- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 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 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]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 14, 2003 was approximately $188,633,069 calculated
using the closing price on such date of $6.25. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of March 14, 2003, was
30,181,291.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 8, 2003, are incorporated herein by reference in Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER-SE TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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..................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 11
ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 29
ITEM 11. EXECUTIVE COMPENSATION...................................... 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................. 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 29
ITEM 14. CONTROLS AND PROCEDURES..................................... 29
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 29
</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, Internet-enabled
connectivity and application software for the healthcare industry. Per-Se
delivers its services and products through its three operating divisions:
Physician Services, e-Health Solutions and Application Software.
The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services focus on revenue
cycle management and include 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 e-Health Solutions division provides connectivity and revenue cycle
management solutions to healthcare providers and payers, which help reduce
administrative costs and enhance cash flows. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing. In addition, e-Health Solutions offers
physician practice management software as an application service provider
("ASP") to physician practices and offers managed care solutions to payers in
ASP, turnkey or outsourced formats.
The Application Software division provides enterprise-wide financial,
clinical and administrative software to acute care healthcare organizations,
including clinical information software, patient financial management software
and patient and staff scheduling systems. These applications enable healthcare
organizations to optimize the quality of care delivered and the profitability of
business operations.
Per-Se markets its products and services to constituents of the healthcare
industry, primarily to hospital-affiliated physician practices, hospitals and
integrated healthcare delivery networks ("IDNs").
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 $1.4
trillion on an annual basis to provide patient care. Physician Services focuses
on the administrative functions of hospital-affiliated physician practices,
physicians practicing in academic settings and other large physician practices.
There are approximately 225,000 hospital-affiliated and academic physicians in
the United States. The Company estimates that these physicians represent 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
to the healthcare industry in the United States. Services include clinical data
collection, data input, medical coding, billing, contract management, cash
collections and accounts receivable management. 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 with physician groups that perform
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
while minimizing compliance risk, the ability to provide proactive practice
management services and, to the extent that service offerings are comparable,
price.
E-HEALTH SOLUTIONS
e-Health Solutions, through The Per-Se Exchange, the third largest
electronic clearinghouse (based on Company market research) in the healthcare
industry, delivers dedicated electronic 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 and hospitals. Its "provider-focused" solutions include
electronic claims processing, electronic remittance advice transmission,
real-time eligibility verification, web-based business intelligence 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; a regional, ASP-based physician practice management
system for office-based physicians; and an automated accounts receivable
remittance processing solution for hospitals.
Competition in the e-Health market is based on providing solutions that
enhance the revenue cycle of a physician or hospital provider. Such value-added
solutions include 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, focuses almost entirely on medical claims,
in contrast to many competitors that focus on pharmacy claims.
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 continuum of care in
hospitals and IDNs and manage millions of lives online. Application Software's
customers include approximately 2,000 healthcare organizations that depend on
the division's solutions for many critical functions. The division's patient-
centric clinical information solution, Patient1, provides computerized physician
order entry capabilities and access to real-time, point-of-care clinical
information with decision support. The division's patient financial management
solution, Business1, provides consolidated billing capabilities coupled with
contract management functionality incorporated throughout this workflow-driven
product. The division's Resource1 family of scheduling products provides
enterprise-wide and departmental staff and patient scheduling.
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 the Resource1
suite of products. 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
2
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.
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 2002, 2001 and 2000 and as of December 31,
2002 and 2001, 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 by trends in the United States healthcare
industry. As healthcare expenditures have become a larger percentage of the
gross domestic product, increasing focus has been placed on the administrative
costs and burdens associated with the delivery of care and the incidence of
medical errors. As a result, payers have sought to control costs by changing
from the traditional fee-for-service reimbursement model to managed care, fixed
fee and capitation arrangements. These reimbursement models, coupled with
extensive regulatory control and government healthcare fraud and abuse
initiatives, have resulted in a significantly more complex accounting, coding,
billing and collection environment. Such industry changes create a more positive
market for services and software that reduce a healthcare provider's
administrative burdens, help ensure compliance in the complex regulatory
environment and minimize medical coding and billing errors, while increasing
reimbursement and improving the quality of care.
Both governmental and private payers continue to restrict payments for
healthcare services, using measures such as payment bundling, medical necessity
edits and post-payment audits. These measures may decrease revenue to the
Company's provider clients and consequently decrease revenue derived by the
Company from such clients, as well as increase the cost of providing services.
The healthcare industry continues to focus 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") have on operations and information technology solutions. HIPAA
was designed to reduce administrative waste in healthcare and protect the
privacy and security of patients' health information. HIPAA regulations identify
and impose standards for all aspects of handling patient health information.
These regulations, which are described in more detail below under the caption
"Regulation," may require the Company to enhance its internal systems and
software applications sold, but HIPAA may also create an increased demand for
the Company's services and solutions. While the Company has incurred and will
continue to incur costs to comply with HIPAA, management believes these
compliance costs will not have a material impact on the Company's results of
operations.
REGULATION
Per-Se's business is subject to numerous federal and state laws, 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. The Balanced Budget Act of 1997 and HIPAA have mandated
additional regulations, and many states have passed legislation addressing
billing and payment for healthcare services.
The federal government is making significant efforts to detect and
eliminate healthcare fraud and abuse, particularly through its enforcement of
the False Claims Act, the Medicare and Medicaid Patient and Program Protection
Act of 1987 and HIPAA, all of which provide the federal government with the
authority to impose both civil and criminal sanctions and penalties for
submission of false claims to governmental payers. The federal government may
impose civil monetary penalties up to $50,000 per offense as well as exclude a
provider from participation in Medicare and other governmental healthcare
3
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 and potentially share in damages and civil penalties
paid to the government. The U.S. Centers for Medicare & Medicaid Services
("CMS," formerly the Health Care Financing Administration) offers rewards for
information leading to the recovery of Medicare funds, and CMS engages private
contractors to detect and investigate fraudulent billing practices.
The Company's compliance program, which is modeled after the Office of
Inspector General's Compliance Program Guidance for Third-Party Medical Billing
Companies, 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 compliance with the
law. The existence of an effective compliance program may, nevertheless,
mitigate civil and criminal sanctions for certain healthcare-related offenses.
Under HIPAA, final rules have been published regarding the standards for
electronic transactions as well as standards for privacy and security of
individually identifiable health information. These rules set new or higher
standards for the healthcare industry in handling healthcare transactions and
information, with penalties for noncompliance.
The HIPAA rules regarding standards for electronic transactions require
healthcare providers, healthcare clearinghouses and health plans that send or
receive healthcare transaction data electronically to use standard data formats.
The Company has modified the operations of its subsidiaries that are engaged in
the electronic transmission of such data substantially to comply with HIPAA's
electronic transaction standards, which have an extended compliance deadline of
October 16, 2003.
The HIPAA rules regarding privacy of patient health information require
organizations that handle such information to establish safeguards regarding
access, use and disclosure, and to restrict how other entities use that
information. The privacy rules have a compliance deadline of April 14, 2003. The
Company believes that its operations are in material compliance with the privacy
rule requirements. Although the HIPAA privacy rules do not provide a private
right of action for individuals, individuals could bring a privacy action under
applicable state law for misuse or improper disclosure their health information.
The HIPAA rules regarding the security of medical information became final
on February 20, 2003. Under these rules, health insurers, certain healthcare
providers and healthcare clearinghouses must establish procedures and mechanisms
to protect the confidentiality, integrity and availability of electronic
protected health information. These rules have a compliance deadline of April
21, 2005. Management believes that the costs of compliance with the HIPAA
security rules will not materially impact the Company's results of operations.
EMPLOYEES
The Company currently employs approximately 5,000 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
AVAILABLE INFORMATION
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to reports filed pursuant to Sections
13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge through the Company's website at www.per-se.com, as
soon as reasonably practicable after such reports are electronically filed with
the Securities and Exchange Commission (the "Commission") and are available on
the Commission's website. The Commission maintains an Internet website that
contains reports, proxy and information statements and other information
regarding the Company at www.sec.gov. In addition, the Company's documents that
have been filed electronically with the Commission may be read and copied at the
Commission's Public
4
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330.
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," "Legal Proceedings," "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 meritorious defenses to the claims and other issues asserted in
pending legal matters, 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 93 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.
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.
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.
5
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-22 to F-24 .
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 2002.
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.................. 50 President and Chief Executive 1999
Officer
Chris E. Perkins................ 40 Executive Vice President and 2000
Chief Financial Officer of the
Company
Karen B. Andrews................ 48 Senior Vice President of the 2000
Company and the President of the
Company's Application Software
division
William N. Dagher............... 39 Senior Vice President of the 2000
Company and the President of the
Company's e-Health Solutions
division
Frank B. Murphy................. 44 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 division and in 1999 formed the e-Health Solutions
division. He served as President of the division from May 1997 until August
1999. From May 1996 to April 1997, Mr. Pead was employed by Dun & Bradstreet
Software as a senior executive, with responsibility for international
operations.
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 for the Europe, Africa and Middle East division, 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 LLP.
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
6
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 Operations for Per-Se's e-Health
Solutions division 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 of Charter
Behavioral Health Systems. 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, 2002 HIGH LOW
- ---------------------------- ------- ------
First Quarter............................................... $13.230 $9.760
Second Quarter.............................................. 13.450 8.200
Third Quarter............................................... 9.930 6.810
Fourth Quarter.............................................. 10.700 8.250
</Table>
<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>
The last reported sales price of the Common Stock as reported on Nasdaq on
March 14, 2003, was $6.25 per share. As of March 14, 2003, the Company's Common
Stock was held by 3,363 stockholders of record.
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 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 of Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data on pages F-20 to F-22), contains restrictions
on the Company's ability to declare or pay cash dividends on its Common Stock.
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, 2002. 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, 1998 and 1999, present the operations of
Medaphis Services Corporation ("Hospital Services") and Impact Innovations Group
("Impact"), as discontinued operations. Hospital
8
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,
---------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue(1)......................... $354,054 $330,076 $311,283 $323,776 $ 352,029
Salaries and wages................. 203,263 199,254 193,952 212,940 226,894
Other operating expenses(1)........ 99,154 93,620 95,639 105,839 128,389
Depreciation....................... 11,528 12,401 15,562 20,177 23,848
Amortization....................... 11,828 13,245 10,125 9,293 18,077
Interest expense................... 18,485 18,287 18,276 18,512 24,166
Interest income.................... (472) (1,128) (3,751) (2,410) (672)
Goodwill and client lists
impairment....................... -- -- -- -- 390,641
Process improvement project........ -- 3,423 501 -- --
Litigation settlements............. -- -- 1,147 24,811 35,987
Restructuring and other expenses... -- 593 2,382 -- 5,191
Income tax expense (benefit)....... 1,303 607 (695) (610) 58,465
Income (loss) from continuing
operations....................... 8,965 (10,226) (21,855) (64,776) (558,957)
Net income (loss)(2)............... 7,940 (6,338) (48,202)(3) (33,702) (560,214)(4)
Shares used in computing net income
(loss) per common
share -- basic................... 30,061 29,915 29,852 28,097 25,673
Shares used in computing net income
(loss) per common
share -- diluted................. 31,966 29,915 29,852 28,097 25,673
PER SHARE DATA
Income (loss) from continuing
operations -- basic.............. $ 0.30 $ (0.34) $ (0.74) $ (2.31) $ (21.77)
Net income (loss) per common
share -- basic................... $ 0.26 $ (0.21) $ (1.62) $ (1.20) $ (21.82)
Income (loss) from continuing
operations -- diluted............ $ 0.28 $ (0.34) $ (0.74) $ (2.31) $ (21.77)
Net income (loss) per common
share -- diluted................. $ 0.25 $ (0.21) $ (1.62) $ (1.20) $ (21.82)
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital....................... $ 31,846 $ 24,307 $ 27,179 $ 93,304 $ 86,215
Intangible assets..................... 66,743 77,268 72,695 46,446 48,241
Total assets.......................... 209,471 202,891 214,126 265,017 286,721
Total debt............................ 175,916 175,091 175,000 177,138 176,080
Stockholders' (deficit) equity........ (39,252) (50,130) (44,136)(3) 1,440 2,323
</Table>
- ---------------
(1) In accordance with the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred, the Company reclassified $1.2 million, $1.3 million, $1.6 million
and $2.2 million of reimbursed out-of-pocket expenses in the e-Health
Solutions and
9
Application Software divisions for 2001, 2000, 1999 and 1998, respectively,
from other operating expenses to revenue.
(2) Reflects the results from discontinued operations of ($1.0) million, $3.9
million, $11.3 million, $31.1 million and $7.1 million for 2002, 2001, 2000,
1999 and 1998, respectively.
(3) Reflects a $37.7 million cumulative effect of accounting change for the
change in accounting for revenue pursuant to Staff Accounting Bulletin
Number 101, Revenue Recognition in Financial Statements, and the
corresponding increase in the Company's deferred tax valuation allowance.
(4) Reflects an $8.4 million extraordinary expense for the early extinguishment
of debt.
10
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 25 to 27 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 ("SFAS") 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 initial impairment test by June 30, 2002. The Company
completed the impairment test of its goodwill and other indefinite lived
intangible assets and did not identify an asset impairment as a result of the
impairment test. Additionally, the Company completed its periodic review of its
goodwill and other indefinite lived intangible assets for impairment as of
December 31, 2002, and did not identify an asset impairment as a result of the
review. The Company will continue to review its goodwill and other indefinite
lived intangible assets annually for impairment as of December 31.
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. 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.
