- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER: 000-19480
PER-SE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
<Table>
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2840 MT. WILKINSON PARKWAY 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)
</Table>
(770) 444-5300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<Table>
<Caption>
TITLE OF CLASS SHARES OUTSTANDING AT OCTOBER 27, 2003
-------------- --------------------------------------
Common Stock $0.01 Par Value 31,254,618 shares
Non-voting Common Stock $0.01 Par Value 0 Shares
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PER-SE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2003
<Table>
<Caption>
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003, and
December 31, 2002........................................... 2
Consolidated Statements of Operations for the three and nine
months ended September 30, 2003 and 2002.................... 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002........................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 26
Item 4. Controls and Procedures..................................... 26
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 27
</Table>
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 18,481 $ 46,748
Restricted cash........................................... 96 4,296
-------- --------
Total cash and cash equivalents................... 18,577 51,044
Accounts receivable, billed (less allowances of $4,295 and
$3,880, respectively).................................. 46,530 41,382
Accounts receivable, unbilled (less allowances of $488 and
$408, respectively).................................... 1,856 2,096
Other..................................................... 14,378 10,560
-------- --------
Total current assets.............................. 81,341 105,082
Property and equipment, net of accumulated depreciation..... 16,998 19,493
Other intangible assets, net of accumulated amortization.... 20,330 22,902
Goodwill, net of accumulated amortization................... 32,549 32,549
Assets of discontinued operations, net...................... 840 26,338
Other....................................................... 6,215 3,486
-------- --------
Total assets...................................... $158,273 $209,850
======== ========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 5,393 $ 3,525
Accrued compensation...................................... 16,576 20,594
Accrued expenses.......................................... 17,495 21,883
Current portion of long-term debt......................... 12,500 15,020
-------- --------
51,964 61,022
Deferred revenue.......................................... 19,509 18,002
-------- --------
Total current liabilities......................... 71,473 79,024
Long-term debt.............................................. 112,500 160,000
Liabilities of discontinued operations...................... 65 7,938
Other obligations........................................... 1,719 2,140
-------- --------
Total liabilities................................. 185,757 249,102
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
31,198 and 30,163 issued and outstanding as of
September 30, 2003, and December 31, 2002,
respectively........................................... 312 302
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 785,024 778,021
Warrants.................................................. 1,495 1,495
Accumulated deficit....................................... (813,951) (818,553)
Treasury stock at cost, 117 as of September 30, 2003, and
90 as of December 31, 2002............................. 1,242 1,045
Deferred stock unit plan obligation....................... (1,242) (1,045)
Accumulated other comprehensive loss...................... (364) (517)
-------- --------
Total stockholders' deficit....................... (27,484) (39,252)
-------- --------
Total liabilities and stockholders' deficit....... $158,273 $209,850
======== ========
</Table>
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
Revenue..................................................... $84,511 $82,842 $251,826 $243,632
------- ------- -------- --------
Salaries and wages.......................................... 49,846 46,976 146,119 140,125
Other operating expenses.................................... 20,534 23,986 65,805 68,029
Depreciation................................................ 2,352 2,643 7,315 8,342
Amortization................................................ 1,786 2,042 5,396 5,921
Restructuring expenses...................................... 177 -- 177 --
Interest expense............................................ 9,943 4,610 18,900 13,810
Interest income............................................. (79) (107) (245) (344)
------- ------- -------- --------
Total expenses..................................... 84,559 80,150 243,467 235,883
------- ------- -------- --------
(Loss) income before income taxes........................... (48) 2,692 8,359 7,749
Income tax expense.......................................... 143 218 805 643
------- ------- -------- --------
(Loss) income from continuing operations.................... (191) 2,474 7,554 7,106
------- ------- -------- --------
Discontinued operations (see Note 7)
(Loss) income from discontinued operations, net of
tax -- Patient1......................................... (228) 197 (1,337) (310)
Gain on sale of Patient1.................................. 9,436 -- 9,436 --
Loss from discontinued operations, net of
tax -- Business1........................................ (977) (527) (2,851) (1,230)
Loss from discontinued operations, net of tax -- Business1
write-down of assets.................................... (7,708) -- (7,708) --
Loss from discontinued operations, net of tax -- Other.... (258) (857) (492) (958)
------- ------- -------- --------
Net income......................................... $ 74 $ 1,287 $ 4,602 $ 4,608
======= ======= ======== ========
Net income per common share -- basic:
(Loss) income from continuing operations.................. $ (0.01) $ 0.08 $ 0.24 $ 0.23
(Loss) income from discontinued operations, net of
tax -- Patient1......................................... (0.01) 0.01 (0.04) (0.01)
Gain on sale of Patient1.................................. 0.31 -- 0.31 --
Loss from discontinued operations, net of
tax -- Business1........................................ (0.03) (0.02) (0.09) (0.04)
Loss from discontinued operations, net of tax -- Business1
write-down of assets.................................... (0.25) -- (0.25) --
Loss from discontinued operations, net of tax -- Other.... (0.01) (0.03) (0.02) (0.03)
------- ------- -------- --------
Net income per common share -- basic............... $ 0.00 $ 0.04 $ 0.15 $ 0.15
======= ======= ======== ========
Weighted average shares used in computing basic earnings per
share..................................................... 30,677 30,083 30,364 30,041
======= ======= ======== ========
Net income per common share -- diluted:
(Loss) income from continuing operations.................. $ (0.01) $ 0.08 $ 0.23 $ 0.22
(Loss) income from discontinued operations, net of
tax -- Patient1......................................... (0.01) 0.01 (0.04) (0.01)
Gain on sale of Patient1.................................. 0.31 -- 0.29 --
Loss from discontinued operations, net of tax -
Business1............................................... (0.03) (0.02) (0.09) (0.04)
Loss from discontinued operations, net of tax - Business1
write-down of assets.................................... (0.25) -- (0.24) --
Loss from discontinued operations, net of tax -- Other.... (0.01) (0.03) (0.01) (0.03)
------- ------- -------- --------
Net income per common share -- diluted............. $ 0.00 $ 0.04 $ 0.14 $ 0.14
======= ======= ======== ========
Weighted average shares used in computing diluted earnings
per share................................................. 30,677 31,258 32,199 32,092
======= ======= ======== ========
</Table>
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 4,602 $ 4,608
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 12,711 14,263
Loss from discontinued operations......................... 11,896 1,540
(Gain) loss on sale of discontinued operations and
other................................................... (8,944) 958
Amortization of deferred financing costs.................. 2,872 1,050
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash......................................... 4,200 71
Accounts receivable, billed............................. (5,148) (3,424)
Accounts receivable, unbilled........................... 240 (308)
Accounts payable........................................ 1,868 (184)
Accrued compensation.................................... (4,018) (4,152)
Accrued expenses........................................ (5,590) (2,329)
Deferred revenue........................................ 1,507 3,136
Other, net.............................................. (3,440) (5,772)
--------- --------
Net cash provided by continuing operations........... 12,756 9,457
Net cash used for discontinued operations............ (9,672) (4,961)
--------- --------
Net cash provided by operating activities............ 3,084 4,496
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,850) (5,137)
Software development costs.................................. (2,821) (2,841)
Proceeds from sale of discontinued operations............... 27,092 --
Proceeds from sale of property and equipment................ 3 48
Acquisitions, net of cash acquired.......................... (57) (1,620)
--------- --------
Net cash provided by (used for) continuing
operations........................................... 19,367 (9,550)
Net cash used for discontinued operations............ (2,289) (3,228)
--------- --------
Net cash provided by (used for) investing
activities........................................... 17,078 (12,778)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... 125,000 --
Debt issuance costs......................................... (5,421) --
Proceeds from the exercise of stock options................. 7,012 681
Payments of debt............................................ (175,020) (53)
--------- --------
Net cash (used for) provided by financing
activities........................................... (48,429) 628
--------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (28,267) (7,654)
Balance at beginning of period.............................. 46,748 36,493
--------- --------
Balance at end of period.................................... $ 18,481 $ 28,839
========= ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 21,977 $ 16,813
Income taxes.............................................. 421 648
</Table>
See notes to consolidated financial statements.
