in 2001. The
increase is attributable to a reduction in interest income due to a decrease in
investment rates available.
Process Improvement Project. The Company incurred approximately $2.2
million of expense in the six months ended June 30, 2001 during the first phase
of the Project, which involved implementation in twelve processing centers. The
first phase of the Project was completed in the third quarter of 2001 with all
external project costs for this phase, amounting to approximately $3.4 million,
incurred as of September 30, 2001. The Company began the second phase of the
Project in the first quarter of 2002. The second phase is being implemented with
internal resources, and therefore the Company will not incur any external
project costs. As of June 30, 2002, the second phase had been implemented in ten
of the projected fifteen offices, with no external project costs.
Non-recurring and Other Expenses. During the first quarter of 2001, the
Company recorded severance expense of approximately $0.6 million associated with
former executive management.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was $0.5 million for the six months ended June 30, 2002, as
compared to income tax expense of $0.4 million for the same period in 2001. As
of June 30, 2002, the Company had a net deferred tax asset, which was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had working capital of $31.4 million
compared to $24.3 million at December 31, 2001. The increase in working capital
is primarily related to the Company's seasonal increase in accounts receivable
days outstanding and the $3.1 million increase in other current assets related
to the Company's litigation with Lloyd's (refer to "Note 7 -- Legal Matters" in
the Company's Notes to Consolidated Financial Statements for more information).
Restricted cash totaled $4.7 million as of June 30, 2002, and $4.4 million as of
December 31, 2001. Restricted cash principally represents restrictions on the
Company's cash as security for letters of credit. Unrestricted cash and cash
equivalents totaled $27.9 million at June 30, 2002, a decrease of $8.6 million
compared to December 31, 2001.
Cash provided by continuing operations was $0.6 million in the six months
ended June 30, 2002, compared to cash provided by continuing operations in the
six months ended June 30, 2001, of $0.5 million.
The Company used $9.6 million in cash for investing activities during the
six months ended June 30, 2002, compared to $13.9 million during the same period
in 2001. The decrease in cash used for investment activities was primarily
related to investments in strategic acquisitions made during the first six
months of 2001 partially offset by an increased level of capital spending in
2002.
Cash provided by financing activities was $0.6 million in the six months
ended June 30, 2002, compared to cash used for financing activities of $0.3
million in the same period in 2001. These amounts were primarily attributable to
proceeds from the exercise of stock options in the six months ended June 30,
2002, compared to deferred financing costs related to the Company initiating a
credit facility in April 2001.
For more information about the Company's long-term debt, refer to "Note
10 -- Long-Term Debt" in the Company's Notes to Consolidated Financial
Statements.
18
The Company is in litigation with certain underwriters at Lloyd's of London
("Lloyd's") following an attempt by Lloyd's to rescind certain of the Company's
insurance policies (refer to "Note 7 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). The Company estimates
insurance premium increases related to new insurance coverage and the cost of
pursuing litigation against Lloyd's to be approximately $3 million for the year
2002, the majority of which will be incurred in the second half of the year. At
June 30, 2002, the Company had incurred approximately $0.5 million of these
costs and, accordingly, these costs have been reflected in the Company's
Consolidated Statements of Operations for the three and six months ended June
30, 2002.
In addition, pending the outcome of the litigation with Lloyd's, the
Company will fund the legal costs and any litigation settlements covered by the
E&O policies. The Company expects to recover these costs from Lloyd's and will
reflect the amounts as a receivable. The Company estimates the negative cash
flow impact of these costs to be in the range of $4 million to $6 million for
the remainder of 2002. The Company believes it will be successful in its
litigation with Lloyd's and, therefore, that it will recover these costs when
the litigation process is complete, which the Company currently estimates to be
in 2003.
The negative impact of these items on the Company's full year cash flow is
projected to be $7 million to $9 million, which consists of approximately $3
million related to insurance premium increases for new insurance coverage and
the cost of pursuing litigation against Lloyd's and approximately $4 million to
$6 million related to the funding of legal costs and any litigation settlements
covered by the E&O policies. As of June 30, 2002, cash flow has been negatively
impacted by approximately $2.6 million, which includes funding of legal costs
and litigation settlements in excess of the policies' deductibles and the cost
of increased insurance premiums.
19
FORWARD-LOOKING STATEMENTS
Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including certain statements
set forth under the captions "Note 7 -- Legal Matters," "Note 8 -- Process
Improvement Project," "Note 10 -- Long-Term Debt," "Note 11 -- Income Taxes,"
"Results of Operations" and "Liquidity and Capital Resources," are
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934, as amended by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include the Company's
expectations with respect to meritorious defenses to the claims and other issues
asserted in pending legal matters, the effect of industry and regulatory changes
on the Company's customer base, the impact of revenue backlog on future revenue,
the impact of operational improvement or cost reduction initiatives, operating
margins, overall profitability and the availability of capital. Although the
Company believes that the statements it has made are based on reasonable
assumptions, they are based on current information and beliefs and, accordingly,
the Company can give no assurance that its expectations will be achieved. In
addition, these statements are subject to factors that could cause actual
results to differ materially from those suggested by the forward-looking
statements. These factors include, but are not limited to, factors identified
below under the caption "Factors That May Affect Future Results of Operations,
Financial Condition or Business." The Company disclaims any responsibility to
update any forward-looking statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
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 and local physician reimbursement organizations, and physician
groups that provide their own business management services. Successful
competition within this industry is dependent on numerous industry and market
conditions. An increase in the number of competitors providing comparable
services could adversely affect the Company's ability to compete within this
industry.