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 $1.2
million and $1.3 million of reimbursed out-of-pocket expenses in the e-Health
Solutions and Application Software divisions for 2001 and 2000, respectively,
from other operating expenses to revenue. This reclassification did not affect
net income.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145
amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the
11
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for financial statements issued on or after May 15, 2002. The
Company adopted SFAS No. 145 effective May 15, 2002, however, SFAS No. 145 did
not affect the Company's Consolidated Statements of Operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The effective date of SFAS No. 146 is December 31, 2002. The Company
adopted SFAS No. 146 on December 31, 2002, however, SFAS No. 146 did not affect
the Company's Consolidated Statements of Operations.
At the November 21, 2002, EITF meeting, the EITF reached a consensus on
EITF Issue No. 00-21, Revenue Arrangements With Multiple Deliverables ("EITF
00-21"). EITF 00-21 addresses how to determine if an arrangement involving
multiple deliverables contains more than one unit of accounting. In applying
EITF 00-21, separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a
package and should, therefore, be evaluated as a single arrangement in
considering whether there are one or more units of accounting. That presumption
may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The EITF indicated that the
guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company adopted EITF 00-21 on
January 1, 2003, however, management does not believe EITF 00-21 will have a
material effect on the Company's Consolidated Statements of Operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure ("SFAS No. 148"). SFAS No. 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002, and for interim periods beginning after December 15, 2002.
The annual disclosure requirements of SFAS No. 148 were adopted by the Company
on December 31, 2002.
At December 31, 2002, the Company has four stock-based compensation plans
described more fully in Note 13 of Notes to Financial Statements in Item 8.
Financial Statements and Supplementary Data on pages F-25 to F-27. The Company
accounts for its stock-based compensation plans under Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"). No stock-based compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that management
believes are both most important to the portrayal of the Company's financial
condition and results, and/or they require management's most difficult,
subjective and/or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
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
12
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 and our customers are billed 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.
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 paid to connectivity partners. Revenue related to
high-speed print and mail services is billed and recognized when the
services are delivered. 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 is recognized using the
percentage-of-completion method over the implementation period. Less than
1% of the division's revenue was determined using percentage-of-completion
accounting for the year ended December 31, 2002. Revenue related to the ASP
physician practice management system is recognized as monthly subscription
revenue. The e-Health Solutions 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 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 40% of the division's revenue was determined using
percentage-of-completion accounting for the year ended December 31, 2002.
AMORTIZATION OF INTANGIBLES
Amortization of intangible assets includes the amortization of client
lists, developed technology and software development costs (prior to the
Company's adoption of SFAS No. 142 on January 1, 2002, amortization of
intangible assets also included the amortization of goodwill and other
indefinite lived intangible assets). 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 determined based on the Company's
13
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. 142, 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 discount rates.
During 2001, in accordance with APB No. 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 increased $1.8
million in 2002, which was 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 was $1.7 million, or $0.05 per share on a 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.
Workforce. Workforce represents the intangible value of the workforce
of businesses acquired in the e-Health Solutions division from 2000 to
2001.
Trademarks. Trademarks represent the value of the trademarks acquired
in the e-Health Solutions division from 2000 to 2001.
SFAS No. 142 required companies with goodwill and indefinite lived
intangible assets to complete an initial impairment test by June 30, 2002.
The Company completed the initial impairment test of its goodwill and other
indefinite lived intangible assets and did not identify an asset impairment
as a result of the impairment test. Additionally, the Company performed its
periodic review of its goodwill and other indefinite lived intangible
assets for impairment as of December 31, 2002, and did not identify an
asset impairment as a result of the review. The Company's initial
impairment test and periodic review of its goodwill and other indefinite
lived intangible assets were based upon an estimated discounted future cash
flow analysis that included revenue and cost estimates, market growth rates
and appropriate discount rates. The Company will continue to test its
goodwill and other indefinite lived intangible assets annually for
impairment as of December 31.
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
using the straight-line method over their estimated useful lives, which
range from five to ten years.
Developed Technology. 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 using the straight-line method
over their estimated useful lives of five years.
Software Development Costs. Software development includes costs
incurred in the development or the enhancement of software developed by the
e-Health Solutions and Application Software divisions for resale and the
development of software for internal use.
Software development costs related to external use software 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. External use software development costs
are amortized over the greater of the ratio that current revenue bears to
total and anticipated future
14
revenue 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
external use software development costs to ensure that the investment will
be recovered through margins from future sales.
Software development costs related to internal use software are
capitalized after: 1.) the preliminary project stage is complete; 2.)
management with the relevant authority authorizes and commits to the
funding of the software project; and 3.) it is probable that the project
will be completed and the software will be used to perform the function
intended. Capitalization ceases no later than the point at which the
project is substantially complete and ready for its intended use. Software
development costs related to internal use software are expensed as incurred
during the planning and post-implementation phases of development.
Internal-use software is amortized on a straight-line basis over its
estimated useful life, generally five years. The estimated useful life
considers the effects of obsolescence, technology, competition and other
economic factors.
OTHER
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 11 Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). Pending the outcome of
the litigation with Lloyd's, the Company will fund the legal costs and any
litigation settlements associated with claims covered by the Lloyd's Errors &
Omissions ("E&O") policies. The Company expects to recover these costs from
Lloyd's and has reflected the amounts as a non-trade accounts receivable,
reported as other current assets on the Company's Consolidated Balance Sheet. As
of December 31, 2002, the balance of the Lloyd's non-trade account receivable
was approximately $6.8 million.
Additionally, 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 Notes 9 and 10 of Notes to Financial Statements in
Item 8, and certain vendor financing arrangements in the ordinary course
of business; or
-- any material related party transactions.
15
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes.
YEARS ENDED DECEMBER 31, 2002 AND 2001
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $233,222 $223,875
e-Health Solutions.......................................... 68,296 57,961
Application Software........................................ 65,209 59,988
Eliminations................................................ (12,673) (11,748)
-------- --------
$354,054 $330,076
======== ========
</Table>
Revenue for the Physician Services division increased approximately 4% in
2002 compared to 2001. Revenue growth was attributable to the implementation of
new sales combined with stability in the division's customer base. Client
retention levels have remained in the Company's target of the mid-90% range for
the last two years. Net revenue backlog at December 31, 2002, was approximately
$4 million compared to approximately $3 million at December 31, 2001. Net
backlog at September 30, 2002, was approximately $5 million. Net backlog
represents the annualized revenue related to new contracts signed with the
business still to be implemented, less the annualized revenue related to
existing contracts where discontinuance notification has been received and the
customer has yet to be phased out. The year over year increase in net backlog is
attributable to the division's second half 2002 new sales performance. New sales
were 26% higher in the second half of 2002 compared to the prior year period.
The decline in net backlog from September 30, 2002, is primarily attributable to
the Company's substantially higher implementation rate during the fourth quarter
of 2002 as compared to the prior three quarters of 2002. The Company focuses on
maintaining a positive net backlog and believes it is a useful indicator of
future revenue growth.
Revenue for the e-Health Solutions division increased approximately 18% in
2002 compared to 2001. Excluding e-Health Solutions intersegment revenue,
revenue for the division increased approximately 20% in 2002 compared to 2001.
The division has achieved year-over-year double-digit revenue growth since the
division became an external reportable business segment in 1999. Revenue growth
in 2002 was attributable to increased revenue in the physician and hospital
medical transaction processing business. This growth is evidenced by the 26%
increase in transaction volume that the division achieved in 2002 over 2001. The
Company believes transaction volume is a useful indicator of future growth as
business is implemented into the business' recurring revenue model.
Revenue for the Application Software division increased approximately 9% in
2002 as compared to 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 were sold in 2001 and 2002. The
division's scheduling products continue to be a significant contributor of
revenue for the division, comprising approximately 57% of divisional revenue in
2002. The division's backlog at December 31, 2002, was $52 million as compared
to $43 million at December 31, 2001, an increase of approximately 21%. Backlog
for the division represents contracts signed with the revenue to be recognized
over the future implementation period. The Company believes that backlog is a
useful indicator of future revenue growth for the division.
The e-Health Solutions division revenue includes intersegment revenue for
services provided to the Physician Services division, which is shown as
Eliminations to reconcile to total consolidated revenue.
16
In accordance with EITF 01-14, the Company reclassified $1.2 million of
reimbursed out-of-pocket expenses in the e-Health Solutions and Application
Software divisions for the year ended December 31, 2001, from other operating
expenses to revenue. This reclassification did not affect net income.
Segment Operating Margin. The Company evaluates each segment's performance
based on its segment operating margin. Segment operating margin is not a
Generally Accepted Accounting Principles ("GAAP") financial measure. The Company
believes segment operating margin is meaningful as it excludes expenses that are
not indicative of future operating performance.
Segment operating margin may be reconciled to the GAAP measure of income
(loss) from continuing operations, by including net interest expense, the
process improvement project costs, litigation settlements, restructuring and
other expenses, and income taxes.
Segment operating margin, classified by the Company's divisions, is as
follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-----------------
2002 2001
------- -------
(IN THOUSANDS)
Physician Services.......................................... $24,145 $12,469
e-Health Solutions.......................................... 9,253 5,228
Application Software........................................ 9,530 5,473
Corporate................................................... (14,647) (11,614)
------- -------
$28,281 $11,556
======= =======
</Table>
Physician Services' segment operating margin increased approximately 94% in
2002 over 2001, resulting in operating margins of approximately 10.4% versus
approximately 5.6% in the prior year. The margin expansion is attributable to
the incremental margins achieved on increased revenue. Additionally, the segment
realized labor and cost savings from productivity initiatives in the division,
such as the process improvement project, which was completed in the third
quarter of 2002 (see Process Improvement Project discussion below for additional
information).
e-Health Solutions' segment operating margin increased approximately 77% in
2002 over 2001, resulting in operating margins of approximately 13.5% versus
approximately 9.0% in the prior year. The margin expansion is attributable to
the incremental margins achieved on increased revenue combined with operational
efficiencies and cost savings gained from increased transaction volume.
Excluding the reduction of amortization expense of approximately $1.7 million
related to the adoption of SFAS No. 142, the division's segment operating margin
was approximately 11.1%, or an increase of approximately 45% over the prior
year.
Application Software's segment operating margin increased approximately 74%
in 2002 over 2001, resulting in operating margins of approximately 14.6% versus
approximately 9.1% in the prior year. The margin expansion is attributable to
the incremental margins achieved on increased revenue and improved leverage on
operating expenses.
The Company's corporate overhead expenses increased approximately 26% in
2002 compared to 2001. The increase was attributable to increased insurance
premiums and litigation expenses of approximately $3.0 million related to the
Company's former underwriters, Lloyd's of London's, attempt to rescind certain
insurance policies (refer to Note 11 of Notes to Financial Statements in Item 8.
Financial Statements and Supplementary Data on pages F-22 to F-24 for more
information).
Interest. Interest expense increased approximately $0.2 million to $18.5
million in 2002 from $18.3 million in 2001. Interest income decreased
approximately 58% to $0.5 million in 2002 from $1.1 million in 2001, due to a
decrease in investment rates.
Process Improvement Project. The Company incurred approximately $3.4
million of expense in 2001, associated with the implementation of a process
improvement project within the Physician Services
17
division (the "Project"). The Project installed 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 focused on
productivity improvements that resulted in both improved client service as well
as improved profitability for the division.
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. In 2001,
the costs associated with the Project primarily consisted of professional fees
paid to outside consultants retained exclusively for implementation of the
Project. Annualized cost savings resulting from phase one are approximately $6
million, of which, approximately $4 million were realized in 2001. The full
benefit of phase one cost savings were realized in 2002.
The second phase of the Project, which began in the first quarter of 2002,
was completed as of September 30, 2002, with implementation into an additional
fifteen processing centers. The second phase was implemented with internal
resources, and therefore the Company did not incur any external project costs.
Annualized cost savings for phase two of the Project are approximately $2.5
million, of which, approximately $1 million was realized in 2002.
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.
Income Taxes. Income tax expense, which was related to state, local, and
foreign income taxes, was $1.3 million in 2002 compared to $0.6 million in 2001.
As of December 31, 2002 and 2001, 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 $208.4 million and $207.6
million was required as of December 31, 2002, and December 31, 2001,
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, 2002, the Company had federal net operating loss carryforwards
("NOLs") for income tax purposes of approximately $402.5 million. The NOLs will
expire at various dates between 2003 and 2021 (refer to Note 15 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
pages F-28 to F-30 for more information regarding NOL expiration dates and
respective amounts).
Discontinued Operations. The government division of Impact Innovations
Group ("Impact") was sold on December 17, 1999, to J3 Technology Services Corp.
for $46.5 million, including a favorable purchase price adjustment of $1.5
million received on March 30, 2000, based on the division's tangible net worth
at closing. 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. The Company continues to
pursue claims against a former vendor of this division for damages incurred in
the SCI matter.
On November 30, 1998, the Company completed the sale of Medaphis Services
Corporation ("Hospital Services") to NCO Group, Inc. ("NCO").
18
For the year ended December 31, 2002, the Company charged $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO. When NCO bought Hospital Services, the Company
agreed to indemnify NCO for limited periods of time in the event NCO incurred
certain damages related to Hospital Services. NCO incurred such damages in
connection with an alleged environmental liability of Hospital Services, and the
Company agreed to reimburse NCO for a portion of those damages, in satisfaction
of the Company's indemnification obligation. The Company paid $0.3 million to
NCO on September 16, 2002. The Company intends to pay the remaining balance of
$0.4 million, plus interest at the then-current prime rate, in equal payments to
NCO, on the first and second anniversaries of that date.