4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Per-Se Technologies, Inc. ("Per-Se" or the "Company") are presented in
accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X.
For further information, the reader of this Form 10-Q may wish to refer to the
audited consolidated financial statements of the Company for the fiscal year
ended December 31, 2002, included in the Company's Annual Report on Form 10-K,
filed on March 27, 2003, with the Securities and Exchange Commission.
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and accompanying notes. Actual results could differ from those
estimates.
The consolidated financial statements of the Company have been presented to
reflect the operations of the Hospital Services division's Patient1 clinical
product line ("Patient1") and Business1-PFM patient accounting product line
("Business1") as discontinued operations. Patient1 was sold on July 28, 2003,
and Business1 is held for sale as of September 2003. Additionally, the activity
related to the Medaphis Services Corporation ("MSC") and Impact Innovations
Group ("Impact") businesses, which were sold in 1998 and 1999, respectively, are
also reflected as discontinued operations for all periods presented (refer to
Note 7 for additional information).
NOTE 2 -- STOCK-BASED COMPENSATION PLANS
At September 30, 2003, the Company has four stock-based compensation plans.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). No 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 and
net income per share if the Company had applied the fair value recognition
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), to stock-based
compensation.
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2003 2002 2003 2002
-------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported......................... $ 74 $ 1,287 $ 4,602 $ 4,608
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects...................................... $(2,063) $(1,356) $(4,570) $(3,910)
------- ------- ------- -------
Pro forma net income........................... $(1,989) $ (69) $ 32 $ 698
======= ======= ======= =======
Net income (loss) per common share:
Basic -- as reported......................... $ 0.00 $ 0.04 $ 0.15 $ 0.15
======= ======= ======= =======
Basic -- pro forma........................... $ (0.06) $ 0.00 $ 0.00 $ 0.02
======= ======= ======= =======
Diluted -- as reported....................... $ 0.00 $ 0.04 $ 0.14 $ 0.14
======= ======= ======= =======
Diluted -- pro forma......................... $ (0.06) $ 0.00 $ 0.00 $ 0.02
======= ======= ======= =======
</Table>
NOTE 3 -- EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options and warrants. The following sets forth the
computation of basic and diluted net income per share for the three-month and
nine-month periods ended September 30, 2003 and 2002 (in thousands, except per
share data):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2003 2002 2003 2002
-------- -------- ------- -------
Net income..................................... $ 74 $ 1,287 $ 4,602 $ 4,608
======= ======= ======= =======
Common shares outstanding:
Shares used in computing net income per
common share -- basic..................... 30,677 30,083 30,364 30,041
Effect of potentially dilutive stock options
and warrants.............................. -- 1,175 1,835 2,051
------- ------- ------- -------
Shares used in computing net income per
common share -- diluted................... 30,677 31,258 32,199 32,092
======= ======= ======= =======
Net income per common share:
Basic........................................ $ 0.00 $ 0.04 $ 0.15 $ 0.15
======= ======= ======= =======
Diluted...................................... $ 0.00 $ 0.04 $ 0.14 $ 0.14
======= ======= ======= =======
</Table>
Options and warrants to purchase 6.9 million shares of Common Stock during
the three months ended September 30, 2003, were excluded from the computation of
diluted earnings per share due to their antidilutive effect as a result of the
Company's loss from continuing operations for the period.
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Options and warrants to purchase 3.0 million shares of Common Stock during
the nine months ended September 30, 2003, were excluded from the computation of
diluted earnings per share because the exercise prices of the options and
warrants were greater than the average market price of the common shares, and
therefore, the effect would have been antidilutive.
Options and warrants to purchase 3.7 million and 3.1 million shares of
Common Stock during the three and nine months ended September 30, 2002,
respectively, were excluded from the computation of diluted earnings per share
because the exercise prices of the options and warrants were greater than the
average market price of the common shares, and therefore, the effect would have
been antidilutive.
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. These warrants expired on July 8, 2003.
NOTE 4 -- NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN No.
45"). The Interpretation requires that a guarantor recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee. The Interpretation also requires additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees it has issued. FIN No. 45 does not have
a material effect on the Company's condensed consolidated financial statements
for the nine months ended September 30, 2003. Certain of the Company's sales
agreements contain infringement indemnity provisions that are covered by FIN No.
45. Under these sales agreements, the Company agrees to defend and indemnify a
customer in connection with infringement claims made by third parties with
respect to the customer's authorized use of the Company's products and services.
The indemnity obligations contained in sales agreements generally have no
specified expiration date and generally limit the award to the amount of fees
paid. The Company has not previously incurred costs to settle claims or pay
awards under these indemnification obligations. As a result, the Company's
estimated fair value of these obligations is nominal.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities ("FIN No. 46"), which clarifies the consolidation accounting
guidance of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entities to finance their activities without additional
subordinated financial support from other parties. Such entities are known as
variable interest entities ("VIE"). Controlling financial interests of a VIE are
identified by the exposure of a party to the VIE to a majority of either the
expected losses or residual rewards of the VIE, or both. Such parties are
primary beneficiaries of the VIE, and FIN No. 46 requires that the primary
beneficiary of a VIE consolidate the VIE. FIN No. 46 also requires new
disclosures for significant relationships with VIEs, whether or not
consolidation accounting is either used or anticipated. The Company currently
believes that it does not have any relationships with a VIE, however, the
Company is in the process of evaluating all business relationships and will
continue to do so until the December 31, 2003, effective date of FIN No. 46.
NOTE 5 -- RESTRICTED CASH
At September 30, 2003, restricted cash primarily represents amounts
collected on behalf of certain clients, a portion of which is held in trust
until it is remitted to such clients. The $4.1 million decrease in restricted
cash from December 31, 2002 is primarily the result of using the Company's
Revolving Credit Facility rather than cash as security for the Company's letters
of credit. For more information about the Company's long-term debt, refer to
"Note 9 -- Long-Term Debt" in the Company's Notes to Consolidated Financial
Statements.
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 6 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME
The functional currency of the Company's operations outside of the United
States is the local country's currency. Consequently, assets and liabilities of
operations outside the United States are translated into dollars using exchange
rates at the end of each reporting period. Revenue and expenses are translated
at the average exchange rates prevailing during the period. Cumulative
translation gains and losses are reported in accumulated other comprehensive
income. Net foreign currency translation included a reversal of approximately
$0.3 million in the three and nine months ended September 30, 2003,
respectively, related to the sale of Patient1. In the three-month and nine-month
periods ended September 30, 2003 and 2002, the only component of other
comprehensive income was the net foreign currency translation:
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
----- ----- ----- -----
(IN THOUSANDS)
Net foreign currency translation.......................... $290 $51 $153 $11
</Table>
NOTE 7 -- DISCONTINUED OPERATIONS AND DIVESTITURES
In June 2003, the Company announced that it agreed to sell Patient1 to
Misys Healthcare Systems, a division of Misys plc ("Misys") for $30 million in
cash. Patient1 was the Company's only clinical product line and its sale allows
the Company to better focus on optimizing reimbursement and improving
administrative efficiencies for physician practices and hospitals. The sale was
completed on July 28, 2003. The Company recognized a gain on the sale of
Patient1 of approximately $9.4 million, subject to closing adjustments, in the
three months ended September 30, 2003. Net proceeds on the sale of Patient1 were
approximately $27.1 million, subject to closing adjustments.
