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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-19480
PER-SE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1145 SANCTUARY PARKWAY, SUITE 200 30004
ALPHARETTA, GEORGIA (Zip code)
(Address of principal executive offices)
(770) 237-4300
(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.
TITLE OF CLASS SHARES OUTSTANDING AT JULY 29, 2005
-------------- -----------------------------------
Common Stock $0.01 Par Value 32,943,419 shares
Non-voting Common Stock $0.01 Par Value 0 Shares
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PER-SE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 2005
PAGE
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Consolidated Balance Sheets as of June 30, 2005
and December 31, 2004 (Unaudited)........................... 2
Consolidated Statements of Income for the three and six
months ended
June 30, 2005 and 2004 (Unaudited).......................... 3
Consolidated Statements of Cash Flows for the six months
ended
June 30, 2005 and 2004 (Unaudited).......................... 4
Notes to Consolidated Financial Statements (Unaudited)...... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
Item 4. Controls and Procedures..................................... 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 26
Item 2c. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers.................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 6. Exhibits.................................................... 27
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
--------- ------------
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 46,166 $ 42,422
Restricted cash........................................... 44 51
--------- ---------
Total cash and cash equivalents........................ 46,210 42,473
Accounts receivable, billed (less allowances of $2,951 and
$3,229 as of June 30, 2005, and December 31, 2004,
respectively).......................................... 54,584 49,105
Accounts receivable, unbilled (less allowances of $314 and
$371 as of June 30, 2005, and December 31, 2004,
respectively).......................................... 374 302
Deferred income taxes, net................................ 12,799 12,799
Prepaid expenses.......................................... 5,114 2,823
Other..................................................... 4,652 4,906
--------- ---------
Total current assets................................... 123,733 112,408
Property and equipment, net of accumulated depreciation..... 16,309 15,512
Goodwill.................................................... 32,549 32,549
Other intangible assets, net of accumulated amortization.... 20,135 20,784
Deferred income taxes, net.................................. 15,316 15,316
Other....................................................... 7,071 6,122
--------- ---------
Total assets........................................... $ 215,113 $ 202,691
========= =========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 5,446 $ 5,290
Accrued compensation...................................... 21,005 14,562
Accrued expenses.......................................... 12,614 14,628
Current portion of long-term debt and capital lease
obligations............................................ 118 98
Deferred revenue.......................................... 25,766 24,127
--------- ---------
Total current liabilities.............................. 64,949 58,705
Long-term debt and capital lease obligations................ 125,498 125,527
Other obligations........................................... 5,491 5,484
--------- ---------
Total liabilities...................................... 195,938 189,716
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 20,000 shares authorized;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 shares
authorized, 32,900 and 32,324 issued and 30,912 and
30,336 outstanding as of June 30, 2005, and December
31, 2004, respectively................................. 329 323
Common stock, non-voting, $0.01 par value, 600 shares
authorized; none issued................................ -- --
Paid-in capital........................................... 799,854 795,263
Accumulated deficit....................................... (740,151) (757,128)
Treasury stock at cost, 3,101 and 2,125 as of June 30,
2005, and December 31, 2004, respectively.............. (41,668) (26,510)
Deferred stock unit plan obligation....................... 1,280 1,511
Accumulated other comprehensive loss...................... (469) (484)
--------- ---------
Total stockholders' equity............................. 19,175 12,975
--------- ---------
Total liabilities and stockholders' equity............. $ 215,113 $ 202,691
========= =========
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.............................................. $93,300 $88,141 $185,330 $172,742
------- ------- -------- --------
Operating expenses:
Cost of services................................... 62,470 56,939 122,507 112,337
Selling, general and administrative................ 21,974 22,368 43,114 43,749
Other expenses..................................... -- 2,538 -- 6,499
------- ------- -------- --------
Operating income..................................... 8,856 6,296 19,709 10,157
Interest expense..................................... 1,448 1,999 2,929 4,073