The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to Hospital Services have passed without the
assertion by NCO of any other significant claims. These limitations do not apply
to a small number of other types of potential claims to which statutory
limitations apply, such as those involving title to Hospital Services' shares,
taxes and billing and coding under Medicare and Medicaid; however, management
believes that such other types of claims are unlikely to occur.
For the years ended December 31, 2002 and 2001, the Company also incurred
expenses of approximately $0.3 million and $0.1 million, respectively, which
were primarily legal costs, associated with Hospital Services and Impact.
Pursuant to SFAS No. 144, 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.
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 $225,099
e-Health Solutions.......................................... 57,961 35,276
Application Software........................................ 59,988 61,913
Eliminations................................................ (11,748) (11,005)
-------- --------
$330,076 $311,283
======== ========
</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 approximately $27.1
million. This decline was partially offset by the implementation of new sales
from 2000 and 2001 that resulted in revenue recognized in 2001 of approximately
$16.0 million and revenue growth related to existing customers of approximately
10%. Revenue stability in 2001 was a result of the Company's intense focus on
client satisfaction that resulted in client retention in the mid-90% range on a
full year basis.
The e-Health Solutions division experienced significant growth during 2001
with revenue increasing $22.7 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") in December 2000, Virtual
Information Systems, Inc. ("VIS") and OfficeMed.com LLC ("OfficeMed") in April
2001, as well as organic growth of 20% over the prior year.
Revenue for the Application Software division decreased slightly in 2001.
Although new sales increased approximately $20.7 million, revenue decreased due
to the timing of 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
19
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 revenue includes intersegment revenue for
services provided to the Physician Services division, which is shown as
Eliminations to reconcile to total consolidated revenue.
In accordance with EITF 01-14, the Company reclassified $1.2 million and
$1.3 million for the years ended December 31, 2001 and 2000, respectively, of
reimbursed out-of-pocket expenses in the e-Health Solutions and Application
Software divisions, from other operating expenses to revenue. This
reclassification did not affect net income.
Segment Operating Margin. The Company evaluates each segment's performance
based on its segment operating margin. Segment operating margin is not a GAAP
financial measure. The Company believes segment operating margin is meaningful
as it excludes expenses that are not indicative of future operating performance.
Segment operating margin may be reconciled to the GAAP measure of income
(loss) from continuing operations, by including net interest expense, the
process improvement project costs, litigation settlements, restructuring and
other expenses, and income taxes.
Segment operating margin, classified by the Company's divisions, is as
follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $ 12,469 $ 4,267
e-Health Solutions.......................................... 5,228 3,401
Application Software........................................ 5,473 2,859
Corporate................................................... (11,614) (14,522)
-------- --------
$ 11,556 $ (3,995)
======== ========
</Table>
Physician Services' segment operating margin increased $8.2 million or 192%
in 2001 over 2000, resulting in operating margins of approximately 5.6% versus
approximately 1.9% in the prior year. The margin expansion is attributable to
the cost savings realized from the productivity initiatives in the division such
as the Process Improvement Project (see "Process Improvement Project" discussion
on page 17 and Note 5 of Notes to Financial Statements in Item 8).
The e-Health Solutions segment experienced growth in segment operating
margin of $1.8 million or 53% in 2001 compared to 2000 resulting in operating
margins of approximately 9.0% versus approximately 9.6% in the prior year. The
increase in segment operating margin 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 decrease in
operating margin is attributable to the division's $3.4 million increase in
depreciation and amortization expense in 2001 versus 2000 related to the
amortization of intangible assets acquired during 2001 and the fourth quarter of
2000.
In 2001, Application Software's segment operating margin increased $2.6
million or 91% compared to 2000, resulting in operating margins of 9.1% versus
4.6% in the prior year. 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 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.
20
Interest. Interest expense was $18.3 million in 2001 and 2000. Interest
income decreased approximately 70% to $1.1 million in 2001 from $3.8 million in
2000 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 the Project.
Litigation Settlements. There were no material litigation settlements in
2001. In December 2000, the Company recorded an estimated litigation settlement
expense of approximately $1.2 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 approximately $1.2
million.
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 other expense
related to e-Health Solutions' retirement of a software product that was
replaced by a superior software product at 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 who 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 related to state and local
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 was required as of December
31, 2001, and December 31, 2000, respectively. 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. 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
through discontinued operations. Additionally, the sale agreement stipulated
that $1.0 million of the purchase price be placed 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, 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,
21
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 for initial consideration of $107.5 million. During the first quarter of
1999, the Company received additional consideration of $0.8 million based on
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, the Company had working capital of $31.8 million
compared to $24.3 million at December 31, 2001. The increase in working capital
is primarily related to an increase in unrestricted cash, accounts receivable,
and a $6.8 million increase in other current assets related to recoverable
amounts in conjunction with the Company's litigation with its former
underwriters, Lloyd's of London (refer to "Note 11 -- Legal Matters" in the
Company's Notes to Consolidated Financial Statements for more information). The
working capital increase was offset by approximately $14.8 million related to
the acceptance of the Company's offer to repurchase $15.0 million of its $175
million 9 1/2% Senior Notes due February 15, 2005 (the "Notes") (see additional
discussion below). Restricted cash totaled $4.3 million as of December 31, 2002,
compared to $4.4 million at December 31, 2001. Restricted cash primarily
represents restrictions on the Company's cash as security for the Company's
letters of credit. Unrestricted cash and cash equivalents totaled $46.7 million
at December 31, 2002, an increase of $10.3 million compared to December 31,
2001.
Cash provided by continuing operations was $23.5 million in 2002 compared
to cash provided by continuing operations in 2001 of $22.0 million. This
improvement in cash flow was driven by improvements in operations, net of
depreciation and amortization, that resulted in net income of $7.9 million in
2002 versus a net loss of $6.3 million in 2001. Operational improvements were
offset by an increase in unbilled accounts receivable of approximately $5.2
million attributable to growth in the business and a difference in the timing of
production versus billings under certain contracts in the Application Software
division. The Company expects to invoice items in unbilled accounts receivable
in 2003 as milestones are achieved under the Application Software division
contracts. These improvements were also offset by the increase in other current
assets of $6.8 million related to recoverable amounts in conjunction with the
Company's litigation with Lloyd's.
During 2003, the Company expects to continue to fund its working capital
needs through cash provided by operations.
The Company used $15.7 million in cash for investing activities during 2002
compared to $20.1 million during 2001. The improvement was primarily related to
a $9.2 million reduction in investments related to strategic acquisitions. The
Company used $1.6 million for investment in strategic acquisitions during 2002,
compared to $10.8 million during 2001. This improvement was partially offset by
an increase in capital spending of $3.3 million during 2002.
Cash provided by financing activities was $2.9 million in 2002 compared to
cash used of $0.3 million in 2001. The increase in cash provided by financing
activities is primarily attributable to an approximately $2 million capital
contribution paid to the Company in November 2002 resulting from the Company's
recovery of short-swing profits from an outside stockholder in accordance with
Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides
that any profit realized by an insider (defined as an officer, director or
principal stockholder of an issuer) from any purchase and sale, or any sale and
purchase, of an equity security of the issuer within any period of less than six
months are recoverable by
22
the issuer, irrespective of the intention of the insider in entering into such
transaction. In addition, cash provided by proceeds from the exercise of stock
options was $1.1 million in 2002 as compared to $0.3 million in 2001.
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. Interest payments commenced on August 15, 1998, and will end when the Notes
mature on February 15, 2005. 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
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, 2002, the Company did not have excess proceeds (as defined by the Indenture
governing the Notes) in excess of $10.0 million.
In February 2003, the Company determined that KHS would not meet the
post-acquisition operational targets set in the KHS purchase agreement, and the
Company reduced the portion of the KHS purchase price allocated to goodwill by
approximately $5.9 million. This adjustment is reflected in the Company's
December 31, 2002, Consolidated Balance Sheet. Because of this adjustment,
excess proceeds (as defined by the Indenture) exceeded $10.0 million (refer to
Note 9 of Notes to Financial Statements in Item 8. Financial Statements and
Supplementary Data on pages F-20 to F-22 for more information). On February 13,
2003, the Company initiated an offer to purchase up to $15 million of the Notes
at par plus accrued interest, including $13.2 million to satisfy the
requirements under the Indenture for the reinvestment of excess proceeds. The
Company's offer to repurchase the Notes was accepted in full, and on March 17,
2003, the Company's repurchased $15 million of the Notes at par plus accrued
interest. The Company used a portion of its available cash to fund the
repurchase. As a result of the repurchase, the Company reclassified $15 million
of the Notes to the "current portion of long-term debt" from "long-term debt" in
its December 31, 2002, Consolidated Balance Sheet.
The Company entered into a $50 million revolving credit facility (the
"Credit Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a borrowing base calculated based on eligible billed accounts
receivable of the Company's Physician Services and e-Health Solutions divisions,
as defined in the Credit Facility. The Company has the option of entering into
LIBOR-based loans or index-rate loans, each as defined in the Credit Facility.
LIBOR-based loans bear interest at LIBOR plus amounts ranging from 1.85% to
2.65% based on the Company's leverage ratio, as defined in the Credit Facility.
Index-rate loans bear interest at rates approximating prime plus amounts ranging
from 0.35% to 1.15% based on the Company's leverage ratio, as defined in the
Credit Facility. In addition, the Company pays a quarterly commitment fee on the
unused portion of the Credit Facility of 0.375% per annum and an annual
administration fee.
The Credit Facility contains financial, collateral and other restrictive
covenants, including, without limitation, those restricting additional
indebtedness, lien creation, dividend payments, asset sales, stock offerings,
capital expenditures, cash velocity, maximum days sales outstanding and the
prepayment of the Notes and those requiring a minimum EBITDA (as defined)
maintenance, fixed charge coverage and cash velocity and limiting days sales
outstanding in billed accounts receivable, each as defined in the Credit
Facility. The Company was in compliance with all applicable covenants as of
December 31, 2002.
23
The initial term of the Credit Facility is 42 months, expiring on October
6, 2004. The Company and the Lender can mutually agree to extend this term by 18
months if certain conditions have been met. The Company intends to use the
Credit Facility, as needed, for future investments in its operations including
capital expenditures, strategic acquisitions, debt refinancing and other general
corporate purposes. The Company has not incurred any borrowings under the Credit
Facility and there are no outstanding borrowings under the Credit Facility as of
December 31, 2002.
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 investment requirements for at least the next twelve
months.
The Company is in litigation with certain underwriters at Lloyd's following
an attempt by Lloyd's to rescind certain of the Company's insurance policies
(refer to "Note 11 -- Legal Matters" in the Company's Notes to Consolidated
Financial Statements for more information). For the year ended December 31,
2002, the Company incurred approximately $3.0 million of expense related to the
insurance premium increases for its new insurance coverage and the cost of
pursuing litigation against Lloyd's. Accordingly, these costs have been
reflected in the Company's Consolidated Statements of Operations.
In addition, pending the outcome of the litigation with Lloyd's, the
Company continues to fund the legal costs and any litigation settlements
associated with claims covered by the Lloyd's Errors & Omissions ("E&O")
policies. The Company expects to recover these costs from Lloyd's and has
reflected the amounts as a non-trade accounts receivable, reported as other
current assets on the balance sheet. The negative impact of these items on the
Company's 2002 cash flow was approximately $8.9 million, which consisted of
approximately $3.6 million related to insurance premium increases for new
insurance coverage and the cost of pursuing litigation against Lloyd's and
approximately $5.3 million related to the funding of legal costs and litigation
settlements covered by the Lloyd's E&O policies.
24
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 regional or national competitors providing
comparable services and new alliances between healthcare providers and
third-party payers in which healthcare providers are employed by such
third-party payers.
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 client/server and
other advanced technologies in conjunction with the implementation of software.
Failure to meet customers' expectations with respect to a major project could,
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-Health products and services
as well as our business management outsourcing services are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including its
ability to enhance existing products and services; introduce new products and
services quickly and cost effectively; achieve market acceptance for new
products and services; and respond to emerging industry standards and other
technological changes.
Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing our software, e-Health and
billing systems going forward. The costs associated with refining, enhancing and
developing these systems may increase significantly in the future. Existing
software and technology may become obsolete as a result of ongoing technological
developments in the marketplace.
25
Consolidation in the Marketplace
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.
Consolidation of management and billing services through integrated
delivery systems may result in a decrease in demand for the Company's business
management outsourcing services for particular physician practices.
Government Regulations
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 of 1997.
These programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Current or future government
regulations or healthcare reform measures may affect the Company's business.
Healthcare industry participants may respond by reducing their investments or
postponing investment decisions, including investments in the Company's products
and services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid and/or other government-funded healthcare programs.
In the past, the Company has been the subject of federal investigations,
and it may become the subject of false claims litigation or additional
investigations relating to its billing and collection activities. Any such
proceeding or investigation could have a material adverse effect on the
Company's business.
Under HIPAA, final rules have been published regarding standards for
electronic transactions as well as standards for privacy and security of
individually identifiable health information. The HIPAA rules set new or higher
standards for the healthcare industry in handling healthcare transactions and
information, with penalties for noncompliance. The Company has incurred and will
continue to incur costs to comply with these rules. Although management believes
that future compliance costs will not have a material impact on the Company's
results of operations, compliance with these rules may prove to be more costly
than is anticipated. Failure to comply with such rules may subject the Company
to civil and criminal penalties.