In September 2003, the Company initiated a process to sell Business1. As
with the sale of Patient1, the discontinuance of Business1 will allow the
Company to focus resources on solutions that provide meaningful, strategic
returns for the Company, its customers and its shareholders. Pursuant to SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
No. 144"), the Company wrote down the assets of Business1 to fair market value
less costs to sell, and incurred a $7.7 million charge.
Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Patient1 and Business1 were formerly
reported with the Hospital Services division.
Summarized operating results for the discontinued operations are as
follows:
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ------- -------- --------- ------
(IN THOUSANDS)
Revenue....................... $2,168 $ 160 $ 2,328 $6,483 $ 605 $7,088
====== ===== ======= ====== ===== ======
(Loss) income from
discontinued operations
before income taxes......... $ (224) $(977) $(1,201) $ 228 $(527) $ (299)
Income tax expense............ 4 -- 4 31 -- 31
------ ----- ------- ------ ----- ------
(Loss) income from
discontinued operations, net
of tax...................... $ (228) $(977) $(1,205) $ 197 $(527) $ (330)
====== ===== ======= ====== ===== ======
</Table>
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ------- -------- --------- -------
(IN THOUSANDS)
Revenue.................... $15,247 $ 330 $15,577 $18,554 $ 2,069 $20,623
======= ======= ======= ======= ======= =======
Loss from discontinued
operations before income
taxes.................... $(1,292) $(2,851) $(4,143) $ (218) $(1,230) $(1,448)
Income tax expense......... 45 -- 45 92 -- 92
------- ------- ------- ------- ------- -------
Loss from discontinued
operations, net of tax... $(1,337) $(2,851) $(4,188) $ (310) $(1,230) $(1,540)
======= ======= ======= ======= ======= =======
</Table>
The major classes of assets and liabilities for the discontinued operations
are as follows:
<Table>
<Caption>
AS OF
SEPTEMBER 30,
2003 AS OF DECEMBER 31, 2002
-------------- ------------------------------
BUSINESS1 PATIENT1 BUSINESS1 TOTAL
-------------- -------- --------- -------
(IN THOUSANDS) (IN THOUSANDS)
Current assets............................. $ 82 $10,538 $2,395 $12,933
Property and equipment..................... 28 1,889 226 2,115
Other long-term assets..................... 730 4,931 6,359 11,290
---- ------- ------ -------
Assets of discontinued operations........ $840 $17,358 $8,980 $26,338
==== ======= ====== =======
Current liabilities........................ $ 65 $ 3,364 $ 532 $ 3,896
Deferred revenue........................... -- 3,237 13 3,250
Other long-term liabilities................ -- 792 -- 792
---- ------- ------ -------
Liabilities of discontinued operations... $ 65 $ 7,393 $ 545 $ 7,938
==== ======= ====== =======
</Table>
On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment.
During the three months ended September 30, 2003 and 2002, the Company
incurred expenses of approximately $0.3 million and $0.9 million, respectively,
which were primarily legal costs, associated with MSC and Impact. During the
nine months ended September 30, 2003 and 2002, the Company incurred expenses of
approximately $0.5 million and $1.0 million, respectively, which were primarily
legal costs, associated with MSC and Impact. Pursuant to APB Opinion No. 30,
Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("APB No. 30"), the consolidated financial statements of
the Company are presented to reflect the activity associated with MSC and Impact
as discontinued operations for all periods presented.
NOTE 8 -- LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not resulted in legal
action. Within the Company's industry, federal and state civil and criminal laws
govern medical billing and collection activities. These laws provide for various
fines,
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from federal and state healthcare payer 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 from Lloyd's purporting to
rescind various managed healthcare professional liability, or errors and
omissions ("E&O") insurance policies and directors and officers and company
reimbursement ("D&O") insurance policies (collectively the "Policies") issued to
the Company by Lloyd's. The E&O policies were for the term of December 31, 1998,
through June 30, 2002, and the D&O policies were for the term of July 1, 2000,
through June 30, 2002. The purported rescission was based on allegations that
the Company had failed to advise Lloyd's about the existence of several lawsuits
that were alleged to be related to the risk covered under the policies.
On May 31, 2002, Lloyd's filed a lawsuit in the Circuit Court for Kent
County, Michigan, 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. Lloyd's also claimed
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 in the Superior Court
of the State of California for the County of Los Angeles 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.
The lawsuit filed by Lloyd's was dismissed during December 2002 with the
Michigan court citing California as a more suitable forum in which to hear the
litigation. During June 2003, the California Superior Court ordered the Company
and Lloyd's to engage in nonbinding mediation to be completed by October 30,
2003, and in the event mediation is not successful, the trial is scheduled to
begin February 17, 2004.
In October 2003, the Company commenced the nonbinding mediation process
ordered by the California Superior Court in June 2003. The Company expects the
mediation process to continue. The discovery process will continue with the
trial scheduled to begin February 17, 2004, the date previously set by the
Court.
The Company believes that the attempt by Lloyd's 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 was
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 attempted rescission notice was received from Lloyd's. Due to the
attempted rescission, the Company expedited its insurance proposal process, and
in mid-June 2002, the Company secured insurance coverage with a policy period of
12 months. The Company experienced a significant, above-market increase in
insurance premiums and deductibles with its June 2002 policies as a result of
the actions of Lloyd's and is seeking reimbursement for a portion of the
increased premium costs and increased deductibles in its lawsuit against
Lloyd's. During June 2003, the Company secured new insurance policies in the
ordinary course of business, at substantially reduced premiums compared to the
previous twelve-month policies. For the three months ended September 30, 2003,
the Company incurred approximately $0.3 million in expenses related to its
litigation with Lloyd's. For the nine months ended September 30, 2003, the
Company has expensed approximately $2.5 million of increased insurance premiums
and the costs of pursuing litigation against Lloyd's. These costs are reflected
in the Company's Consolidated Statements of Operations in the Corporate segment.
For the three and nine months ended September 30, 2002, the
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Company expensed approximately $1.3 million and $1.8 million, respectively, of
increased insurance premiums and costs to pursue its litigation with Lloyd's.
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 and as is consistent
with standard practices under E&O policies, 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 continue to record the amounts as Other Current Assets on the
Company's Consolidated Balance Sheets.
At September 30, 2003, the Company's Other Current Assets include $10.1
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 expected to be recovered from
Lloyd's. This $10.1 million balance includes $8.2 million paid through September
30, 2003, and additional obligations to be paid of approximately $1.9 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 $10.1 million balance in
Other Current Assets 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 current 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. Amounts of awards or losses, if any, in pending legal
matters have not been reflected in the financial statements unless probable and
reasonably estimable.
NOTE 9 -- LONG-TERM DEBT
On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due 2005 (the "Notes"). On March 17, 2003, the Company repurchased $15.0
million of the Notes at par plus accrued interest of approximately $0.1 million.
The Company incurred a write-off of approximately $0.2 million during the three
months ended March 31, 2003, of deferred debt issuance costs associated with the
original issuance of the Notes related to the repurchase on March 17, 2003.
On August 12, 2003, the Company commenced a cash tender offer for its
then-outstanding $160 million of Notes (the "Tender Offer"). On September 11,
2003, the Company repurchased $143.6 million of the Notes that were tendered at
the redemption price of 102.375% of the principal amount, as required under the
Indenture governing the Notes, and accrued interest of approximately $1.0
million. The Notes tendered by August 25, 2003 included a premium of 0.25% of
the principal amount in addition to the redemption price of 102.375% of the
principal amount. The remaining $16.4 million of the Notes were retired on
September 18, 2003, through a call initiated by the Company on August 12, 2003,
at the redemption price of 102.375% of the principal amount plus accrued
interest of approximately $0.01 million (the "Call").