Interest income...................................... (336) (192) (648) (244)
Loss on extinguishment of debt....................... -- 5,896 -- 5,896
------- ------- -------- --------
Income (loss) before income taxes.................. 7,744 (1,407) 17,428 432
Income tax expense (benefit)......................... 198 (20) 451 212
------- ------- -------- --------
Income (loss) from continuing operations........... 7,546 (1,387) 16,977 220
------- ------- -------- --------
Discontinued operations (see Note 8)
Loss from discontinued operations, net of
tax -- Patient1................................. -- -- -- (18)
Gain on sale of Patient1, net of tax............... -- 3,821 -- 3,755
Loss from discontinued operations, net of
tax -- Business1................................ -- -- -- (303)
Loss on sale of Business1, net of tax.............. -- -- -- (130)
Loss from discontinued operations, net of
tax -- Other.................................... -- (30) -- (93)
------- ------- -------- --------
-- 3,791 -- 3,211
------- ------- -------- --------
Net income...................................... $ 7,546 $ 2,404 $ 16,977 $ 3,431
======= ======= ======== ========
Net income per common share -- basic:
Income (loss) from continuing operations........... $ 0.25 $ (0.04) $ 0.57 $ --
Gain on sale of Patient1, net of tax............... -- 0.12 -- 0.12
Loss from discontinued operations, net of
tax -- Business1................................ -- -- -- (0.01)
------- ------- -------- --------
Net income per common share -- basic............ $ 0.25 $ 0.08 $ 0.57 $ 0.11
======= ======= ======== ========
Weighted average shares used in computing basic
earnings per share................................. 29,773 31,530 30,032 31,530
======= ======= ======== ========
Net income per common share -- diluted:
Income (loss) from continuing operations........... $ 0.23 $ (0.04) $ 0.52 $ --
Gain on sale of Patient1, net of tax............... -- 0.12 -- 0.11
Loss from discontinued operations, net of
tax -- Business1................................ -- -- -- (0.01)
------- ------- -------- --------
Net income per common share -- diluted.......... $ 0.23 $ 0.08 $ 0.52 $ 0.10
======= ======= ======== ========
Weighted average shares used in computing diluted
earnings per share................................. 32,410 31,530 32,480 33,831
======= ======= ======== ========
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2005 2004
-------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 16,977 $ 3,431
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 7,539 7,737
Loss from discontinued operations......................... -- 544
Gain on sale of Patient1, net of tax...................... -- (3,755)
Amortization of deferred financing costs.................. 683 665
Loss on extinguishment of debt............................ -- 5,896
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Accounts receivable, billed............................ (5,479) (5,150)
Accounts receivable, unbilled.......................... (72) 319
Accounts payable....................................... 156 (2,217)
Accrued compensation................................... 6,603 649
Accrued expenses....................................... (2,082) 933
Deferred revenue....................................... 1,639 1,759
Other, net............................................. (3,352) (345)
-------- ---------
Net cash provided by continuing operations........... 22,612 10,466
Net cash used for discontinued operations............ -- (512)
-------- ---------
Net cash provided by operating activities............ 22,612 9,954
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,529) (3,000)
Software development costs.................................. (3,373) (2,529)
Net proceeds from sale of Patient1 and Business1, net of
tax....................................................... -- 3,625
Acquisition, net of cash acquired........................... -- (1,141)
Other....................................................... (163) (35)
-------- ---------
Net cash used for investing activities............... (8,065) (3,080)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... -- 125,000
Treasury stock purchase..................................... (15,404) (24,999)
Proceeds from the exercise of stock options................. 4,600 5,258
Debt issuance costs......................................... -- (5,723)
Payments of debt............................................ (9) (121,875)
Other....................................................... 10 (108)
-------- ---------
Net cash used for financing activities............... (10,803) (22,447)
-------- ---------
CASH AND CASH EQUIVALENTS:
Net change.................................................. 3,744 (15,573)
Balance at beginning of period.............................. 42,422 25,271
-------- ---------
Balance at end of period.................................... $ 46,166 $ 9,698
======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 2,291 $ 3,494
Income taxes.............................................. 413 194
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 condensed consolidated financial statements (interim
financial statements) include the accounts of Per-Se Technologies, Inc. and its
subsidiaries ("Per-Se" or the "Company"). Intercompany accounts and transactions
have been eliminated.
These interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information, the rules and regulations of the
Securities and Exchange Commission ("SEC") for interim financial statements, and
accounting policies consistent, in all material respects, with those applied in
preparing the Company's audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004, filed with the SEC on March 16, 2005 ("2004 Form 10-K"). These interim
financial statements are unaudited but reflect all adjustments (consisting of
normal recurring adjustments) management considers necessary for a fair
presentation of the Company's financial position, operating results and cash
flows for the interim periods presented. The information included in this report
should be read in conjunction with the 2004 Form 10-K.
The consolidated financial statements of the Company have been presented to
reflect the former 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 effective July
28, 2003, and Business1 was sold effective January 31, 2004. Additionally, the
activity related to the Company's former Medaphis Services Corporation and
Impact Innovations Group businesses, which were sold in 1998 and 1999,
respectively, are also reflected as discontinued operations for all periods
presented (refer to Note 8 for additional information).
NOTE 2 -- STOCK-BASED COMPENSATION PLANS
On December 16, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123(R)"), which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123(R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"), and amends SFAS No. 95, Statement of
Cash Flows. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. The original effective date of SFAS No.
123(R) was for interim periods beginning after June 15, 2005.
On April 14, 2005, the SEC announced the adoption of a rule that amends the
compliance date for SFAS No. 123(R). SFAS No. 123(R) must be adopted by the
Company no later than January 1, 2006. The Company expects to adopt SFAS No.
123(R) on January 1, 2006. When the Company adopts SFAS No. 123(R), it may elect
the modified prospective method or the modified retrospective method. The
Company expects to elect the modified prospective method upon adoption.
The Company currently accounts for share-based payments to employees using
APB Opinion No. 25 and the intrinsic value method and, as a result, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)'s fair value method will have a significant impact
on the Company's results of operations, although it will have no impact on the
overall cash flow or financial position of the Company. The impact of adoption
of SFAS No. 123(R) cannot be determined at this time because it will depend on
levels of share-based payments granted in the future. Had the Company adopted
SFAS No. 123(R) in prior periods, the impact would have approximated the impact
of SFAS No. 123 as described below.
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
At June 30, 2005, the Company has four stock-based compensation plans. The
following table illustrates the effect on net income and net income per share if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
its stock-based compensation plans.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported.......................... $ 7,546 $ 2,404 $16,977 $ 3,431
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... $(1,453) $(1,343) $(2,598) $(2,225)
------- ------- ------- -------
Pro forma net income............................ $ 6,093 $ 1,061 $14,379 $ 1,206
======= ======= ======= =======
Net income per common share:
Basic -- as reported.......................... $ 0.25 $ 0.08 $ 0.57 $ 0.11
======= ======= ======= =======
Basic -- pro forma............................ $ 0.20 $ 0.03 $ 0.48 $ 0.04
======= ======= ======= =======
Diluted -- as reported........................ $ 0.23 $ 0.08 $ 0.52 $ 0.10
======= ======= ======= =======
Diluted -- pro forma.......................... $ 0.19 $ 0.03 $ 0.44 $ 0.04
======= ======= ======= =======
NOTE 3 -- SHARE REPURCHASE
On March 9, 2005, the Company announced that its Board of Directors
authorized the repurchase of up to one million shares of the Company's
outstanding Common Stock. Under the share repurchase program, the Company was
able to repurchase shares from time to time at management's discretion in the
open market, by block purchase, in privately negotiated transactions or as
otherwise allowed by securities laws and regulations. All shares repurchased
were placed into treasury stock to be used for general corporate purposes.
During the six months ended June 30, 2005, the Company repurchased one million
shares of its outstanding Common Stock at a cost of approximately $15.4 million.
NOTE 4 -- ADDITIONAL PROCEDURES
As a result of allegations of improprieties made during 2003 and 2004, the
Company's external auditors advised the Company and the Audit Committee of the
Board of Directors that additional procedures should be performed related to the
allegations. These additional procedures were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement
Audit, that became effective for periods beginning on or after December 15,
2002. Due to the volume and, in some cases, vague nature of many of the
allegations, the scope of the additional procedures was broad and extensive. The
additional procedures included the review of certain of the Company's revenues,
expenses, assets and liabilities accounts for the years 2001 through 2003.