Currently in the area of privacy and security of health information,
numerous federal and state civil and criminal laws govern the collection, use,
storage and disclosure of health information. Penalties for noncompliance, both
criminal and civil, may be brought by federal or state governments. Persons who
believe their health information has been misused or disclosed improperly may
bring claims and payers who believe 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
26
regulations will be enacted and, if enacted, whether such new developments will
affect its business. However, the Company has made and expects to continue to
make investments in product enhancements to support customer operations that are
regulated by HIPAA. Responding to HIPAA's impact may require the Company to make
investments in new products or charge higher prices.
Debt
The Company has a significant amount of long-term indebtedness and, as a
result, has obligations to make interest payments on that debt. If unable to
make the required debt payments, the Company could be required to reduce or
delay capital expenditures, sell certain assets, restructure or refinance its
indebtedness, or seek additional equity capital. The Company's ability to make
payments on its debt obligations will depend on future operating performance,
which may be affected by certain conditions that may be beyond the Company's
control.
Litigation
The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of our business. The Company has also received written demands from
customers and former customers that have not yet resulted in legal action. Many
of the Company's software products provide data for use by healthcare providers
in providing care to patients. Although no claims have been brought against the
Company to date regarding injuries related to the use of its products, such
claims may be made in the future.
The Company may not be able successfully to resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, its insurance coverage, product liability coverage
or otherwise, may not fully cover any damages assessed against the Company.
Although the Company maintains all insurance coverage in amounts that it
believes is sufficient for its business, 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
11 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information). As of December 31, 2002, the Company had incurred
approximately $6.8 million of costs related to claims under Lloyd's that are
classified as an Other Current Asset in the Company's Consolidated Balance
Sheet. As of December 31, 2002, approximately $5.3 million of these costs had
been paid. If the Company is unsuccessful in its ongoing litigation with
Lloyd's, the Company would be required to record a write-off of the then-current
receivable related to Lloyd's. The write-off would have a minimal cash flow
impact as the majority of the claims have been paid as incurred. A successful
claim brought 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.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, any fluctuation in the prevailing
interest rates is not expected to have a material effect on the Company's
financial statements.
The Company has the option of entering into loans based on LIBOR or index
rates under the Credit Facility. If the Company were to borrow amounts under the
Credit Facility, the Company could experience fluctuations in the interest
rates. The Company has not incurred any borrowings under the Credit Facility.
EXCHANGE RATE SENSITIVITY
The majority of the Company's sales and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains or losses to date. The Company conducts only limited business
denominated in foreign currencies and does not expect material foreign exchange
gains or losses in the future. The Company does not engage in any foreign
exchange hedging activities.
ITEM 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 Company dismissed PricewaterhouseCoopers LLP as
the Company's principal independent auditors and engaged Ernst & Young LLP as
the Company's new principal independent auditors. The decision to change
independent auditors was recommended by the Audit Committee of the Registrant's
Board of Directors (the "Board") and approved by the Board. There were no
disagreements with PricewaterhouseCoopers on any matter of accounting principle
or practices, financial statement disclosure or auditing scope or procedure.
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.
28
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 that is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Board of Directors" 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 8, 2003, 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 8, 2003, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is included in the sections entitled
"Director and Executive Officer Common Stock Ownership" and "Principal
Stockholders" of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 8, 2003, 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 8, 2003, and is incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of a date within
90 days of the filing date of this report and have concluded that these
disclosure controls and procedures operate effectively to support the
certifications required of such officers in this report.
There were no significant changes in internal controls or in other factors
that could significantly affect the Company's internal controls subsequent to
the date of the most recent evaluation of these internal controls.
PART IV
ITEM 15. 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, 2002 and 2001;
Consolidated Statements of Operations -- years ended December 31, 2002,
2001 and 2000;
Consolidated Statements of Cash Flows -- years ended December 31, 2002,
2001 and 2000;
29
Consolidated Statements of Stockholders' (Deficit) Equity -- years ended
December 31, 2002, 2001 and 2000; 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, 2002, 2001 and 2000
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).
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).
</Table>
30
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
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).
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 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 Form 10-K")).
4.13 -- Third Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of March 10, 2003.
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 -- First Amendment to Credit Agreement dated as of April 6,
2001, among the Registrant, General Electric Capital
Corporation, as Lender and Agent, and the other Credit
Parties signatory thereto, entered into as of August 30,
2002 (incorporated by reference to Exhibit 10.1 to Quarterly
Report of Form 10-Q for the quarter ended September 30,
2002).
10.3 -- 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).
10.4 -- 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).
10.5 -- 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).
10.6 -- 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).
</Table>
31
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.7 -- 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).
10.8 -- 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).
10.9 -- 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).
10.10 -- 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).
10.11 -- 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")).
10.12 -- 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")).
10.13 -- 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).
10.14 -- 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")).
10.15 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.1 to Quarterly Report of Form 10-Q
for the quarter ended June 30, 2002).
10.16 -- 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).
10.17 -- First Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.25 to
the 1998 Form 10-K).
10.18 -- 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).
10.19 -- Third Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.16 to
the 1999 Form 10-K).
10.20 -- Fourth Amendment to Registrant's Non-Employee Director Stock
Option Plan (incorporated by reference to Exhibit 10.46 to
the 1999 Form 10-K).
10.21 -- Registrant's Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 to the 1996 Form 10-K).
10.22 -- 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).
10.23 -- 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")).
10.24 -- 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).
10.25 -- 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).
10.26 -- 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).
</Table>
32
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.27 -- 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).
10.28 -- 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).
10.29 -- 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).
10.30 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
10.31 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees.
10.32 -- 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).
10.33 -- The Per-Se Technologies Employees' Retirement Savings Plan
(incorporated by reference to Exhibit 10.26 to the 1999 Form
10-K).
10.34 -- First Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.29 to the 2000 Form 10-K).
10.35 -- 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).
10.36 -- 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).
10.37 -- Fourth 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 September 30, 2002).
10.38 -- Fifth Amendment to the Per-Se Technologies Employees'
Retirement Savings Plan.
10.39 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.40 -- Registrant's Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.41 -- 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).
10.42 -- 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).
10.43 -- Third Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.76 to the 1997 Form
10-K).
10.44 -- Fourth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.32 to the 1999 Form
10-K).
10.45 -- Fifth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.36 to the 2000 Form
10-K).
10.46 -- Per-Se Technologies, Inc. Executive Deferred Compensation
Plan effective as of January 1, 2002 (incorporated by
reference to Exhibit 10.40 to the 2001 Form 10-K).
10.47 -- Per-Se Technologies, Inc. Non-Qualified Deferred
Compensation Plan Trust Agreement dated as of February 12,
2002, between Registrant and Merrill Lynch Trust Company,
FSB (incorporated by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).
10.48 -- Written description of Registrant's Non-Employee Director
Compensation Plan.
10.49 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan
(incorporated by reference to Exhibit 10.44 to the 2001 Form
10-K).
</Table>
33
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.50 -- First Amendment to Per-Se Technologies, Inc. Deferred Stock
Unit Plan (incorporated by reference to Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
10.51 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan Trust
Agreement dated as of May 1, 2002, between Registrant and
Merrill Lynch Trust Company, FSB (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
10.52 -- 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).
10.53 -- 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).
10.54 -- 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).
10.55 -- 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).
10.56 -- 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).
10.57 -- 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).
10.58 -- Employment Agreement dated January 30, 1998, between
Registrant and William Dagher (incorporated by reference to
Exhibit 10.45 to the 2000 Form 10-K).
10.59 -- 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).
10.60 -- 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).
10.61 -- 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, 2002.
34
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 27, 2003
35
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 27, 2003
------------------------------------------------
David E. Mcdowell
/s/ PHILIP M. PEAD President, Chief Executive Officer March 27, 2003
------------------------------------------------ and Director
Philip M. Pead
/s/ CHRIS E. PERKINS Executive Vice President and Chief March 27, 2003
------------------------------------------------ Financial Officer
Chris E. Perkins
/s/ MARY C. CHISHOLM Vice President and Controller March 27, 2003
------------------------------------------------ (Principal Accounting Officer)
Mary C. Chisholm
/s/ CRAIG MACNAB Director March 27, 2003
------------------------------------------------
Craig Macnab
/s/ DAVID R. HOLBROOKE, M.D. Director March 27, 2003
------------------------------------------------
David R. Holbrooke, M.D.
/s/ STEPHEN A. GEORGE, M.D. Director March 27, 2003
------------------------------------------------
Stephen A. George, M.D.
/s/ JOHN C. POPE Director March 27, 2003
------------------------------------------------
John C. Pope
/s/ C. CHRISTOPHER TROWER Director March 27, 2003
------------------------------------------------
C. Christopher Trower
</Table>
36
CERTIFICATIONS
I, Philip M. Pead, certify that:
1. I have reviewed this annual report on Form 10-K of Per-Se Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ PHILIP M. PEAD
--------------------------------------
Philip M. Pead
President, Chief Executive Officer and
Director
Date: March 27, 2003
37
CERTIFICATIONS
I, Chris E. Perkins, certify that:
1. I have reviewed this annual report on Form 10-K of Per-Se Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ CHRIS E. PERKINS
--------------------------------------
Chris E. Perkins
Executive Vice President and Chief
Financial Officer
Date: March 27, 2003
38
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Per-Se Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Per-Se
Technologies, Inc. (the "Company") as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' (deficit) equity,
and cash flows for each of the two years in the period ended December 31, 2002.
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 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 audits provide 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, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the two years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the financial statements, in 2002 the Company
changed its method of accounting for goodwill and indefinite lived intangible
assets upon adoption of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
As discussed in Note 1 to the financial statements, in 2002 the Company
changed its method of presenting reimbursements of out-of-pocket expenses in the
statement of operations upon adoption of Emerging Issues Task Force Issue 01-14,
"Income Statement Characterization of Reimbursements received for
'Out-of-Pocket' Expenses Incurred."
/s/ Ernst & Young LLP
Atlanta, Georgia
February 7, 2003
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Per-Se Technologies, Inc.:
In our opinion, the consolidated statements of operations, stockholders'
(deficit) equity and cash flows for the year ended December 31, 2000 present
fairly, in all material respects, the results of operations and cash flows of
Per-Se Technologies, Inc. and its subsidiaries ("the Company") for the year
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 audit. We conducted our audit
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 the management,
and evaluating the overall financial statement presentation. We believe that our
audit provides 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,
-------------------------
2002 2001
----------- -----------
(IN THOUSANDS, EXCEPT PAR
VALUE DATA)
Current Assets:
Cash and cash equivalents................................. $ 46,748 $ 36,493
Restricted cash........................................... 4,296 4,419
--------- ---------
Total cash and cash equivalents................... 51,044 40,912
Accounts receivable, billed (less allowances of $4,600 and
$5,144, respectively).................................. 46,234 45,719
Accounts receivable, unbilled (less allowances of $884 and
$1,345, respectively).................................. 8,880 4,150
Other..................................................... 11,478 5,000
--------- ---------
Total current assets.............................. 117,636 95,781
Property and equipment, net of accumulated depreciation..... 21,607 25,012
Other intangible assets, net of accumulated amortization.... 34,194 38,960
Goodwill, net of accumulated amortization................... 32,549 38,308
Other....................................................... 3,485 4,830
--------- ---------
Total assets...................................... $ 209,471 $ 202,891
========= =========
Current Liabilities:
Accounts payable.......................................... $ 3,572 $ 6,085
Accrued compensation...................................... 23,018 23,884
Accrued expenses.......................................... 23,203 21,705
Current portion of long-term debt......................... 15,124 --
--------- ---------
64,917 51,674
Deferred revenue.......................................... 20,873 19,800
--------- ---------
Total current liabilities......................... 85,790 71,474
Long-term debt.............................................. 160,792 175,091
Other obligations........................................... 2,141 6,456
--------- ---------
Total liabilities................................. 248,723 253,021
--------- ---------
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,
30,163 and 29,969 issued and outstanding as of December
31, 2002 and December 31, 2001, respectively........... 302 300
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 778,021 774,983
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (818,553) (826,493)
Treasury stock at cost, 90 shares as of December 31, 2002
and none as of December 31, 2001....................... (1,045) --
Deferred stock unit plan obligation....................... 1,045 --
Accumulated other comprehensive loss...................... (517) (415)
--------- ---------
Total stockholders' deficit....................... (39,252) (50,130)
--------- ---------
Total liabilities and stockholders' deficit....... $ 209,471 $ 202,891
========= =========
</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,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue..................................................... $354,054 $330,076 $311,283
-------- -------- --------
Salaries and wages.......................................... 203,263 199,254 193,952
Other operating expenses.................................... 99,154 93,620 95,639
Depreciation................................................ 11,528 12,401 15,562
Amortization................................................ 11,828 13,245 10,125
Interest expense............................................ 18,485 18,287 18,276
Interest income............................................. (472) (1,128) (3,751)
Process improvement project................................. -- 3,423 501
Litigation settlements...................................... -- -- 1,147
Restructuring and other expenses............................ -- 593 2,382
-------- -------- --------
Total expenses.................................... 343,786 339,695 333,833
-------- -------- --------
Income (loss) before income taxes........................... 10,268 (9,619) (22,550)
Income tax expense (benefit)................................ 1,303 607 (695)
-------- -------- --------
Income (loss) from continuing operations.................... 8,965 (10,226) (21,855)
-------- -------- --------
(Loss) income from discontinued operations, net of tax...... (1,025) 3,888 11,337
-------- -------- --------
Income (loss) before cumulative effect of accounting
change.................................................... 7,940 (6,338) (10,518)
Cumulative effect of accounting change, net of tax.......... -- -- (37,684)
-------- -------- --------
Net income (loss)................................. $ 7,940 $ (6,338) $(48,202)
======== ======== ========
Net income (loss) per common share -- basic:
Income (loss) from continuing operations.................. $ 0.30 $ (0.34) $ (0.74)
(Loss) income from discontinued operations, net of tax.... (0.04) 0.13 0.38
Cumulative effect of accounting change, net of tax........ -- -- (1.26)
-------- -------- --------
Net income (loss) per common share -- basic....... $ 0.26 $ (0.21) $ (1.62)
======== ======== ========
Shares used in computing net income (loss) per common
share -- basic............................................ 30,061 29,915 29,852
======== ======== ========
Net income (loss) per common share -- diluted:
Income (loss) from continuing operations.................. $ 0.28 $ (0.34) $ (0.74)
(Loss) income from discontinued operations, net of tax.... (0.03) 0.13 0.38
Cumulative effect of accounting change, net of tax........ -- -- (1.26)
-------- -------- --------
Net income (loss) per common share -- diluted..... $ 0.25 $ (0.21) $ (1.62)
======== ======== ========
Shares used in computing net income (loss) per common
share -- diluted.......................................... 31,966 29,915 29,852
======== ======== ========
</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,
-----------------------------
2002 2001 2000
-------- ------- --------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income (loss)......................................... $ 7,940 $(6,338) $(48,202)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization........................... 23,356 25,646 25,687
Discontinued operations................................. 1,025 (3,888) (11,337)
Impairment loss on long-lived assets.................... -- -- 1,185
Cumulative effect of accounting change.................. -- -- 37,684
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash...................................... 372 2,008 (1,002)
Accounts receivable, billed.......................... (524) 6,883 (5,834)
Accounts receivable, unbilled........................ (5,164) 1,637 (503)
Accounts payable..................................... (2,514) (4,929) 760
Accrued compensation................................. (92) 5,232 (3,207)
Accrued expenses..................................... 3,024 (1,699) (6,650)
Accrued litigation settlements....................... -- (1,602) (2,441)
Deferred revenue..................................... 1,312 (2,436) 2,667
Other, net........................................... (5,193) 1,520 2,477
-------- ------- --------
Net cash provided by (used for) continuing
operations......................................... 23,542 22,034 (8,716)
Net cash (used for) provided by discontinued
operations......................................... (575) 3,919 (2,100)
-------- ------- --------
Net cash provided by (used for) operating
activities...................................... 22,967 25,953 (10,816)
-------- ------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (7,076) (4,836) (18,801)
Software development costs................................ (6,992) (5,940) (6,137)
Proceeds from sale of property and equipment.............. 50 1,537 5,658
Net proceeds from sale of subsidiaries.................... -- -- 11,337
Acquisitions, net of cash acquired........................ (1,640) (10,846) (25,193)
Other..................................................... -- (31) --
-------- ------- --------
Net cash used for investing activities............. (15,658) (20,116) (33,136)
-------- ------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of stock........................... -- -- 298
Proceeds from the exercise of stock options............... 1,071 299 379
Repayments of debt........................................ (94) (74) (38)
Deferred financing costs/debt issuance costs.............. -- (539) (71)
Capital contribution (see Note 1)......................... 1,969 -- --
-------- ------- --------
Net cash provided by (used for) financing
activities...................................... 2,946 (314) 568
-------- ------- --------
Cash and Cash Equivalents:
Net change................................................ 10,255 5,523 (43,384)
Balance at beginning of period............................ 36,493 30,970 74,354
-------- ------- --------
Balance at end of period.................................. $ 46,748 $36,493 $ 30,970
======== ======= ========
</Table>
See notes to consolidated financial statements.