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On April 16, 2001, the Company entered into a $50 million credit facility
(the "2001 Credit Facility"). The Company did not incur any borrowings under the
2001 Credit Facility, and, on September 11, 2003, the Company terminated the
2001 Credit Facility.
On September 11, 2003, the Company entered into a $175 million Credit
Agreement (the "Credit Agreement"). The Credit Agreement consists of a $125
million Term Loan B (the "Term Loan B") and a $50 million revolving credit
facility (the "Revolving Credit Facility"). Under the Credit Agreement, the
Company has the option of entering into LIBOR based loans or base rate loans,
each as defined in the Credit Agreement. Base rate loans bear interest at rates
approximating Prime. The Term Loan B bears interest at a rate of either LIBOR
plus 4.25% or the base rate plus 2.75%, matures in five years and includes
mandatory quarterly principle payments based on annual amortization of 10% for
the first two years, 15% for years three and four and 50% in year five. LIBOR
based loans under the Revolving Credit Facility bear interest at LIBOR plus
amounts ranging from 3.0% to 3.5% based on the Company's leverage ratio, as
defined in the Credit Agreement. Base rate loans under the Revolving Credit
Facility bear interest at the base rate plus amounts ranging from 1.50% to 2.00%
based on the Company's leverage ratio, as defined in the Credit Agreement. In
addition, the Company pays a quarterly commitment fee on the unused portion of
the Revolving Credit Facility of 0.50% per annum.
Proceeds from the Term Loan B, proceeds from the sale of Patient1 and cash
on hand were used to fund the Tender Offer. The Company used cash on hand to
fund the Call. During the three months ended September 30, 2003, the Company
capitalized expenses related to the refinancing transactions of approximately
$5.4 million, including legal and other professional fees related to the Credit
Agreement, which are included in the Company's Other Long-term Assets on the
Consolidated Balance Sheet. These costs will be amortized over the next three
and five years and included in interest expense. In addition, the Company
incurred expenses associated with the retirement of the Notes and the 2001
Credit Facility of approximately $6.0 million, including the Tender Offer
premium, the Call premium, and the write-off of approximately $1.6 million of
deferred debt issuance costs, which are included in the Company's interest
expense for the three months ended September 30, 2003.
All obligations under the Credit Agreement are fully and unconditionally
guaranteed, on a senior secured basis, jointly and severally by all of the
Company's present and future domestic and material foreign subsidiaries (the
"Subsidiary Guarantors"). The financial statements of the Subsidiary Guarantors
have not been presented as all subsidiaries, except for certain minor foreign
subsidiaries, have provided guarantees and the parent company does not have any
significant operations or assets, separate from its investment in subsidiaries.
Any non-guarantor subsidiaries are minor individually and in the aggregate to
the Company's consolidated financial statements.
The Credit Agreement contains financial and other restrictive covenants,
including, without limitation, those restricting additional indebtedness, lien
creation, dividend payments, asset sales and stock offerings, and those
requiring a minimum net worth, maximum leverage and minimum fixed charge
coverage, each as defined in the Credit Agreement. The Company was in compliance
with all applicable covenants as of September 30, 2003.
The initial term of the Revolving Credit Facility is three years. The
Company and the Lender can mutually agree to extend this term by up to two
years. The Company intends to use the Revolving Credit Facility, as needed, for
future investments in its operations, including capital expenditures, strategic
acquisitions, to secure its letters of credit, as needed, and other general
corporate purposes. The Company has not incurred any borrowings under the
Revolving Credit Facility as of September 30, 2003.
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 10 -- INCOME TAXES
Income tax expense, which was primarily related to state and local income
taxes, was approximately $0.1 million and $0.8 million for the three and nine
month periods ended September 30, 2003, respectively, as compared to income tax
expense of $0.2 million and $0.6 million for the same periods in 2002. The
Company's estimated federal income tax expense for the three-month and
nine-month periods ended September 30, 2003, is offset by the release of an
equal amount of the Company's valuation allowance. As of September 30, 2003, the
Company's remaining net deferred tax asset was fully offset by a valuation
allowance. Realization of the net deferred tax asset is dependent upon the
Company generating sufficient taxable income prior to the expiration of the
federal net operating loss carryforwards. The Company will adjust this valuation
reserve accordingly if, during future periods, management believes the Company
will generate sufficient taxable income to realize the net deferred tax asset.
NOTE 11 -- RESTRUCTURING EXPENSES
The amount of lease termination costs associated with a 1995 restructuring
applied against the reserve in the nine months ended September 30, 2003, is as
follows:
<Table>
<Caption>
RESERVE BALANCE COSTS APPLIED RESERVE BALANCE
DECEMBER 31, 2002 AGAINST RESERVE SEPTEMBER 30, 2003
----------------- --------------- ------------------
(IN THOUSANDS)
Lease termination costs............... $1,980 $(467) $1,513
</Table>
During the three months ended September 30, 2003, the Company incurred
approximately $0.2 million of restructuring expenses related to the realignment
of the Company into the Physician Services and Hospital Services divisions.
NOTE 12 -- SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products to the healthcare market. Per-Se provides its services and
products through its two operating divisions: Physician Services and Hospital
Services.
On July 1, 2003, the Company realigned its operations to better focus on
its core healthcare constituents -- physician practices and hospitals. The
Company created the Hospital Services division by combining the offerings of the
former Application Software and e-Health Solutions divisions, with the exception
of the Company's ASP-based physician practice management solution, which was
transferred from the former e-Health Solutions division to the Physician
Services division.
The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. 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
division's offerings have historically focused on the back-end processes
required to ensure physicians are properly reimbursed for care delivery. The
addition of the ASP-based physician practice management solution, named
MedAxxis, as part of the realignment not only provides operational leverage but
also enables the Company to offer front-end solutions for both hospital- and
office-based physician groups. These large physician groups require both
front-office functionality for scheduling and back-end services for accounts
receivable management. By combining front-office and back-end solutions and
services, the Company will be able to sell its solutions and services to a new
segment of the physician market. The business of the Physician Services division
is conducted by PST Services, Inc., a
13
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Georgia corporation doing business as "Per-Se Technologies," which is a wholly
owned subsidiary of the Company.
To better serve the hospital marketplace, the Company has formed the
Hospital Services division. The products of the new Hospital Services division
focus on optimizing the revenue cycle and improving administrative efficiencies
for hospitals. Combining these offerings allows the Company to better leverage
its solutions and provides an organizational structure through which to broaden
the Company's offerings to hospitals. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing as well as patient and staff scheduling
systems. The business of the Hospital Services division is conducted by the
following five 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;
Knowledgeable Healthcare Solutions, Inc., an Alabama corporation; and PST
Products, LLC, a California limited liability company. All of these subsidiaries
do business under the name "Per-Se Technologies."
In accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company has presented business segment
results in the Physician Services and Hospital Services business segments, as
described above, and all prior periods presented have been adjusted for the
realignment.
The Company evaluates each segment's performance based on its segment
operating profit. Segment operating profit is revenue less segment operating
expenses, which include salaries and wages expense, other operating expenses,
restructuring expenses, depreciation and amortization.
The Hospital Services segment revenue includes intersegment revenue for
services provided to the Physician Services segment, which are shown as
Eliminations to reconcile to total consolidated revenue.