Certain financial items were identified during the additional procedures that
warranted the Company's further review. The Company reviewed these items and
determined that it was appropriate to restate certain prior period financial
statements. The restatements affected the financial statements for the years
ended December 31, 2002, and 2001 and for the nine months ended September 30,
2003. The net result of these restatements was a total increase in net income of
approximately $2.1 million for the years 2001 and 2002, and for the nine months
ended September 30, 2003.
The Company recorded costs related to the additional procedures totaling
approximately $2.5 and $6.5 million during the three and six months ended June
30, 2004, respectively, and included these costs in other
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
expenses in the Company's Consolidated Statements of Income. In Note 13, these
expenses are classified in the Corporate segment.
NOTE 5 -- ACQUISITIONS
On May 28, 2004, the Company entered into a five-year contract to provide
print and mail services for a new customer. As part of the transaction, the
Company purchased substantially all of the production assets and personnel of
that customer's hospital and physician patient statement and paper claims print
and mail business for cash consideration of approximately $1.1 million. In
addition, the Company recorded acquisition liabilities of approximately $1.0
million associated with the transaction.
The Company recorded the acquisition using the purchase method of
accounting and, accordingly, has allocated the purchase price to the assets
acquired and liabilities assumed based on their estimated fair market value at
the date of acquisition. Approximately $1.9 million of the purchase price was
allocated to a finite-lived intangible asset with a five-year life. The
remaining $0.2 million of the purchase price was allocated to tangible assets
acquired. The operating results of the acquisition are included in the Company's
Consolidated Statements of Income from the date of acquisition in the Hospital
Services division.
The pro-forma impact of this acquisition was immaterial to the financial
statements of the Company and therefore has not been presented.
NOTE 6 -- 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. The following sets forth the computation
of basic and diluted net income per share for the three and six months ended
June 30, 2005, and 2004:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
2005 2004 2005 2004
------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income........................................ $7,546 $2,404 $16,977 $3,431
====== ====== ======= ======
Common shares outstanding:
Shares used in computing net income per common
share -- basic............................... 29,773 31,530 30,032 31,530
Effect of potentially dilutive stock options and
warrants..................................... 2,637 -- 2,448 2,301
------ ------ ------- ------
Shares used in computing net income per common
share -- diluted............................. 32,410 31,530 32,480 33,831
====== ====== ======= ======
Net income per common share:
Basic........................................... $ 0.25 $ 0.08 $ 0.57 $ 0.11
====== ====== ======= ======
Diluted......................................... $ 0.23 $ 0.08 $ 0.52 $ 0.10
====== ====== ======= ======
Options to purchase 0.2 million and 0.6 million shares of Common Stock
outstanding during the three and six months ended June 30, 2005, respectively,
were excluded from the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market price of the
common shares, and therefore, the effect would have been antidilutive.
During the three months ended June 30, 2005, the Company's average market
price exceeded the market trigger price of the Company's contingently
convertible debt instrument and as such, the computation of diluted
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
earnings per share includes approximately 14,000 shares related to the
convertible debt instrument (see Note 10 for additional information).
Options and warrants to purchase 7.0 million shares of Common Stock
outstanding during the three months ended June 30, 2004, 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.
Options and warrants to purchase 1.7 million shares of Common Stock
outstanding during the six months ended June 30, 2004, 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.
NOTE 7 -- 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
loss. In the three-month periods ended June 30, 2005, and 2004, the only
component of other comprehensive loss was the net foreign currency translation.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -----------
2005 2004 2005 2004
----- ----- ---- ----
(IN THOUSANDS)
Net foreign currency translation........................... $(21) $13 $(15) $(15)
NOTE 8 -- DISCONTINUED OPERATIONS AND DIVESTITURES
The Company completed the sale of Patient1 to Misys Healthcare Systems, a
division of Misys plc on July 28, 2003. The Company completed the sale of
Business1 effective January 31, 2004, to a privately held company for $0.6
million, which will be received in periodic payments through June 2006. No cash
consideration was received at closing.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, 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 as part of
the Hospital Services division.