F-5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<Table>
<Caption>
ACCUMULATED DEFERRED TOTAL
OTHER STOCK STOCKHOLDERS'
COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE UNIT PLAN TREASURY (DEFICIT)
SHARES STOCK CAPITAL DEFICIT WARRANTS (LOSS)/INCOME OBLIGATION STOCK EQUITY
-------- ------ -------- ----------- -------- ------------- ---------- -------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER
31, 1999.......... 29,575 $296 $771,864 $(771,953) $1,495 $(262) $ -- $ -- $ 1,440
Net loss............ -- -- -- (48,202) -- -- -- -- (48,202)
Foreign currency
translation
adjustment........ -- -- -- -- -- (118) -- -- (118)
--------
TOTAL COMPREHENSIVE
LOSS.............. (48,320)
Issuance of common
stock............. 42 -- 298 -- -- -- -- -- 298
Issuance of common
stock in
acquisitions...... 236 2 1,998 -- -- -- -- -- 2,000
Exercise of stock
options........... 48 1 378 -- -- -- -- -- 379
Other............... 1 -- 65 -- 2 67
------ ---- -------- --------- ------ ----- ------ ------- --------
BALANCE AT DECEMBER
31, 2000.......... 29,902 299 774,603 (820,155) 1,495 (378) -- -- (44,136)
Net loss............ -- -- -- (6,338) -- -- -- -- (6,338)
Foreign currency
translation
adjustment........ -- -- -- -- -- (37) -- -- (37)
--------
TOTAL COMPREHENSIVE
LOSS.............. (6,375)
Issuance of common
stock in
acquisitions...... 5 -- 35 -- -- -- -- -- 35
Exercise of stock
options........... 62 1 295 -- -- -- -- -- 296
Other............... -- -- 50 -- -- -- -- -- 50
------ ---- -------- --------- ------ ----- ------ ------- --------
BALANCE AT DECEMBER
31, 2001.......... 29,969 300 774,983 (826,493) 1,495 (415) -- -- (50,130)
Net income.......... -- -- -- 7,940 -- -- -- -- 7,940
Foreign currency
translation
adjustment........ -- -- -- -- -- (102) -- -- (102)
--------
TOTAL COMPREHENSIVE
INCOME............ 7,838
Exercise of stock
options........... 194 2 1,069 -- -- -- -- -- 1,071
Deferred stock unit
plan activity..... -- -- -- -- -- -- 1,045 (1,045) --
Capital contribution
(see Note 1)...... -- -- 1,969 -- -- -- -- -- 1,969
------ ---- -------- --------- ------ ----- ------ ------- --------
BALANCE AT DECEMBER
31, 2002.......... 30,163 $302 $778,021 $(818,553) $1,495 $(517) $1,045 $(1,045) $(39,252)
====== ==== ======== ========= ====== ===== ====== ======= ========
</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
revenue 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. See Note 3 for further discussion of the Company's
discontinued operations.
Recent Accounting Pronouncements. In August 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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. 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. 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.
In December 2001, the 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 $1.2
million and $1.3 million of reimbursed out-of-pocket expenses in the e-Health
Solutions and Application Software divisions for 2001 and 2000, respectively,
from other operating expenses to revenue. This reclassification did not affect
net income.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS No. 145"). SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145
amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for financial statements issued on or after May 15, 2002. The
Company adopted SFAS No. 145 effective May 15, 2002, however, SFAS No. 145 did
not affect the Company's Consolidated Statements of Operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses the
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The effective date of SFAS No. 146 is December 31, 2002. The
F-7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company adopted SFAS No. 146 on December 31, 2002, however, SFAS No. 146 did not
affect the Company's Consolidated Statements of Operations.
At the November 21, 2002, EITF meeting, the EITF reached a consensus on
EITF Issue No. 00-21, Revenue Arrangements With Multiple Deliverables ("EITF
00-21"). EITF 00-21 addresses how to determine if an arrangement involving
multiple deliverables contains more than one unit of accounting. In applying
EITF 00-21, separate contracts with the same entity or related parties that are
entered into at or near the same time are presumed to have been negotiated as a
package and should, therefore, be evaluated as a single arrangement in
considering whether there are one or more units of accounting. That presumption
may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also
addresses how arrangement consideration should be measured and allocated to the
separate units of accounting in the arrangement. The EITF indicated that the
guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company adopted EITF 00-21 on
January 1, 2003, however, management does not believe EITF 00-21 will have a
material effect on the Company's Consolidated Statements of Operations.
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.
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 deteriorates, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
Company actively reviews its accounts receivable and does not believe
actual results will vary materially from the Company's estimates.
Accrued expenses. The Company relies on estimates to determine the
amounts that are recorded in accrued expenses. Estimates of requirements
for legal services in pending matters and to meet regulatory demands within
our business and industry are used to accrue legal expenses. Income tax
accruals are made using estimates based on historical experience of the
Company, prevailing tax rates 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.
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 and our customers are billed 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.
e-Health Solutions delivers dedicated 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 paid to connectivity partners. 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
F-8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
production, modification or customization changes, revenue is recognized
using the percentage-of-completion method over the implementation period.
Less than 1% of the division's revenue is determined using
percentage-of-completion accounting for the year ended December 31, 2002.
Revenue related to the application service provider ("ASP") physician
practice management system is recognized as monthly subscription 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 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 40% of the division's revenue was determined using
percentage-of-completion accounting for the year ended December 31, 2002.
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. As of December 31, 2002, cash and cash equivalents includes
approximately $5.0 million of commercial paper that matured in January 2003. The
commercial paper is classified as held-to-maturity and its fair value
approximates its carrying value as of December 31, 2002.
Restricted Cash. As of December 31, 2002, restricted cash principally
represents restrictions on the Company's cash as security for 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.
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.
Workforce. Workforce represents the intangible value of the workforce of
businesses acquired in the e-Health Solutions division from 2000 to 2001.
Trademarks. Trademarks represent the value of the trademarks acquired in
the e-Health Solutions division from 2000 to 2001.
In June 2001, the FASB issued SFAS 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
F-9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an initial impairment test by June 30, 2002. The Company completed the initial
impairment test of its goodwill and other indefinite lived intangible assets and
did not identify an asset impairment as a result of the impairment test.
Additionally, the Company performed its periodic review of its goodwill and
other indefinite lived intangible assets for impairment as of December 31, 2002,
and did not identify an asset impairment as a result of the review. The
Company's initial impairment test and periodic review of its goodwill and other
indefinite lived intangible assets were based upon an estimated discounted
future cash flow analysis that included revenue and cost estimates, market
growth rates and appropriate discount rates. The Company will continue to test
its goodwill and other indefinite lived intangible assets annually for
impairment as of December 31.
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill and indefinite lived intangible assets effective January 1, 2002.
For the year ended December 31, 2002, the Company had a reduction in
amortization expense of approximately $1.7 million related to the adoption of
SFAS No. 142. The following table provides pro forma disclosure of net loss and
net loss per share for the years ended December 31, 2001 and 2000, as if
goodwill and indefinite-lived intangible assets had not been amortized (in
thousands, except per share data):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------ ------- --------
Reported net income (loss).............................. $7,940 $(6,338) $(48,202)
Add back:
Goodwill amortization, net of tax..................... -- 2,300 1,272
Trademark amortization, net of tax.................... -- 56 4
Workforce amortization, net of tax.................... -- 42 3
------ ------- --------
Adjusted net income (loss).............................. $7,940 $(3,940) $(46,923)
====== ======= ========
Net income (loss) per common share -- basic:
Reported net income (loss) per common share -- basic.... $ 0.26 $ (0.21) $ (1.62)
Goodwill amortization, net of tax..................... -- 0.08 0.05
Trademark amortization, net of tax.................... -- -- --
Workforce amortization, net of tax.................... -- -- --
------ ------- --------
Adjusted net income (loss) per common share -- basic.... $ 0.26 $ (0.13) $ (1.57)
====== ======= ========
Net income (loss) per common share -- diluted:
Reported net income (loss) per common
share -- diluted...................................... $ 0.25 $ (0.21) $ (1.62)
Goodwill amortization, net of tax..................... -- 0.08 0.05
Trademark amortization, net of tax.................... -- -- --
Workforce amortization, net of tax.................... -- -- --
------ ------- --------
Adjusted net income (loss) per common share --diluted... $ 0.25 $ (0.13) $ (1.57)
====== ======= ========
</Table>
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.
Developed Technology. 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.
F-10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software Development Costs. Software development includes costs incurred
in the development or the enhancement of software developed by the e-Health
Solutions and Application Software divisions for resale and the development of
software for internal use.
Software development costs related to external use software 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. External use software development costs are amortized over
the greater of the ratio that current revenue bears to total and anticipated
future revenue 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 external use
software development costs to ensure that the investment will be recovered
through margins from future sales.
Software development costs related to internal use software are capitalized
after: 1.) the preliminary project stage is complete; 2.) management with the
relevant authority authorizes and commits to the funding of the software
project; and 3.) it is probable that the project will be completed and the
software will be used to perform the function intended. Capitalization ceases no
later than the point at which the project is substantially complete and ready
for its intended use. Software development costs, related to internal use
software, are expensed as incurred during the planning and post-implementation
phases of development. Internal-use software is amortized on a straight-line
basis over its estimated useful life, generally five years. The estimated useful
life considers the effects of obsolescence, technology, competition and other
economic factors.
In December 2000, the Company recorded $1.4 million of 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 $15.6 million, $11.3 million and $9.5 million in 2002, 2001 and
2000, respectively.
Advertising Costs. Advertising costs are expensed as incurred. The Company
recorded advertising costs of approximately $0.4 million, $0.6 million and $0.5
million in 2002, 2001 and 2000, respectively.
Stock-Based Compensation Plans. In December 2002, the FASB issued SFAS No.
148, Accounting for Stock-Based Compensation -- Transition and Disclosure ("SFAS
No. 148"). SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of
the method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002, and for interim
periods beginning after December 15, 2002. The annual disclosure requirements of
SFAS No. 148 were adopted by the Company on December 31, 2002.