Information concerning the Company's reportable operating segments is as
follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
Physician Services......................... $63,517 $62,683 $189,475 $183,935
Hospital Services.......................... 24,411 23,486 72,381 69,097
Eliminations............................... (3,417) (3,327) (10,030) (9,400)
------- ------- -------- --------
$84,511 $82,842 $251,826 $243,632
======= ======= ======== ========
Segment operating expenses:
Physician Services......................... $56,077 $55,458 $167,193 $165,766
Hospital Services.......................... 18,623 19,270 56,249 55,363
Corporate.................................. 3,412 4,246 11,400 10,688
Eliminations............................... (3,417) (3,327) (10,030) (9,400)
------- ------- -------- --------
$74,695 $75,647 $224,812 $222,417
======= ======= ======== ========
</Table>
14
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Segment operating profit:
Physician Services......................... $ 7,440 $ 7,225 $ 22,282 $ 18,169
Hospital Services.......................... 5,788 4,216 16,132 13,734
Corporate.................................. (3,412) (4,246) (11,400) (10,688)
------- ------- -------- --------
$ 9,816 $ 7,195 $ 27,014 $ 21,215
======= ======= ======== ========
Interest expense............................. $ 9,943 $ 4,610 $ 18,900 $ 13,810
======= ======= ======== ========
Interest income.............................. $ (79) $ (107) $ (245) $ (344)
======= ======= ======== ========
(Loss) income before income taxes............ $ (48) $ 2,692 $ 8,359 $ 7,749
======= ======= ======== ========
Depreciation and amortization:
Physician Services......................... $ 2,661 $ 2,977 $ 8,083 $ 9,198
Hospital Services.......................... 1,301 1,468 4,023 4,367
Corporate.................................. 176 240 605 698
------- ------- -------- --------
$ 4,138 $ 4,685 $ 12,711 $ 14,263
======= ======= ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services......................... $ 1,529 $ 1,101 $ 3,773 $ 4,517
Hospital Services.......................... 1,012 1,042 3,707 3,100
Corporate.................................. 48 41 191 361
Discontinued operations.................... 424 971 2,289 3,228
------- ------- -------- --------
$ 3,013 $ 3,155 $ 9,960 $ 11,206
======= ======= ======== ========
</Table>
<Table>
<Caption>
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services........................................ $ 64,929 $ 64,759
Hospital Services......................................... 57,517 56,089
Corporate................................................. 34,987 62,664
Discontinued operations................................... 840 26,338
-------- --------
$158,273 $209,850
======== ========
</Table>
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, provides integrated
business management outsourcing services, Internet-enabled connectivity and
administrative software for the healthcare industry. Per-Se delivers its
services and products through its two operating divisions: Physician Services
and Hospital Services.
On July 1, 2003, the Company realigned its operations to better focus on
its core healthcare constituents -- physician practices and hospitals. The
Company created the Hospital Services division by combining the offerings of the
former Application Software and e-Health Solutions divisions, with the exception
of the Company's ASP-based physician practice management solution, which was
transferred from the former e-Health Solutions division to the Physician
Services division.
The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. 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
division's offerings have historically focused on the back-end processes
required to ensure physicians are properly reimbursed for care delivery. The
addition of the ASP-based physician practice management solution, named
MedAxxis, as part of the realignment not only provides operational leverage but
also enables the Company to offer front-end solutions for both hospital- and
office-based physician groups. These large physician groups require both
front-office functionality for scheduling and back-end services for accounts
receivable management. By combining front-office and back-end solutions and
services, the Company will be able to sell its solutions and services to a new
segment of the physician market.
To better serve the hospital marketplace, the Company has formed the
Hospital Services division. The products of the new Hospital Services division
focus on optimizing the revenue cycle and improving administrative efficiencies
for hospitals. Combining these offerings allows the Company to better leverage
its solutions and provides an organizational structure through which to broaden
the Company's offerings to hospitals. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing as well as patient and staff scheduling
systems.
Per-Se markets its products and services to constituents of the healthcare
industry, primarily to hospital-affiliated physician practices and hospitals.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003, AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $63,517 $62,683
Hospital Services........................................... 24,411 23,486
Eliminations................................................ (3,417) (3,327)
------- -------
$84,511 $82,842
======= =======
</Table>
Revenue for the Physician Services division increased approximately 1% in
the three months ended September 30, 2003, as compared to the same period in
2002. The revenue increase is due to the
16
implementation of new business sold in prior periods. Net backlog at September
30, 2003, was approximately $2 million, compared to approximately $5 million at
June 30, 2003. The decrease in net backlog is a result of a record volume of new
business implementations during the three months ended September 30, 2003. Net
backlog represents the annualized revenue related to new contracts signed with
the business still to be implemented, less the annualized revenue related to
existing contracts where discontinuance notification has been received and the
customer has yet to be phased out. The Company focuses on maintaining a positive
net backlog and believes it is a useful indicator of future revenue growth.
Revenue for the Hospital Services division increased approximately 4% for
the three months ended September 30, 2003, as compared to the same period in
2002 despite the phasing out of a large print and mail customer, which began in
the second half of 2002. This customer's business was not related to medical
claims. Revenue growth in the division is a result of increased revenue in the
medical transaction processing business, evidenced by the approximate 11%
increase in medical transaction volume for the period over the same period in
2002, as well as increased implementation and maintenance revenue in the
Resource1 patient and staff scheduling product lines. Revenue growth does not
necessarily correlate directly to transaction volume due to the mix of products
sold by the division. The Company believes transaction volume is a useful
indicator of future revenue growth as business is implemented into the
division's recurring revenue model.
The Hospital Services division revenue includes intersegment revenue for
services provided to the Physician Services division, which is shown in
Eliminations to reconcile to total consolidated revenue.
Segment Operating Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expense, other operating
expenses, restructuring expenses, depreciation and amortization. Segment
operating profit, classified by the Company's divisions, is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 7,440 $ 7,225
Hospital Services........................................... 5,788 4,216
Corporate................................................... (3,412) (4,246)
------- -------
$ 9,816 $ 7,195
======= =======
</Table>
Physician Services' segment operating profit increased approximately 3% in
the three months ended September 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 11.7% in the three months ended
September 30, 2003, versus approximately 11.5% in the same period in 2002. The
margin expansion is attributable to higher margins achieved on incremental
revenue in addition to labor and costs savings from productivity and other cost
containment initiatives. The operating margins were negatively impacted in 2003
by approximately $1 million of costs related to the conversion of the current
ASP-based physician practice management solution clients onto a new, web-based
platform.
Hospital Services' segment operating profit increased approximately 37% in
the three months ended September 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 23.7% versus approximately 18.0%
in the prior year period. The operating margin improvement is attributable to
the previously mentioned increase in revenue as well as certain expenses
incurred in 2002 that were not incurred in 2003.
Corporate overhead expenses decreased approximately 20% in the three months
ended September 30, 2003, compared to the same period in 2002. The decrease is
attributable to legal expenses of approximately $0.3 million for the three
months ended September 30, 2003, as compared to insurance premiums and legal
expenses of approximately $1.3 million in the same period in 2002, related to
the attempt by Lloyd's to rescind certain insurance policies (refer to "Note
8 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information).
17
Restructuring Expenses. During the three months ended September 30, 2003,
the Company incurred approximately $0.2 million of restructuring expenses
related to the realignment of the Company into the Physician Services and
Hospital Services divisions.
Interest. Interest expense was approximately $9.9 million for the three
months ended September 30, 2003, as compared to $4.5 million for the same period
in 2002. The increase is attributable to approximately $6.0 million of interest
expense for the three months ended September 30, 2003 related to the retirement
of the Company's $175 million of 9 1/2% Senior Notes due 2005 (the "Notes"). The
increase was offset by a reduction of approximately $0.2 million of interest
expense as a result of the retirement of $35 million of long-term debt and
entering into a new Credit Agreement in September 2003. The Company expects
these actions to yield annualized cash interest expense savings of approximately
$8 million, based on current rates. Interest income was $0.1 million for the
three-month periods ended September 30, 2003 and 2002.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was approximately $0.1 million and $0.2 million for the
three months ended September 30, 2003 and 2002, respectively. The Company's
estimated federal income tax expense for the three months ended September 30,
2003, is offset by the release of an equal amount of the Company's valuation
allowance. As of September 30, 2003, the Company's net deferred tax asset was
fully offset by a valuation allowance. Realization of the net deferred tax asset
is dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.