Summarized operating results for the discontinued operations are as
follows:
SIX MONTHS ENDED
JUNE 30, 2004
----------------------------
PATIENT1 BUSINESS1 TOTAL
-------- --------- -----
(IN THOUSANDS)
Revenue.................................................... $ -- $ 106 $ 106
==== ===== =====
Loss from discontinued operations before income taxes...... $(18) $(303) $(321)
Income tax expense......................................... -- -- --
---- ----- -----
Loss from discontinued operations, net of tax.............. $(18) $(303) $(321)
==== ===== =====
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 9 -- LEGAL MATTERS
On April 4, 2005, the Company announced that it was notified by the SEC of
the issuance of an order of investigation, which it believes relates to
allegations of wrongdoing made by a former employee in 2003 and 2004. These
allegations were the subject of a prior investigation by the audit committee and
an outside accounting firm that resulted in the performance of extensive
additional procedures. See Note 4 above and "Note 2 -- "Other Expenses" in the
Company's Notes to the Consolidated Financial Statements in the Company's 2004
Form 10-K for more information.
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, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from federal and state healthcare payer programs.
The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters; however, there can be no
assurance that such matters or any future legal matters will not have an adverse
effect on the Company. 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 10 -- LONG-TERM DEBT
On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A of the Securities Act of
1933, as amended. As originally issued, the Debentures were convertible into
shares of the Company's Common Stock at an initial conversion rate of 56.0243
shares per $1,000 principal amount (a conversion price of approximately $17.85)
once the Company's Common Stock share price reaches 130% of the conversion
price, or a share price of approximately $23.20. In November 2004, the Company
exercised its irrevocable option to pay the principal of Debentures submitted
for conversion in cash. The Company will satisfy any amount above the conversion
trigger price of $17.85 through the issuance of Common Stock. The Debentures
mature on June 30, 2024, and are unsecured. Interest on the Debentures is
payable semiannually at the rate of 3.25% per annum on June 30 and December 30
of each year, beginning on December 30, 2004. The Company may redeem the
Debentures either in whole or in part beginning July 6, 2009. The holders may
require the Company to repurchase the Debentures on June 30, 2009, 2014, and
2019, or upon a fundamental change, as defined in the Indenture governing the
Debentures. The Company used the proceeds from issuance of the Debentures,
together with cash on hand, to retire its then-outstanding $118.8 million of
debt, as well as to repurchase, for approximately $25 million, an aggregate of
approximately 2.0 million shares of the Company's outstanding common stock, at
the market price of $12.57 per share, in negotiated transactions concurrently
with the Debentures offering.
In connection with the sale of the Debentures, the Company agreed to file
with the SEC, within 90 days after the original issuance of the Debentures, a
shelf registration statement with respect to the resale of the Debentures and
the common stock issuable upon conversion of the Debentures. The Company agreed
to use commercially reasonable efforts to cause the shelf registration statement
to become effective within 210 days after the original issuance of the
Debentures. On September 15, 2004, the Company filed the shelf registration
statement with the SEC. On March 14, 2005, the shelf registration became
effective. Since the Company was unable to cause the shelf registration
statement to become effective within 210 days after original issuance of the
Debentures, the Company was required to pay an additional 0.25% of interest on
the Debentures from January 26, 2005, through the effective date of the shelf
registration statement, March 14, 2005. The Company paid approximately $41,000
of additional interest to holders of the Debentures for the period from January
26, 2005, through March 14, 2005.
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On June 30, 2004, the Company also amended its then-current credit facility
to increase its capacity from $50 million to $75 million, to extend its maturity
to three years, and to lower the interest rate from LIBOR plus amounts ranging
from 3.0% to 3.5% to LIBOR plus amounts ranging from 2.5% to 3.0% ("Revolving
Credit Facility"). The Company intends to use the Revolving Credit Facility, as
needed, for future investments in 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 June 30, 2005.