At December 31, 2002, the Company has four stock-based compensation plans
described more fully in Note 13. The Company accounts for its stock-based
compensation plans under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"). No stock-based
compensation cost is reflected in the Company's Statement of Operations, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) and net income (loss) per
F-11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based compensation.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported......................... $ 7,940 $ (6,338) $(48,202)
Deduct: total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects.............. $(5,288) $ (5,001) $ (4,818)
------- -------- --------
Pro forma net income (loss)........................... $ 2,652 $(11,339) $(53,020)
======= ======== ========
Net income (loss) per common share:
Basic -- as reported................................ $ 0.26 $ (0.21) $ (1.62)
======= ======== ========
Basic -- pro forma.................................. $ 0.09 $ (0.38) $ (1.78)
======= ======== ========
Diluted -- as reported.............................. $ 0.25 $ (0.21) $ (1.62)
======= ======== ========
Diluted -- pro forma................................ $ 0.08 $ (0.38) $ (1.78)
======= ======== ========
</Table>
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.
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 Income (Loss) Per Share. Net income per common share -- basic is
calculated by dividing net income (loss) by the weighted average number of
shares of common stock outstanding during the period. Net income per common
share -- diluted 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
F-12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
diluted net income (loss) per common share for the years ended December 31,
2002, 2001 and 2000 (in thousands, except per share data):
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
------- ------- --------
Net income (loss).................................... $ 7,940 $(6,338) $(48,202)
======= ======= ========
Common shares outstanding:
Shares used in computing net income (loss) per
common share -- basic........................... 30,061 29,915 29,852
Effect of potentially dilutive stock options and
warrants........................................ 1,905 --(1) --(1)
------- ------- --------
Shares used in computing net income (loss) per
common share -- diluted......................... 31,966 29,915 29,852
======= ======= ========
Net income (loss) per common share:
Basic.............................................. $ 0.26 $ (0.21) $ (1.62)
======= ======= ========
Diluted............................................ $ 0.25 $ (0.21) $ (1.62)
======= ======= ========
</Table>
- ---------------
(1) The Company has excluded all stock options and warrants from the diluted
loss per common share because such securities are antidilutive for 2001 and
2000.
Options and warrants to purchase 3.3 million shares of common stock
outstanding during 2002 were excluded from the computation of diluted earnings
per share because the exercise prices were greater than the average market price
of the common shares, and therefore, the effect would have been antidilutive.
Options and warrants to purchase 8.7 million and 5.8 million shares of
common stock outstanding during 2001 and 2000, 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.
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 accounting
principles generally accepted in the United States 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 on
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.
F-13
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Contribution. The Company recorded an approximately $2 million
capital contribution paid to the Company in November 2002 as a result of
recovering short-swing profits from an outside stockholder in accordance with
Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides
that any profit realized by an insider (defined as an officer, director or
principal stockholder of an issuer) from any purchase and sale, or any sale and
purchase, of an equity security of the issuer within any period of less than six
months are recoverable by the issuer, irrespective of the intention of the
insider in entering into such transaction.
Foreign Currency Translation and Comprehensive Income (Loss). The
functional currency of the Company's operations outside of the United States is
the local country's currency. Consequently, assets and liabilities of operations
outside the United States are translated into dollars using exchange rates at
the end of each reporting period. Revenue and expenses are translated at the
average exchange rates prevailing during the period. Cumulative translation
gains and losses are reported in accumulated other comprehensive income (loss).
In the years ended December 31, 2002, 2001 and 2000, the only component of other
comprehensive loss is the net foreign currency translation, which was $0.1
million, $37,000 and $0.1 million, respectively.
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 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
and accordingly, on May 10, 2002, the payment for the purchase price adjustment
of $1.5 million was made. 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 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 VIS, OfficeMed and HDS/PAMS 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 20 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 five
to ten years. The operating results of VIS, OfficeMed and HDS/PAMS 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
provided for a purchase price adjustment of up to $6.0 million, which was
recorded in
F-14
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In February 2003, the Company determined
that KHS would not meet its purchase agreement operational targets and reduced
the purchase price allocation to goodwill by approximately $5.9 million. This
adjustment is reflected in the Company's December 31, 2002, Consolidated Balance
Sheet. The operating results of KHS are included in the Company's Consolidated
Statements of Operations from the date of acquisition.
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, e-Health Solutions and Application Software. Management
began 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.
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 placed 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
F-15
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discontinued operations. The Company continues to pursue claims against a former
vendor of this division for damages incurred in the SCI matter.
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.
For the year ended December 31, 2002, the Company charged $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO, the buyer of the Company's Hospital Services
division. When NCO bought Hospital Services, the Company agreed to indemnify NCO
for limited periods of time in the event NCO incurred certain damages related to
Hospital Services. NCO incurred such damages in connection with an alleged
environmental liability of Hospital Services, and the Company agreed to
reimburse NCO for a portion of those damages, in satisfaction of the Company's
indemnification obligation. The Company paid $0.3 million to NCO on September
16, 2002. The Company intends to pay the remaining balance of $0.4 million, plus
interest at the then-current prime rate, in equal payments to NCO, on the first
and second anniversaries of that date.
The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to Hospital Services have passed without the
assertion by NCO of any other significant claims. These limitations do not apply
to a small number of other types of potential claims to which statutory
limitations apply, such as those involving title to Hospital Services' shares,
taxes and billing and coding under Medicare and Medicaid; however, management
believes that such other types of claims are unlikely to occur.
During the years ended December 31, 2002 and 2001, the Company also
incurred expenses of approximately $0.3 million and $0.1 million, respectively,
which were primarily legal costs, associated with Hospital Services and Impact.
During the year ended December 31, 2000, the Company recognized approximately
$1.0 million of an additional gain related to other Hospital Services and Impact
post-acquisition matters. Pursuant to SFAS No. 144, 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.
The net operating results of these segments have been reported in the
Consolidated Statements of Operations as "(Loss) income from discontinued
operations, net of tax" and the net cash flows have been reported in the
Consolidated Statements of Cash Flows as "Net cash (used for) provided by
discontinued operations."
4. RESTRUCTURING AND OTHER EXPENSES
Components of other expenses are as follows:
<Table>
<Caption>
2002 2001 2000
---- ---- ------
(IN THOUSANDS)
Severance costs............................................. $-- $593 $ 963
Other....................................................... -- -- 1,419
--- ---- ------
$-- $593 $2,382
=== ==== ======
</Table>
F-16
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Severance Costs. In 2001, the Company recorded an expense of $0.6 million
for severance costs associated with former executive management.
In 2000, the Company recorded an expense of approximately $1.0 million for
severance costs. Approximately $0.4 million of the 2000 expense was related to
the severance in December 2000 for approximately 20 employees associated with
the retirement of a software product that was replaced by a superior software
product at HDS/PAMS (a company acquired by Per-Se in 2000). The remaining $0.6
million in 2000 was related to severance costs associated with former executive
management, net of 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 other
expenses related to e-Health Solutions' retirement of a software product that
was replaced by a superior software product at HDS/PAMS.
Restructuring Expenses. Under SFAS No. 146, 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 1998, the Application Software division recorded approximately $1.3
million of restructuring costs for severance when management decided to
restructure its operations to more appropriately align Application Software's
resources with future operational needs and new product development. The
severance costs relate to approximately 35 employees, primarily in the areas of
professional services and research and development, who had been notified of
their termination.
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for all of the restructurings
discussed above is as follows:
<Table>
<Caption>
RESERVE COSTS RESERVE COSTS RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE APPLIED BALANCE APPLIED BALANCE
JANUARY 1, RESERVE AGAINST DECEMBER 31, AGAINST DECEMBER 31, AGAINST DECEMBER 31,
2000 ADJUSTMENTS RESERVE 2000 RESERVE 2001 RESERVE 2002
---------- ----------- ------- ------------ ------- ------------ ------- ------------
(IN THOUSANDS)
Lease termination costs..... $3,528 $ -- $(655) $2,873 $(535) $2,338 $(358) $1,980
Severance................... 273 (273) -- -- -- -- -- --
------ ----- ----- ------ ----- ------ ----- ------
$3,801 $(273) $(655) $2,873 $(535) $2,338 $(358) $1,980
====== ===== ===== ====== ===== ====== ===== ======
</Table>
The terminated leases have various expiration dates through 2011. The
estimated lease termination costs to be incurred within the next 12 months are
classified in Accrued Expenses in the Company's Consolidated Balance Sheets.
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 installed 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 focused on productivity improvements that
resulted in both improved client service as well as improved profitability for
the division.
F-17
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In 2001,
the costs associated with the Project primarily consisted of professional fees
paid to outside consultants retained exclusively for implementation of the
Project
The second phase of the Project, which began in the first quarter of 2002,
was completed as of September 30, 2002, with implementation into an additional
fifteen processing centers. The second phase was implemented with internal
resources, and therefore the Company did not incur any external project costs.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<Table>
<Caption>
2002 2001
--------- ---------
(IN THOUSANDS)
Land........................................................ $ 590 $ 590
Buildings................................................... 2,751 2,751
Furniture and fixtures...................................... 15,978 16,497
Equipment................................................... 119,855 123,802
Leasehold improvements...................................... 5,909 5,629
--------- ---------
145,083 149,269
Less accumulated depreciation............................... (123,476) (124,257)
--------- ---------
$ 21,607 $ 25,012
========= =========
</Table>
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<Table>
<Caption>
2002 2001
-------- --------
(IN THOUSANDS)
Goodwill.................................................... $ 38,177 $ 43,869
Client lists................................................ 44,308 44,308
Developed technology........................................ 4,616 4,616
Trademarks.................................................. 1,316 1,313
Workforce................................................... 880 880
Software development costs.................................. 61,566 54,574
-------- --------
150,863 149,560
Less accumulated amortization............................... (84,120) (72,292)
-------- --------
$ 66,743 $ 77,268
======== ========
</Table>
In accordance with APB Opinion No. 16, Business Combinations, as of
December 31, 2001, 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.
F-18
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 2003, the Company determined that its KHS acquisition would not
meet its purchase agreement operational targets and reduced the purchase price
allocation to goodwill by approximately $5.9 million.
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. The Company completed the initial
impairment test of its goodwill and other indefinite lived intangible assets and
did not identify an asset impairment as a result of the impairment test.
Additionally, the Company performed its periodic review of its goodwill and
other indefinite lived intangible assets for impairment as of December 31, 2002,
and did not identify an asset impairment as a result of the review. The
Company's initial impairment test and periodic review of its goodwill and other
indefinite lived intangible assets were based upon an estimated discounted
future cash flow analysis that included revenue and cost estimates, market
growth rates and appropriate discount rates. The Company will continue to test
its goodwill and other indefinite lived intangible assets annually for
impairment as of December 31.
Expenditures on capitalized software development costs were approximately
$7.0 million, $5.9 million and $6.1 million in 2002, 2001 and 2000,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $6.0 million, $5.8 million and $4.7 million in 2002, 2001 and
2000, respectively. The unamortized balance of software development costs at
December 31, 2002 and 2001, was $16.3 million and $15.3 million, respectively.
Software development costs are required to be amortized over the greater of the
ratio that current revenue bears to total and anticipated future revenue for the
applicable product or the straight-line method over the estimated useful lives
of the assets. The Company amortizes its capitalized software development costs
using the straight-line method over the estimated useful lives, which are
generally three to five years.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
<Table>
<Caption>
2002 2001
------- -------
(IN THOUSANDS)
Interest.................................................... $ 6,270 $ 6,235
Accrued restructuring and severance costs, current.......... 793 1,198
Accrued legal costs and litigation settlements.............. 3,587 762
Accrued taxes............................................... 1,637 1,237
Funds due clients........................................... 2,200 1,568
Accrued costs of businesses acquired........................ 237 3,958
Other....................................................... 8,479 6,747
------- -------
$23,203 $21,705
======= =======
</Table>
F-19
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>
2002 2001
-------- --------
(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 8 1/2% and 6.0% in 2002 and 2001,
respectively.............................................. 916 91
-------- --------
175,916 175,091
Less current portion........................................ 15,124 --
-------- --------
$160,792 $175,091
======== ========
</Table>
On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due on February 15, 2005 (the "Notes"). The Notes bear interest at the
rate of 9 1/2% per annum, payable semi-annually on February 15 and August 15.
Interest payments commenced on August 15, 1998, and will end when the Notes
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, 2002, the Company did not have excess proceeds (as defined by the Indenture
governing the Notes) in excess of $10.0 million.
In February 2003, the Company reduced its unpaid portion of the purchase
price allocation for the Company's 2000 acquisition of KHS. This adjustment is
reflected in the Company's December 31, 2002, Consolidated Balance Sheet. Due to
the reduction of the KHS purchase price allocation, excess proceeds exceeded
$10.0 million (refer to Note 20 for more information).
At December 31, 2002, the estimated fair value of the Notes is
approximately $167.1 million, or 95.5% 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 revolving credit facility (the
"Credit Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a borrowing base calculated based on eligible billed accounts
receivable of the Company's Physician Services and e-Health Solutions divisions,
as defined in the Credit Facility. The Company has the option of entering into
LIBOR-based loans or index-rate loans, each as defined in the Credit Facility.
LIBOR-based loans bear interest at LIBOR plus amounts ranging from 1.85% to
2.65% based on the Company's leverage ratio, as defined in the Credit Facility.
Index-rate loans bear interest at rates approximating prime plus amounts ranging
from 0.35% to 1.15% based on the Company's leverage ratio, as defined in the
Credit Facility. In addition, the Company
F-20
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pays a quarterly commitment fee on the unused portion of the Credit Facility of
0.375% per annum and an annual administration fee.