Discontinued Operations. In June 2003, the Company announced that it
agreed to sell its Patient1 clinical product line ("Patient1") to Misys
Healthcare Systems, a division of Misys plc ("Misys") for $30 million in cash.
Patient1 was the Company's only clinical product line and its sale allows the
Company to better focus on optimizing reimbursement and improving administrative
efficiencies for physician practices and hospitals. The sale was completed on
July 28, 2003. The Company recognized a gain on the sale of Patient1 of
approximately $9.4 million, subject to closing adjustments, in the three months
ended September 30, 2003. Net proceeds on the sale of Patient1 were
approximately $27.1 million, subject to closing adjustments.
In September 2003, the Company initiated a process to sell its Business1
patient accounting product line ("Business1"). As with the sale of Patient1, the
discontinuance of Business1 will allow the Company to focus resources on
solutions that provide meaningful, strategic returns for the Company, its
customers and its shareholders. Pursuant to SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), the Company wrote
down the net assets of Business1 to fair market value less costs to sell and
incurred a $7.7 million charge.
Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Summarized operating results for the
discontinued operations are as follows:
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ------- -------- --------- ------
(IN THOUSANDS)
Revenue....................... $2,168 $ 160 $ 2,328 $6,483 $ 605 $7,088
====== ===== ======= ====== ===== ======
(Loss) income from
discontinued operations
before income taxes......... $ (224) $(977) $(1,201) $ 228 $(527) $ (299)
Income tax expense............ 4 -- 4 31 -- 31
------ ----- ------- ------ ----- ------
(Loss) income from
discontinued operations, net
of tax...................... $ (228) $(977) $(1,205) $ 197 $(527) $ (330)
====== ===== ======= ====== ===== ======
</Table>
18
Revenue for the Patient1 product line decreased approximately 67% in the
three months ended September 30, 2003, as compared to the same period in 2002.
Revenue is recognized using the percentage-of-completion method of accounting
and the decrease over the prior year period is the result of lower Patient1
sales in prior periods.
Operating loss for the Patient1 product line was approximately $0.2 million
in the three months ended September 30, 2003, as compared to operating income of
approximately $0.2 million for the same period in 2002. The decline is due to
reduced implementation productivity as a result of the pending sale of the
product line in 2003.
Revenue for the Business1 product line decreased approximately 74% in the
three months ended September 30, 2003, as compared to the same period in 2002.
Revenue is recognized using the percentage-of-completion method of accounting
and the decrease over the prior year period is the result of lower Business1
sales in prior periods plus implementation delays at a major customer.
The operating loss for the Business1 product line increased approximately
$0.5 million in the three months ended September 30, 2003, as compared to the
same period in 2002, due to lower Business1 revenue in the current period.
NINE MONTHS ENDED SEPTEMBER 30, 2003, AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $189,475 $183,935
Hospital Services........................................... 72,381 69,097
Eliminations................................................ (10,030) (9,400)
-------- --------
$251,826 $243,632
======== ========
</Table>
Revenue for the Physician Services division increased approximately 3% in
the nine months ended September 30, 2003, as compared to the same period in
2002. The revenue increase is due to the implementation of new business sold in
prior periods as well as growth in the existing client base. Net backlog at
September 30, 2003, was approximately $2 million, compared to approximately $5
million at September 30, 2002. The decrease in net backlog is a result of a
record volume of new business implementations during the nine months ended
September 30, 2003. Net backlog represents the annualized revenue related to new
contracts signed with the business still to be implemented, less the annualized
revenue related to existing contracts where discontinuance notification has been
received and the customer has yet to be phased out. The Company focuses on
maintaining a positive net backlog and believes it is a useful indicator of
future revenue growth.
Revenue for the Hospital Services division increased approximately 5% for
the nine months ended September 30, 2003, as compared to the same period in 2002
despite the phasing out of a large print and mail customer, which began in the
second half of 2002. This customer's business was not related to medical claims.
Revenue growth in the division is a result of increased revenue in the medical
transaction processing business, evidenced by the approximate 15% increase in
the division's medical transaction volume for the period over the same period in
2002, as well as increased implementation and maintenance revenue. Revenue
growth does not necessarily correlate directly to transaction volume due to the
mix of products sold by the division. The Company believes transaction volume is
a useful indicator of future revenue growth as business is implemented into the
division's recurring revenue model.
19
Segment Operating Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expense, other operating
expenses, restructuring expenses, depreciation and amortization. Segment
operating profit, classified by the Company's divisions, is as follows:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2003 2002
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 22,282 $ 18,169
Hospital Services........................................... 16,132 13,734
Corporate................................................... (11,400) (10,688)
-------- --------
$ 27,014 $ 21,215
======== ========
</Table>
Physician Services' segment operating profit increased approximately 23% in
the nine months ended September 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 11.8% in the nine months ended
September 30, 2003, versus approximately 9.9% in the same period in 2002. The
margin expansion is attributable to the higher margins achieved on incremental
revenue in addition to labor and cost savings from productivity and other cost
containment initiatives. In addition, Physician Services margin was negatively
impacted in 2003 by approximately $2.5 million of costs related to the
conversion of the current ASP-based physician practice management solution
clients onto a new, web-based platform.
Hospital Services' segment operating profit increased approximately 17% in
the nine months ended September 30, 2003, compared to the same period in 2002,
resulting in operating margins of 22.3% versus 19.9% in the prior year period.
The operating margin improvement is attributable to the previously mentioned
increase in revenue as well as certain expenses incurred during 2002 that were
not incurred in 2003.
Corporate overhead expenses increased approximately 7% in the nine months
ended September 30, 2003, compared to the same period in 2002. The increase is
attributable to increased insurance premiums and legal expenses of approximately
$2.5 million in 2003, as compared to $1.8 million in 2002, related to the
attempt by Lloyd's to rescind certain insurance policies (refer to "Note
8 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information).
Restructuring Expenses. During the nine months ended September 30, 2003,
the Company incurred approximately $0.2 million of restructuring expenses
related to the realignment of the Company into the Physician Services and
Hospital Services divisions.
Interest. Interest expense was approximately $18.9 million for the nine
months ended September 30, 2003, as compared to approximately $13.8 million for
the same period in 2002. The increase is attributable to approximately $6.3
million of interest expense for the nine months ended September 30, 2003,
related to the retirement of the Company's Notes. The increase was offset by a
reduction of approximately $0.2 million of interest expense as a result of the
retirement of $35 million of long-term debt and entering into a new Credit
Agreement in September 2003. The Company expects these actions to yield
annualized cash interest expense savings of approximately $8 million, based on
current rates. Interest income was approximately $0.2 million and $0.3 million
for the nine-month periods ended September 30, 2003 and 2002, respectively.
Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was $0.8 million for the nine months ended September 30,
2003, as compared to income tax expense of $0.6 million for the same period
2002. The Company's estimated federal income tax expense for the nine months
ended September 30, 2003, is offset by the release of an equal amount of the
Company's valuation allowance. As of September 30, 2003, the Company's net
deferred tax asset was fully offset by a valuation allowance. Realization of the
net deferred tax asset is dependent upon the Company generating sufficient
taxable income prior to the expiration of the federal net operating loss
carryforwards. The Company will adjust this valuation reserve accordingly if,
during future periods, management believes the Company will generate sufficient
taxable income to realize the net deferred tax asset.