All obligations under the Revolving Credit Facility 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 those subsidiaries. Any non-guarantor subsidiaries are minor
individually and in the aggregate to the Company's consolidated financial
statements. There are no restrictions on the Subsidiary Guarantors that would
prohibit the transfer of funds or assets to the parent company by dividend or
loan.
The Revolving Credit Facility 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 Revolving Credit Facility. The Company
was in compliance with all applicable covenants as of June 30, 2005.
NOTE 11 -- INCOME TAXES
Income tax expense, which was primarily related to federal, state and local
income taxes, was approximately $0.2 million and $0.5 million for the three and
six months ended June 30, 2005, respectively, as compared to an income tax
benefit of approximately $20,000 for the three months ended June 30, 2004, and
an income tax expense of approximately $0.2 million for the six months ended
June 30, 2004. The Company has historically had a full valuation allowance
against its deferred tax asset due to the uncertainty regarding its ability to
generate sufficient future taxable income prior to the expiration of its net
operating loss carryforwards. In the fourth quarter of 2004, the Company
reassessed the valuation allowance previously established and determined that it
was more likely than not that a portion of the deferred tax asset would be
realized in the foreseeable future. This determination was based upon the
Company's projection of taxable income for 2005 and 2006. Accordingly, a portion
of the valuation allowance was released during the fourth quarter of 2004. The
Company will continue to assess the potential realization of the remaining
deferred tax asset, and will adjust the valuation allowance in future periods,
as appropriate. During the current period, the Company utilized net operating
losses to offset current period taxable income which significantly reduced the
Company's effective tax rate.
NOTE 12 -- RESTRUCTURING EXPENSES
The amount of lease termination costs associated with a 1995 restructuring
applied against the reserve in the six months ended June 30, 2005, is as
follows:
RESERVE BALANCE COSTS APPLIED RESERVE BALANCE
DECEMBER 31, 2004 AGAINST RESERVE JUNE 30, 2005
----------------- --------------- ---------------
(IN THOUSANDS)
Lease termination costs................. $1,104 $(168) $936
NOTE 13 -- SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its two
operating divisions: Physician Services and Hospital Services.
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Physician Services division provides Connective Healthcare solutions
that manage the revenue cycle for physician groups. The division is the largest
provider of business management outsourced services that supplant all or most of
the administrative functions of a physician group related to their revenue
cycle. The target market is primarily hospital-affiliated physician groups in
the specialties of radiology, anesthesiology, emergency medicine and pathology
as well as physician groups practicing in the academic setting and other large
physician groups. The division recognizes revenue primarily on a contingency fee
basis, which aligns the division's interests with the interests of the physician
groups it services. The outsourced services business recognizes revenue as a
percentage of the physician group's cash collections for the services performed.
Since this is an outsourced service delivered on the Company's proprietary
technology, license fees or maintenance fees are not required to be paid by the
division's hospital-affiliated physician groups. The division also sells a
physician practice management ("PPM") solution that is delivered via an ASP
model. The PPM solution collects a monthly usage fee from the office-based
physician practices using the system. The division's revenue model is 100%
recurring in nature due to the transaction-based nature of its fee revenue in
the outsourced services business and the monthly usage fee in the PPM business.
The business of the Physician Services division is conducted by PST Services,
Inc. a Georgia corporation d/b/a "Per-Se Technologies," which is a wholly owned
subsidiary of the Company.
The Hospital Services division provides Connective Healthcare solutions
that increase revenue and decrease expenses for hospitals, with a focus on
revenue cycle management and resource management. The division's revenue cycle
management solutions enable a hospital's central billing office to improve its
revenue cycle. The division has one of the largest clearinghouses in the medical
industry, which provides an important infrastructure to support its revenue
cycle offering. The division also provides resource management solutions that
enable hospitals efficiently to manage resources, such as personnel and the
operating room, to reduce costs and improve their bottom line. The division
primarily recognizes revenue on a per-transaction basis for its revenue cycle
management solutions and primarily recognizes revenue on a
percentage-of-completion basis or upon software shipment for sales of its
resource management software solutions. Approximately 88% of the division's
revenue is recurring due to its transaction-based business and the maintenance
revenue from its substantial installed base for the resource management software
solutions. The business of the Hospital Services division is conducted by the
following wholly owned subsidiaries of the Company: Per-Se Transaction Services,
Inc., an Ohio corporation; Patient Account Management Services, Inc., an Ohio
corporation; PST Products, LLC, a California limited liability company; and
Knowledgeable Healthcare Solutions, Inc., an Alabama corporation. All of these
subsidiaries do business under the name "Per-Se Technologies."