The Credit Facility contains financial, collateral and other restrictive
covenants, including, without limitation, those restricting additional
indebtedness, lien creation, dividend payments, asset sales, stock offerings,
capital expenditures, cash velocity, maximum days sales outstanding and the
prepayment of the Notes; those requiring a minimum EBITDA (as defined)
maintenance, fixed charge coverage and cash velocity; and limiting days sales
outstanding in billed accounts receivable, each as defined in the Credit
Facility. The Company was in compliance with all applicable covenants as of
December 31, 2002.
The initial term of the Credit Facility is 42 months, expiring on October
6, 2004. The Company and the Lender can mutually agree to extend this term by 18
months if certain conditions have been met. The Company intends to use the
Credit Facility, as needed, for future investments in its operations including
capital expenditures, strategic acquisitions and other general corporate
purposes. The Company has not incurred any borrowings under the Credit Facility
and there are no outstanding borrowings under the Credit Facility as of December
31, 2002.
The Company's policy is 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 the Notes and the Credit Facility for the
years ended 2002, 2001 and 2000 were $1.4 million, $1.3 million and $1.1
million, respectively.
The aggregate maturities of long-term debt are as follows (in thousands):
<Table>
2003........................................................ $ 15,000
2004........................................................ --
2005........................................................ 160,000
2006........................................................ --
2007........................................................ --
Thereafter.................................................. --
--------
$175,000
========
</Table>
The Company's capital leases consist principally of leases for equipment.
As of December 31, 2002 and 2001, the net book value of equipment subject to
capital leases totaled $1.1 million and $0.1 million, respectively. In addition,
certain capital leases of the Company include equipment maintenance agreements
that expire in September 2006. The future payments related to these capital
lease maintenance agreements total $0.5 million, which will be paid by the
Company in equal installments over the term of the agreement.
F-21
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future payments under capital leases (in
thousands):
<Table>
2003........................................................ $ 206
2004........................................................ 187
2005........................................................ 187
2006........................................................ 187
2007........................................................ 187
Thereafter.................................................. 281
------
1,235
Less interest expense....................................... (319)
------
$ 916
======
</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 $16.4
million, $16.6 million and $17.5 million for the years ended December 31, 2002,
2001 and 2000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<Table>
2003........................................................ $15,423
2004........................................................ 13,353
2005........................................................ 7,058
2006........................................................ 3,663
2007........................................................ 2,048
Thereafter.................................................. 3,673
-------
$45,218
=======
</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 for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from federal and state healthcare programs.
In February 2002, the Company settled claims for alleged breach of contract
arising out of a 1997 contract for billing services provided by the Physician
Services division to a former client. The Company and its insurance carrier at
the time, Certain Underwriters at Lloyd's of London (collectively "Lloyd's"),
each paid the plaintiff $2.0 million in cash in exchange for a release of all
claims asserted against the Company. Under the terms of its insurance policy
with Lloyd's, the Company is seeking reimbursement from Lloyd's for the $2.0
million it paid in this settlement.
On May 30, 2002, the Company received a letter on behalf of Lloyd's
purporting to rescind various managed healthcare professional liability, or
errors and omissions ("E&O"), insurance policies and directors and officers and
company reimbursement ("D&O") insurance policies (collectively the
F-22
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Policies") issued to the Company by Lloyd's. The E&O policies were for the term
of December 31, 1998, through June 30, 2002, and the D&O policies were for the
term of July 1, 2000, through June 30, 2002. The purported rescission was based
on allegations that the Company had failed to advise Lloyd's about the existence
of several lawsuits that were alleged to be related to the risk covered under
the policies, including the lawsuit settled in February 2002 in which the
Company and Lloyd's each paid the plaintiff $2.0 million.
On May 31, 2002, Lloyd's filed a lawsuit against the Company seeking
rescission of the E&O and D&O policies based on the allegations in its letter,
dated May 30, 2002, or a declaration that coverage is unavailable for the claim
related to the February 2002 settlement under the policies issued by Lloyd's,
and restitution of the $2.0 million paid by Lloyd's on behalf of the Company in
that settlement. On June 5, 2002, the Company filed a lawsuit against Lloyd's
seeking damages for breach of contract and breach of obligations of good faith
and fair dealing, including punitive damages. The Company also seeks a
declaratory judgment to enforce the E&O and D&O policies according to their
terms.
Lloyd's lawsuit, filed in the Circuit Court for Kent County, Michigan, was
dismissed during December 2002 with the Michigan court citing that California
was a more suitable forum in which to hear the litigation. The Company's
lawsuit, filed in the Superior Court of the State of California for the County
of Los Angeles, is pending.
The Company believes that Lloyd's attempt to rescind the policies is
without merit, and the Company is prosecuting the matter vigorously and
asserting all appropriate claims against Lloyd's.
The Company's insurance coverage for both the E&O and D&O policies were
scheduled to be renewed as of June 30, 2002, and the Company was in the process
of actively pursuing new coverage with insurance carriers, including Lloyd's,
when the rescission notice was received from Lloyd's. Due to the attempted
rescission, the Company expedited its insurance proposal process and the Company
secured new insurance coverage in mid-June, 2002. The Company believes it
experienced a significant increase in insurance premiums and deductibles with
its new policies as a result of Lloyd's actions and is seeking reimbursement for
a portion of the increased premium costs and increased deductibles in its
lawsuit against Lloyd's. The Company has expensed the increased insurance
premiums and deductibles in the Company's Consolidated Statements of Operations.
The insurance premium increases related to new insurance coverage plus the
cost of pursuing litigation against Lloyd's were approximately $3.0 million for
the year 2002 and, accordingly, these costs have been reflected as an expense in
the Corporate operating segment of Company's Consolidated Statements of
Operations.
The Company has not received any D&O insurance claims since 1996. The
Company did receive E&O insurance claims during the term of the Lloyd's E&O
insurance policies in the ordinary course of business. Over the last five years,
the majority of E&O claims received by the Company were resolved with nominal or
no settlement.
Pending the outcome of the litigation with Lloyd's, the Company will
continue to vigorously defend, and will be required to fund the legal costs and
any litigation settlements related to E&O claims covered by the Lloyd's E&O
policies. The Company expects to recover these costs from Lloyd's in accordance
with the obligations of Lloyd's under the E&O policies and, as such, has
recorded and will record the amounts as non-trade accounts receivable.
At December 31, 2002, the Company's Other Current Assets include non-trade
accounts receivable of $6.8 million associated with the interim funding of legal
costs and litigation settlements related to E&O claims that were incurred by the
Company in excess of the Lloyd's E&O policies' deductible that are
F-23
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expected to be recovered from Lloyd's. The non-trade accounts receivable
includes $5.3 million paid through December 31, 2002, and additional obligations
to be paid of approximately $1.5 million.
The Company believes that it has meritorious defenses to the Lloyd's claims
and that a favorable outcome is probable. The Company's insurance is on a
"claims-made" basis, which means insurance coverage is in place based on the
date the claim is made, not the date(s) the services were provided and/or the
products were sold. In the event that the Company is unsuccessful in the
litigation with Lloyd's, certain claims presently pending against the Company
would become the sole responsibility of the Company. Although the Company
believes it will be successful in its litigation with Lloyd's, if it is not and
uninsured claims do exist, such claims, including the non-trade accounts
receivable related to the interim funding of legal costs and litigation
settlements, could have a material adverse effect on the Company's financial
condition and results of operations. Regardless of the outcome of the litigation
with Lloyd's, the Company's new insurance coverage will not be affected.
The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters; however, there can be no
assurance that such matters or any future legal matters will not have an adverse
effect on the Company. 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. In February 2001, after a lengthy
appeal process, the Company paid the full amount, that was estimated and accrued
for in December 2000, of the net award 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.
12. STOCKHOLDERS' RIGHTS AGREEMENT
On January 21, 1999, the Board approved a stockholders' rights agreement
(the "Rights Agreement"). Pursuant to the Rights Agreement, 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.
F-24
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Agreement, 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 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, 2002 and 2001, no rights have
become exercisable under this plan.
On May 4, 2000, the Company amended the Rights Agreement 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 Agreement to rescind the May 4, 2000, amendment, thereby making Regan
Fund Management subject to the 15% beneficial ownership threshold described
above.
13. 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.
Options expire ten to eleven 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 1.7 million at
December 31, 2002.
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 equal 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 are not exercisable until
one year after the date of grant. As of December 31, 2002, the Company had
38,543 options available for future grant under this plan.
The Company's Senior Executive Non-Qualified Stock Option Plan permitted
certain former Company executive officers to purchase shares of the Company's
Common Stock. All options under this plan expired on January 16, 2001.
F-25
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$15.94 per share and will expire on June 25, 2004.
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. Warrants are currently 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 July 2003.
The Company has reserved 1.9 million shares for future issuance for the
warrants outstanding.
Activity related to all stock option plans is summarized as follows (shares
in thousands):
<Table>
<Caption>
2002 2001 2000
------------------------- ------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
Options outstanding as
of January 1.......... 6,934 $8.07 4,449 $10.90 3,120 $16.00
Granted................. 890 9.97 4,250 6.77 2,660 6.19
Exercised............... (194) 5.53 (62) 4.80 (48) 7.95
Canceled................ (311) 8.35 (1,703) 11.73 (1,283) 13.64
----- ------ ------
Options outstanding as
of December 31........ 7,319 $8.36 6,934 $ 8.07 4,449 $10.90
===== ====== ======
Options exercisable as
of December 31........ 3,057 $9.76 1,831 $12.00 1,685 $16.66
===== ====== ======
</Table>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2002 (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 2002 LIFE PRICE 2002 PRICE
- ------------------------ -------------- ----------- --------- -------------- ---------
$1.95 to $6.00............. 1,800 8.97 $ 5.20 694 $ 4.66
$6.02 to $13.05............ 4,721 9.09 7.92 1,587 7.91
$16.13 to $22.31........... 737 5.06 16.84 715 16.87
$26.10 to $29.34........... 49 5.88 28.80 49 28.80
$30.00 to $135.00.......... 12 4.07 45.97 12 45.97
----- -----
$1.95 to $135.00........... 7,319 8.63 8.36 3,057 9.76
===== =====
</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 that 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-26
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
<Table>
<Caption>
2002 2001 2000
----- ----- -----
Expected life (years)....................................... 4.7 4.8 4.0
Risk-free interest rate..................................... 3.55% 3.85% 6.23%
Dividend rate............................................... 0.00% 0.00% 0.00%
Expected volatility......................................... 54.65% 64.96% 80.88%
</Table>
The estimated weighted-average fair value per option for options granted
under the Company's stock option plans during the years ended December 31, 2002,
2001 and 2000, was $4.44, $3.10 and $4.06, respectively.
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>
2002 2001 2000
--------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss):
As reported.......................................... $7,940 $ (6,338) $(48,202)
Pro forma -- for SFAS No. 123........................ $2,652 $(11,339) $(53,020)
Basic net income (loss) per share:
As reported.......................................... $ 0.26 $ (0.21) $ (1.62)
Pro forma -- for SFAS No. 123........................ $ 0.09 $ (0.38) $ (1.78)
Diluted net income (loss) per share:
As reported.......................................... $ 0.25 $ (0.21) $ (1.62)
Pro forma -- for SFAS No. 123........................ $ 0.08 $ (0.38) $ (1.78)
</Table>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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 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 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.
14. DEFERRED STOCK UNIT PLAN
Effective October 1, 2001, and approved by the stockholders at the annual
meeting held on May 2, 2002, the Board of Directors adopted the Per-Se
Technologies, Inc. Deferred Stock Unit Plan (the "Plan"). The purpose of the
Plan is to further align the interests of the Company's non-employee directors
and a select group of key employees of the Company (and its affiliates) with the
interests of stockholders by encouraging additional ownership of the Common
Stock. The Plan also provides the participants with an opportunity to defer
taxation of income in consideration of the valuable services that they provide
to the Company. Non-employee directors of the Company are automatically eligible
to participate in the Plan.
F-27
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Compensation Committee of the Board of Directors may select key employees of
the Company from time to time as eligible participants. Currently, five
non-employee directors and six executives (including two employee directors) are
eligible to participate in the Plan.
Pursuant to the Plan, a non-employee director may elect to defer up to 100%
of his Board and committee meeting fees and his annual retainer each year.
Eligible employees may elect each year to defer up to 50% of their annual
incentive bonus and receive an enhancement bonus equal to $0.25 for each dollar
of compensation deferred. The Compensation Committee may also from time to time
in its sole discretion designate such other enhancement bonus contributions as
it deems appropriate. The cash amount of such deferrals and, in the case of
employee participants, the enhancement bonuses will be converted to stock units,
by dividing the amount to be deferred, plus any enhancement bonus, by the fair
market value of the Common Stock on the date the amounts are credited to the
participant's account.
Participants are always fully vested in the stock units converted from
deferrals of compensation. However, stock units that are converted from an
enhancement bonus credited to an employee participant, and any related dividend
equivalent stock units, will vest at the rate of 20% each year over a period of
five years from the date of deferral of the related compensation. If a
participant's employment is terminated for "cause" (as defined in the Plan) or
if he or she resigns without "good reason" (as defined in the Plan) before the
enhancement bonus stock units are vested, he or she will forfeit any such
unvested stock units.
For the year ended December 31, 2002, the Plan purchased a total of 89,857
shares of the Company's Common Stock at a total cost of approximately $1.0
million. In accordance with EITF 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, these
amounts and the Company's obligation are reflected as treasury stock and
deferred compensation obligation, respectively, in the financial statements.
15. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<Table>
<Caption>
2002 2001 2000
------- ----- -------
(IN THOUSANDS)
Current:
Federal................................................. $ -- $ -- $ --
State................................................... 982 607 (695)
Foreign................................................. 321 -- --
Deferred:
Federal................................................. 2,945 823 (9,062)
State................................................... (3,762) 113 (1,243)
Valuation allowance....................................... 817 (936) 10,305
------- ----- -------
Total income tax expense (benefit)........................ 1,303 607 (695)
Income tax benefit on discontinued operations............. -- -- --
------- ----- -------
Income tax expense (benefit) on continuing operations..... $ 1,303 $ 607 $ (695)
======= ===== =======
</Table>
F-28
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to income (loss) from continuing operations before income taxes
and income tax expense (benefit) from continuing operations is as follows:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Income tax expense (benefit) at federal statutory
rate.................................................. $ 3,491 $(3,270) $(9,453)
State taxes, net of federal benefit..................... 648 494 (1,296)
Foreign taxes........................................... 321 -- --
Change in tax rates..................................... (4,236) -- --
Nondeductible goodwill amortization..................... -- 208 195
Valuation allowance..................................... 817 (936) 10,305
Other................................................... 262 4,111 (446)
------- ------- -------
$ 1,303 $ 607 $ (695)
======= ======= =======
</Table>
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, 2002 and 2001,
are as follows:
<Table>
<Caption>
2002 2001
--------- ---------
(IN THOUSANDS)
CURRENT:
Accounts receivable, unbilled............................... $ (905) $ (1,535)
Acquisition accruals........................................ 91 2,901
Accrued expenses............................................ 7,042 8,648
Valuation allowance......................................... (7,874) (11,924)
Other....................................................... 1,646 1,910
--------- ---------
$ -- $ --
========= =========
NONCURRENT:
Net operating loss carryforwards............................ $ 163,478 $ 164,736
Valuation allowance......................................... (200,553) (195,686)
Depreciation and amortization............................... 35,062 28,937
Other....................................................... 2,013 2,013
--------- ---------
$ -- $ --
========= =========
</Table>
F-29
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2002, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $402.5 million,
which consist of $339.8 million of consolidated NOLs and $62.7 million of NOLs
that are subject to certain limitations as to future utilization. The NOLs will
expire at various dates between 2003 and 2021 as follows:
<Table>
<Caption>
AMOUNTS
EXPIRING
-------------
(IN MILLIONS)
between 2003 and 2006....................................... $ 9.2
between 2007 and 2010....................................... 54.4
between 2011 and 2014....................................... 191.5
between 2015 and 2021....................................... 147.4
------
$402.5
======
</Table>
In addition, at December 31, 2002, the Company had approximately $198.5
million of state net operating loss carryforwards that expire in various years.
As of December 31, 2002, the Company has a net deferred tax asset of $208.4
million, which is offset by a valuation allowance of $208.4 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. The Company matches a percentage of the employee contributions. The
Company's contribution expense was $1.8 million, $1.6 million and $1.7 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
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 for the year
ended December 31, 2000.
17. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities are as follows:
<Table>
<Caption>
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Additions to capital lease obligations................ $ 916 $ 165 $ --
Liabilities assumed in acquisitions................... -- 311 1,672
KHS purchase price adjustment......................... (5,789) -- 6,000
Common Stock issued in acquisition.................... -- 35 2,000
Issuance of promissory note........................... -- -- --
Issuance of stock warrants............................ -- -- --
Cash paid for:
Interest.............................................. 16,894 16,731 16,987
Income taxes.......................................... 807 189 1,017
</Table>
F-30
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, e-Health Solutions and
Application Software.
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 business of the Physician Services
division is conducted by PST Services, Inc. a Georgia corporation d/b/a "Per-Se
Technologies," which is a wholly owned subsidiary of the Company.
The e-Health Solutions segment provides healthcare providers and payers
with connectivity and business intelligence solutions that help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice management software as an ASP to physician
practices and managed care solutions to payers in ASP, turnkey, or outsourced
formats. The business of e-Health Solutions division is conducted by the
following four wholly owned subsidiaries of the Company: Per-Se Transaction
Services, Inc., an Indiana corporation; Health Data Services, Inc., an Ohio
corporation; Patient Account Management Services, Inc., an Ohio corporation; and
Knowledgeable Healthcare Solutions, Inc., an Alabama corporation. All of these
subsidiaries do business under the name "Per-Se Technologies."
The Application Software segment provides enterprise-wide financial,
clinical and administrative software to acute care healthcare organizations,
including patient financial management software, clinical information software
and patient and staff scheduling systems. These applications enable healthcare
organizations to simultaneously optimize the quality of care delivered and the
profitability of business operations. The business of the Application Software
division is conducted by PST Products, Inc., a California corporation d/b/a
"Per-Se Technologies," which is a wholly owned subsidiary of the Company.
The Company evaluates each segment's performance based on its segment
operating margin. Segment operating margin is not a Generally Accepted
Accounting Principles ("GAAP") financial measure. The Company believes segment
operating margin is meaningful as it excludes expenses that are not indicative
of future operating performance.
Segment operating margin may be reconciled to the GAAP measure of income
(loss) from continuing operations, by including net interest expense, the
process improvement project costs, litigation settlements, restructuring and
other expenses, and income taxes.
F-31
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The e-Health Solutions segment revenue includes intersegment revenues for
services provided to the Physician Services segment, which are shown as
Eliminations to reconcile to total consolidated revenue. Information concerning
the operations in these reportable segments is as follows:
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Revenue(1):
Physician Services................................. $233,222 $223,875 $225,099
e-Health Solutions................................. 68,296 57,961 35,276
Application Software............................... 65,209 59,988 61,913
Eliminations....................................... (12,673) (11,748) (11,005)
-------- -------- --------
$354,054 $330,076 $311,283
======== ======== ========
Segment operating expenses(2):
Physician Services................................. $209,077 $211,406 $220,832
e-Health Solutions................................. 59,043 52,733 31,875
Application Software............................... 55,679 54,515 59,054
Corporate.......................................... 14,647 11,614 14,522
Eliminations....................................... (12,673) (11,748) (11,005)
-------- -------- --------
$325,773 $318,520 $315,278
======== ======== ========
Segment operating margin(2):
Physician Services................................. $ 24,145 $ 12,469 $ 4,267
e-Health Solutions................................. 9,253 5,228 3,401
Application Software............................... 9,530 5,473 2,859
Corporate.......................................... (14,647) (11,614) (14,522)
-------- -------- --------
$ 28,281 $ 11,556 $ (3,995)
======== ======== ========
Interest expense..................................... $ 18,485 $ 18,287 $ 18,276
======== ======== ========
Interest income...................................... $ (472) $ (1,128) $ (3,751)
======== ======== ========
Process improvement project
Physician Services................................. $ -- $ 3,423 $ 501
======== ======== ========
Restructuring and other expenses (including goodwill
and client lists impairment and litigation
settlements)
Physician Services................................. $ -- $ (18) $ 1,292
e-Health Solutions................................. -- -- 1,820
Application Software............................... -- -- (273)
Corporate.......................................... -- 611 690
-------- -------- --------
$ -- $ 593 $ 3,529
======== ======== ========
Income (loss) before income taxes.................... $ 10,268 $ (9,619) $(22,550)
======== ======== ========
</Table>
F-32
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Depreciation and amortization:
Physician Services................................. $ 10,609 $ 11,246 $ 12,988
e-Health Solutions................................. 5,395 6,071 2,716
Application Software............................... 6,417 7,210 7,295
Corporate.......................................... 935 1,119 2,688
-------- -------- --------
$ 23,356 $ 25,646 $ 25,687
======== ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services................................. $ 4,012 $ 2,041 $ 11,644
e-Health Solutions................................. 4,816 3,587 3,318
Application Software............................... 4,871 4,732 8,535
Corporate.......................................... 369 416 1,441
-------- -------- --------
$ 14,068 $ 10,776 $ 24,938
======== ======== ========
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Identifiable Assets:
Physician Services........................................ $ 50,700 $ 55,812
e-Health Solutions........................................ 60,248 65,713
Application Software...................................... 36,014 33,172
Corporate................................................. 62,509 48,194
-------- --------
$209,471 $202,891
======== ========
</Table>
- ---------------
(1) In accordance with EITF 01-14, the Company reclassified reimbursed
out-of-pocket expenses in the e-Health Solutions and Application Software
divisions for 2001 and 2000 from other operating expenses to revenue.
(2) Segment operating margin may be reconciled to the GAAP measure of income
(loss) from continuing operations, by including net interest expense, the
process improvement project costs, litigation settlements, restructuring and
other expenses, and income taxes.
F-33
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)
2002
Revenue.................................. $85,436 $88,888 $89,930 $89,800
Income from continuing operations........ 1,400 2,022 2,144 3,399
Discontinued operations, net of tax...... (101) -- (857) (67)
Net income............................... 1,299 2,022 1,287 3,332
Net income per common share -- basic from
continuing operations.................. 0.04 0.07 0.07 0.11
Discontinued operations, net of tax,
per common share.................... -- -- (0.03) --
Net income per common share -- basic... 0.04 0.07 0.04 0.11
Shares used to compute net income per
common share -- basic............... 29,990 30,049 30,083 30,119
Net income per common share -- diluted
from continuing operations............. 0.04 0.06 0.07 0.11
Discontinued operations, net of tax,
per common share.................... -- -- (0.03) --
Net income per common
share -- diluted.................... 0.04 0.06 0.04 0.11
Shares used to compute net income per
common share -- diluted............. 32,527 32,491 31,258 31,585
2001(1)
Revenue(2)............................... $80,296 $83,483 $82,230 $84,067
(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
Net (loss) income per common
share -- basic 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 --
basic............................... (0.21) (0.01) (0.06) 0.07
Shares used to compute net (loss)
income per common share -- basic.... 29,902 29,904 29,914 29,939
Net (loss) income per common share --
diluted from continuing operations..... (0.21) (0.11) (0.06) 0.03
Discontinued operations, net of tax,
per common share.................... -- 0.10 -- 0.03
Net (loss) income per common share --
diluted............................. (0.21) (0.01) (0.06) 0.06
Shares used to compute net (loss)
income per common
share -- diluted.................... 29,902 29,904 29,914 31,435
</Table>
F-34
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(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 expenses
that are not shown in the above table.
(2) In accordance with the EITF No. 01-14, the Company reclassified $0.3
million, in each of the quarterly periods ended March 31, 2001, June 30,
2001, September 30, 2001, and December 31, 2001, from other operating
expenses to revenue in the e-Health Solutions and Application Software
divisions.
20. SUBSEQUENT EVENTS (UNAUDITED)
In February 2000, the Company acquired KHS. A portion of the purchase price
was deferred based on KHS's performance during the three years following the
acquisition date. The Company recorded a liability for the unpaid purchase price
based on KHS's performance estimates.
In February 2003, the Company determined that KHS would not meet the
post-acquisition operational targets set in the KHS purchase agreement, and the
Company reduced the portion of the KHS purchase price allocated to goodwill by
approximately $5.9 million. This adjustment is reflected in the Company's
December 31, 2002, Consolidated Balance Sheet. Because of this adjustment,
excess proceeds (as defined by the Indenture) exceeded $10.0 million (refer to
Note 9 for more information). On February 13, 2003, the Company initiated an
offer to purchase up to $15 million of the Notes at par plus accrued interest,
including $13.2 million to satisfy the requirements under the Indenture for the
reinvestment of excess proceeds. The Company's offer to repurchase the Notes was
accepted in full, and on March 17, 2003, the Company's repurchased $15 million
of the Notes at par plus accrued interest. The Company used a portion of its
available cash to fund the repurchase. As a result of the repurchase, the
Company reclassified $15 million of the Notes to the "current portion of
long-term debt" from "long-term debt" in its December 31, 2002, Consolidated
Balance Sheet.
On March 10, 2003, the Company amended the Rights Agreement to provide that
the meaning of the term "Acquiring Person" shall not include ValueAct Capital
Partners, L.P. ("ValueAct Partners"); ValueAct Capital Partners II, L.P.
("ValueAct Partners II"), ValueAct Capital International, Ltd. ("ValueAct
International"); VA Partners, L.L.C. ("VA Partners"), Jeffrey W. Ubben, George
F. Hamel, Jr., and Peter H. Kamin (ValueAct Partners, ValueAct Partners II,
ValueAct International, VA Partners and Messrs. Ubben, Hamel and Kamin, and
their affiliates, collectively "ValueAct"); so long as ValueAct does not become
the beneficial owner of 20% or more of the then outstanding shares of the
outstanding shares of Common Stock. As of March 10, 2003, ValueAct was the
beneficial owner of approximately 14.9% of the outstanding shares of Common
Stock.
F-35
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Per-Se
Technologies, Inc. as of December 31, 2002 and 2001 and for the years then ended
and have issued our report thereon dated February 7, 2003 (included elsewhere in
this Annual Report on Form 10-K). Our audit also included the financial
statement schedule as of December 31, 2002 and 2001 and for the years then ended
listed in Item 15(a)(2) 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 audits.
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 7, 2003
F-36
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Per-Se Technologies, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated February 5, 2001 appearing in the 2002 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 15(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-37
PER-SE TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
<Table>
<Caption>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- ----------- ---------- ---------- -------- ---------- -----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts........ $ 6,489 $ 2,214 -- $(3,219) $ 5,484
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts........ $ 11,973 $ 1,995 -- $(7,479) $ 6,489
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts........ $ 14,501 $ 4,651 -- $(7,179) $ 11,973
</Table>
F-38