20
Discontinued Operations. Summarized operating results of the discontinued
operations are as follows:
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ------- -------- --------- -------
(IN THOUSANDS)
Revenue.................... $15,247 $ 330 $15,577 $18,554 $ 2,069 $20,623
======= ======= ======= ======= ======= =======
Loss from discontinued
operations before income
taxes.................... $(1,292) $(2,851) $(4,143) $ (218) $(1,230) $(1,448)
Income tax expense......... 45 -- 45 92 -- 92
------- ------- ------- ------- ------- -------
Loss from discontinued
operations, net of tax... $(1,337) $(2,851) $(4,188) $ (310) $(1,230) $(1,540)
======= ======= ======= ======= ======= =======
</Table>
Revenue for the Patient1 product line decreased approximately 18% in the
nine months ended September 30, 2003, as compared to the same period in 2002.
Revenue is recognized using the percentage-of-completion method of accounting
and the decrease over the prior year period is the result of lower Patient1
sales in prior periods.
The operating loss for the Patient1 product line increased approximately
$1.0 million in the nine months ended September 30, 2003, as compared to the
same period in 2002, due to costs associated with an international contract for
which revenue would have been recognized in future periods when cash was
received and reduced implementation productivity as a result of the pending sale
of the product line in 2003.
Revenue for the Business1 product line decreased approximately 84% in the
nine months ended September 30, 2003, as compared to the same period in 2002.
Revenue is recognized using the percentage-of-completion method of accounting
and the decrease over the prior year period is the result of lower Business1
sales in prior periods in addition to implementation delays at a major customer.
The operating loss for the Business1 product line decreased approximately
$1.6 million in the nine months ended September 30, 2003, as compared to the
same period in 2002, due to lower revenue in the current period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had working capital of $9.9 million
compared to $26.1 million at December 31, 2002. The decrease in working capital
is primarily related to the Company's repayment of the Notes during 2003 (refer
to "Note 9 -- Long Term Debt" in the Company's Notes to Consolidated Financial
Statements for more information), an increase of approximately $4.9 million in
accounts receivable as a result of seasonality in collections and a reduction of
accrued expenses due to the timing of certain payments.
Restricted cash totaled $0.1 million as of September 30, 2003, and $4.3
million as of December 31, 2002. The decrease in restricted cash is primarily
the result of using the Company's Revolving Credit Facility rather than cash as
security for the Company's letters of credit. Restricted cash at September 30,
2003, primarily represents amounts collected on behalf of certain clients, a
portion of which is held in trust until it is remitted to such clients.
Unrestricted cash and cash equivalents totaled $18.5 million at September 30,
2003, a decrease of $28.3 million compared to December 31, 2002, primarily due
to the use of cash on hand for long-term debt reduction.
Cash provided by continuing operations was $12.8 million in the nine months
ended September 30, 2003, compared to cash provided by continuing operations in
the nine months ended September 30, 2002, of $9.5 million. The improvement is
primarily attributable to the working capital and restricted cash changes
discussed previously. Cash used by discontinued operations in both periods was
primarily related to costs associated with the discontinued Patient1 and
Business1 product lines.
21
Cash provided by investing activities related to continuing operations for
the nine months ended September 30, 2003, was $19.4 million, compared to cash
used for investing activities related to continuing operations of $9.5 million
during the same period in 2002. The increase in cash provided by investing
activities was primarily related to approximately $27.1 million in net proceeds
related to the sale of the Patient1 product line during July 2003. Cash used by
investing activities for discontinued operations in both periods related to
purchases of property and equipment and software development costs for the
discontinued Patient1 and Business1 product lines.
The Company used $48.4 million in cash for financing activities during the
nine months ended September 30, 2003, compared to cash provided by financing
activities of $0.6 million during the same period in 2002. The increase in cash
used for financing activities was primarily related to the Company's repayment
of long-term debt. The Company used cash on hand as well as the net proceeds
from the Patient1 divestiture to retire $50.0 million of long-term debt during
the first nine months of 2003. The Company refinanced the remaining $125 million
in long-term debt during September 2003. The Company capitalized approximately
$5.4 million in expenses related to the refinancing transactions, including
legal and other professional fees related to the Credit Agreement and other
costs, which are included in the Company's Other Long-Term Assets on the
Consolidated Balance Sheet. These costs will be amortized over the next three
and five years and included in interest expense. In addition, the Company
incurred expenses associated with the retirement of the Notes and the 2001
Credit Facility of approximately $6.3 million, including the tender offer
premium, the call premium and the write-off of unamortized debt issuance costs
associated with the Notes and unamortized debt issuance costs associated with
entering into the 2001 Credit Facility, which are included in the Company's
interest expense for the nine months ended September 30, 2003.
For more information about the Company's long-term debt, refer to "Note
9 -- Long-Term Debt" in the Company's Notes to Consolidated Financial
Statements.
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 8 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). For the nine months
ended September 30, 2003, the Company incurred approximately $2.5 million of
expense related to significantly increased insurance premiums and the cost of
pursuing litigation against Lloyd's. Accordingly, these costs have been
reflected in the Company's Consolidated Statements of Operations in the
Corporate segment.
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 and Omissions ("E&O")
policies. The Company expects to recover these costs from Lloyd's and has
reflected these amounts as Other Current Assets on the Company's Consolidated
Balance Sheets.
The negative impact of these items on the Company's 2003 full year cash
flow is projected to be approximately $7.5 million to $8.5 million, which
consists of approximately $3.0 million to $3.5 million related to insurance
premium increases for new insurance coverage and the cost of pursuing litigation
against Lloyd's and approximately $4.5 million to $5.0 million related to the
funding of legal costs and litigation settlements covered by the Lloyd's E&O
policies. The Company only incurred increased insurance premiums during the
first half of 2003 as the insurance policies were renegotiated and renewed
during June 2003. As of September 30, 2003, the negative impact on 2003 cash
flow was approximately $4.7 million, which consisted of approximately $1.8
million related to insurance premium increases for new insurance coverage and
the cost of pursuing litigation against Lloyd's and $2.9 million related to the
funding of legal costs and litigation settlements covered by the Lloyd's E&O
policies.
22
FORWARD-LOOKING STATEMENTS
Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including but not limited to
certain statements set forth under the captions "Note 7 -- Discontinued
Operations and Divestitures," "Note 8 -- Legal Matters," "Note 9 -- Long-Term
Debt," "Note 10 -- Income Taxes," "Results of Operations" and "Liquidity and
Capital Resources," are "forward-looking statements" within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Forward-looking statements include the Company's expectations with respect to
meritorious defenses to the claims and other issues asserted in pending legal
matters, the effect of industry and regulatory changes on the Company's customer
base, the impact of revenue backlog on future revenue, gain on sale and net
proceeds related to the Patient1 product line divestiture, fair market value
less costs to sell of Business1, overall profitability and the availability of
capital. Although the Company believes that the statements it has made are based
on reasonable assumptions, they are based on current information and beliefs
and, accordingly, the Company can give no assurance that its expectations will
be achieved. In addition, these statements are subject to factors that could
cause actual results to differ materially from those suggested by the
forward-looking statements. These factors include, but are not limited to,
factors identified below under the caption "Factors That May Affect Future
Results of Operations, Financial Condition or Business" and "Quantitative and
Qualitative Disclosures about Market Risk." The Company disclaims any
responsibility to update any forward-looking statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS
Per-Se provides the following risk factor disclosures in connection with
its continuing efforts to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include, but are not limited to, the following:
Competition with Business Management Outsourcing Services Companies and
In-house Providers
The business management outsourcing services business, especially in the
areas of billings and collections, is highly competitive. The Company competes
with regional physician reimbursement organizations and physician groups that
provide their own business management services. Successful competition within
this industry depends on numerous industry and market conditions.
Potential industry and market changes that could adversely affect the
Company's ability to compete for business management outsourcing services
include an increase in the number of competitors providing comparable services
and new alliances between healthcare providers and third-party payers in which
the third-party payers employ healthcare providers.