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.
Competition with Electronic Transaction Processing Companies
The business of providing electronic transaction processing services to
physicians and hospitals is also highly competitive. The Company competes with
national and regional electronic transaction processing 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 have adverse consequences,
including but not limited to the following: damage the Company's reputation and
standing in this marketplace; impair its ability to attract new client/server
information technology business; inhibit its ability to collect for services
performed on a project; and inhibit its ability to collect for services to be
performed on a project.
20
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 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 but are not limited to employer initiatives such as
creating group 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
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Federal and state legislatures
have periodically considered programs, such as the Balanced Budget Act, to
reform or amend the U.S. healthcare system at both the federal and state level
and to change healthcare financing and reimbursement systems. These programs may
contain proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare
industry participants operate. Current or future government regulations or
healthcare reform measures may affect 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 Health Insurance Portability and Accountability Act of 1996
("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 extension for healthcare
providers, healthcare clearinghouses and large health plans upon filing a
compliance plan. 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. The implementation
deadlines for the standards of security have not yet been set. One of the most
contentious areas of HIPAA reform is in the area of privacy and security.
21
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 that matures
in February 2005. As a result, the Company has obligations to make semi-annual
interest payments on that debt and to repay the entire principal amount upon
maturity. 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 successfully to resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, its insurance coverage, product liability coverage
or otherwise, may not fully cover any damages assessed against the Company.
Although the Company maintains all insurance coverage in amounts that it
believes is sufficient for its business, 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. In the event that the Company is
unsuccessful in its ongoing litigation with Lloyd's, certain claims presently
pending against the Company would not be covered by insurance (refer to "Note
7 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information). A successful claim brought against the Company, which is
uninsured or under-insured, could materially harm its business, results of
operations or financial condition.
Stock Price Volatility
The trading price of the Company's common stock may be volatile. The market
for the Company's common stock may experience significant price and volume
fluctuations in response to a number of factors, including actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments
and other factors, many of which are beyond the Company's control. Furthermore,
the stock market in general and the market for software, healthcare and high
technology companies in particular, has experienced volatility that often has
been unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of the
Company's common stock, regardless of actual operating performance.
22
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in "Note 7 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 2, 2002. The
following directors were elected at such meeting:
<Table>
<Caption>
NOMINEE BOARD TERM VOTES FOR VOTES WITHHELD
- ------- ------------ ---------- --------------
Stephen A. George, M.D. .................... Through 2002 27,421,393 156,465
David R. Holbrooke, M.D. ................... Through 2002 25,797,573 1,780,285
Craig Macnab................................ Through 2002 25,407,422 170,436
David E. McDowell........................... Through 2002 25,795,826 1,782,032
Philip M. Pead.............................. Through 2002 27,421,082 156,776
John C. Pope................................ Through 2002 25,796,059 1,781,799
C. Christopher Trower....................... Through 2002 25,806,486 1,771,372
</Table>
A proposal to approve the Company's Deferred Stock Unit Plan also was voted
upon at the Annual Meeting of Stockholders and was approved by the stockholders.
Votes cast were 26,670,882 for; 881,551 against; and 25,424 abstained; one share
was unvoted.
A stockholder proposal relating to independent accountants also was voted
upon at the Annual Meeting of Stockholders, and was not approved by the
stockholders. Votes cast were 6,385,292 for; 15,217,835 against; and 168,268
abstained; 5,806,463 shares were unvoted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<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).
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).
</Table>
23
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K")).
3.2 -- Restated By-laws of Registrant (incorporated by reference to
Exhibit 3.2 to the 1999 Form 10-K).
4.1 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on March 3,
1998).
4.2 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998).
4.3 -- Settlement Agreement dated as of June 24, 1999, by and among
Lori T. Caudill, William J. DeZonia, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust, Paulanne H. Thacker Retained Annuity
Trust and Borrower (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.4 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.5 -- First Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of May 4, 2000 (incorporated by
reference to Exhibit 4.4 to Quarterly Report of Form 10-Q
for the quarter ended March 31, 2000).
4.6 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001).
10.1 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies.
10.2 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees.
10.3 -- First Amendment to Registrant's Deferred Stock Unit Plan.
</Table>
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2002.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PER-SE TECHNOLOGIES, INC.
(Registrant)
By: /s/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: August 14, 2002
INDEX TO EXHIBITS
<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).
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 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on March 3,
1998).
4.2 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998).
4.3 -- Settlement Agreement dated as of June 24, 1999, by and among
Lori T. Caudill, William J. DeZonia, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust, Paulanne H. Thacker Retained Annuity
Trust and Borrower (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.4 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
4.5 -- First Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of May 4, 2000 (incorporated by
reference to Exhibit 4.4 to Quarterly Report of Form 10-Q
for the quarter ended March 31, 2000).
4.6 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001).
10.1 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies.
10.2 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees.
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.3 -- First Amendment to Registrant's Deferred Stock Unit Plan.
</Table>