Competition with Information Technology Companies
The business of providing application software, information technology,
consulting services and connectivity 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 depends on numerous industry and market
conditions.
Major Client Projects
The Company's Hospital Services division engages in 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
have the following consequences: damage the Company's reputation and standing in
this marketplace; impair its ability
23
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 transaction processing products
and services as well as its 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 depend on many 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 its software, transaction
processing 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.
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
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.
Government Regulations
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Federal and state legislatures
have periodically considered programs, such as the Balanced Budget Act of 1997,
to reform or amend the U.S. healthcare system and to change healthcare financing
and reimbursement systems. These programs may increase government involvement in
healthcare, lower reimbursement rates or otherwise change the healthcare
industry environment. 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 and regulations. Federal and state agencies
investigate healthcare providers and companies that provide billing and
collection services, which thus may subject the Company to federal or state
government investigations or sanctions and penalties. The Company may have to
defend against false claims actions and private payer claims and the Company may
be excluded from participation in federal and/or state payer 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 the Health Information Portability and Accountability Act of 1996
("HIPAA"), final rules have been published regarding standards for electronic
transactions as well as standards for privacy and security of individually
identifiable health information. HIPAA establishes new or higher standards for
handling healthcare transactions and information and provides 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 HIPAA may be more costly than anticipated. Failure to comply
with such rules may subject the Company to civil and criminal penalties.
24
The Company relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA-compliant format. While the Company
believes it will be fully and properly prepared to process electronic medical
claims in a HIPAA-compliant format, there can be no assurance that third
parties, including healthcare providers and payers, will likewise be prepared to
supply all the data elements required to process electronic medical claims and
make electronic remittance under HIPAA's standards. If payers reject electronic
medical claims and such claims are processed manually rather than
electronically, there could be a material adverse affect on the Company's
business.
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. Federal or state agencies may
impose civil and criminal penalties for noncompliance. Persons who believe their
health information has been misused or disclosed improperly may bring claims,
and payers who believe privacy and security standards have been violated may
report violations to federal or state agencies who may impose sanctions or civil
or criminal penalties 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 continue to pass laws and issue regulations addressing healthcare issues
and reimbursement of healthcare providers. The Company cannot predict whether
new legislation and regulations will be enacted and, if enacted, whether such
new developments will affect its business. However, the Company has invested and
expects to continue to invest in product enhancements to support customer
operations regulated by HIPAA. Responding to HIPAA's impact may require the
Company to invest 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 quarterly 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 its business. The Company has also received written demands from
customers and former customers that have not resulted in legal action. Although
no claims have been brought against the Company to date regarding injuries
related to the use of the Company's software 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, such coverage may prove to be
inadequate or may become unavailable on acceptable terms, if at all. A
successful claim brought against the Company, which is uninsured or
under-insured, could materially harm its business, results of operations or
financial condition. 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 8 -- Legal Matters" in
the Company's Notes to Consolidated Financial Statements for more information).
As of September 30, 2003, the Company had incurred approximately $10.1 million
of costs related to claims related to Lloyd's that are reported as Other Current
Assets on the Company's Consolidated Balance Sheets. As of September 30, 2003,
approximately $8.2 million of these costs had been paid. If the Company is
unsuccessful
25
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.
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,
litigation 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, have
experienced volatility that often has been unrelated to the operating
performance of particular companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of actual operating performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, any fluctuation in the prevailing
interest rates is not expected to have a material effect on the Company's
financial statements.
The Company has the option of entering into loans based on LIBOR or base
rates under the Term Loan B and the Revolving Credit Facility. As such, the
Company could experience fluctuations in the interest rates under the Term Loan
B, and, if the Company were to borrow amounts under the Revolving Credit
Facility, the Company could experience fluctuations in interest rates under the
Revolving Credit Facility. The Company had borrowings totaling $125 million
under the Term Loan B at September 30, 2003, and has not incurred any borrowings
under the Revolving Credit Facility.
The Company has a process in place to monitor fluctuations in interest
rates and could hedge against significant forecast changes in interest rates, if
necessary.
EXCHANGE RATE SENSITIVITY
The majority of the Company's revenue and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains or losses to date. The Company conducts only limited business
denominated in foreign currencies and does not expect material foreign exchange
gains or losses in the future. The Company does not engage in any foreign
exchange hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of September 30,
2003, 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.
26
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in "Note 8 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
2.1 -- Asset Purchase Agreement dated as of June 18, 2003, among
Misys Hospital Systems, Inc., Misys Healthcare Systems
(International) Limited, Misys plc, Registrant and PST
Products, LLC., together with the First Amendment thereto
dated as of June 28, 2003 (incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed on August 5,
2003).
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (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 -- 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 Registrant (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.2 -- 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).
4.3 -- 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).
4.4 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001).
4.5 -- Third Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of March 10, 2003 (incorporated by
reference to Exhibit 4.13 to Annual Report on Form 10-K for
the year ended December 31, 2002).
10.1 -- Credit Agreement dated as of September 11, 2003, by and
among Registrant, certain subsidiaries of Registrant
identified therein, as Guarantors, the Lenders identified
therein, and Bank of America, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed on September 12, 2003).
10.2 -- Written description of Registrant's Non-Employee Director
Compensation Plan.
10.3 -- Employment Agreement between Registrant and Philip J.
Jordan, dated July 1, 2003.
31.1 -- Certification of Chief Executive Officer pursuant Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
</Table>
27
(B) Reports on Form 8-K
The Company filed or furnished the following reports on Form 8-K during the
quarter ended September 30, 2003:
<Table>
<Caption>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT DATE FILED OR FURNISHED
- ------------- ---------- ------------------ -----------------------
Press release dated July 30, 2003, No July 30, 2003 July 30, 2003
announcing results of operations
for the quarterly period ended
June 30, 2003
Completion of the sale of the No July 28, 2003 August 5, 2003
Company's Patient1(R) clinical
product line to Misys Hospital
Systems, Inc., a division of
Misys plc (London: MSY.L)
Press Release dated August 12, No August 12, 2003 August 13, 2003
2003, announcing tender offer
and call for 9 1/2% Senior Notes
Press Release dated September 11, No September 11, 2003 September 12, 2003
2003, announcing the completion
of tender offer for 9 1/2%
Senior Notes and the closing of
a new senior credit facility
</Table>
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PER-SE TECHNOLOGIES, INC.
(Registrant)
By: /s/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer
By: /s/ MARY C. CHISHOLM
------------------------------------
Mary C. Chisholm
Vice President and Controller
(Principal Accounting Officer)
Date: November 5, 2003
29
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DOCUMENT
- ------- --------
2.1 -- Asset Purchase Agreement dated as of June 18, 2003, among
Misys Hospital Systems, Inc., Misys Healthcare Systems
(International) Limited, Misys plc, Registrant, and PST
Products, LLC., together with the First Amendment thereto
dated as of June 28, 2003 (incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed on August 5,
2003).
3.1 -- Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 to Annual Report
on Form 10-K for the year ended December 31, 1999 (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 -- 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 Registrant (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
4.2 -- 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).
4.3 -- 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).
4.4 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001).
4.5 -- Third Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of March 10, 2003 (incorporated by
reference to Exhibit 4.13 to Annual Report on Form 10-K for
the year ended December 31, 2002).
10.1 -- Credit Agreement dated as of September 11, 2003, by and
among Registrant, certain subsidiaries of Registrant
identified therein, as Guarantors, the Lenders identified
therein, and Bank of America, N.A., as Administrative Agent
(incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed on September 12, 2003).
10.2 -- Written description of Registrant's Non-Employee Director
Compensation Plan.
10.3 -- Employment Agreement between Registrant and Philip J.
Jordan, dated July 1, 2003.
31.1 -- Certification of Chief Executive Officer pursuant Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
</Table>
30