The Company evaluates each segment's performance based on its segment
operating income. Segment operating income is revenue less cost of services,
selling, general and administrative expenses and other expenses.
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.
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company's segment information from continuing operations is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2005 2004 2005 2004
------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Revenue:
Physician Services......................... $69,068 $66,075 $136,258 $129,258
Hospital Services.......................... 27,808 25,446 56,172 50,217
Eliminations............................... (3,576) (3,380) (7,100) (6,733)
------- ------- -------- --------
$93,300 $88,141 $185,330 $172,742
======= ======= ======== ========
Segment operating expenses:
Physician Services......................... $61,581 $58,958 $120,203 $116,188
Hospital Services.......................... 22,547 19,078 44,482 38,047
Corporate.................................. 3,892 7,189 8,036 15,083
Eliminations............................... (3,576) (3,380) (7,100) (6,733)
------- ------- -------- --------
$84,444 $81,845 $165,621 $162,585
======= ======= ======== ========
Segment operating income:
Physician Services......................... $ 7,487 $ 7,117 $ 16,055 $ 13,070
Hospital Services.......................... 5,261 6,368 11,690 12,170
Corporate.................................. (3,892) (7,189) (8,036) (15,083)
------- ------- -------- --------
$ 8,856 $ 6,296 $ 19,709 $ 10,157
======= ======= ======== ========
Interest expense............................. $ 1,448 $ 1,999 $ 2,929 $ 4,073
======= ======= ======== ========
Interest income.............................. $ (336) $ (192) $ (648) $ (244)
======= ======= ======== ========
Loss on extinguishment of debt............... $ -- $ 5,896 $ -- $ 5,896
======= ======= ======== ========
Income (loss) before income taxes............ $ 7,744 $(1,407) $ 17,428 $ 432
======= ======= ======== ========
Depreciation and amortization:
Physician Services......................... $ 2,097 $ 2,341 $ 4,157 $ 4,765
Hospital Services.......................... 1,615 1,380 3,211 2,700
Corporate.................................. 75 122 171 272
------- ------- -------- --------
$ 3,787 $ 3,843 $ 7,539 $ 7,737
======= ======= ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services......................... $ 1,511 $ 1,080 $ 3,489 $ 2,690
Hospital Services.......................... 1,457 1,387 4,050 2,537
Corporate.................................. 309 298 363 302
------- ------- -------- --------
$ 3,277 $ 2,765 $ 7,902 $ 5,529
======= ======= ======== ========
AS OF
-----------------------
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services........................................ $ 68,170 $ 63,611
Hospital Services......................................... 64,107 59,964
Corporate................................................. 82,836 79,116
-------- --------
$215,113 $202,691
======== ========
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 14 -- ENHANCEMENT TO PHYSICIAN CLAIMS CLEARINGHOUSE PROJECT
During the latter part of 2004, the Company initiated a project to enhance
substantially its physician claims clearinghouse functionality. The Company
expects that the improved platform will provide efficiencies and competitive
advantages for its Physician Services division. The Company expects to incur
approximately $3 million in capital expenditures and capitalized software
development costs and approximately $1.5 million in expenses related to the
physician claims clearinghouse enhancement in 2005. During the six months ended
June 30, 2005, the Company incurred approximately $0.7 million of expenses which
are reflected in the Hospital Services division, and invested approximately $1.3
million for capital expenditures and capitalized software development costs
related to this project. The Company expects the project to be completed in
mid-2006.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
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.
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. The division provides a
complete outsourcing service, therefore, allowing physician groups to avoid the
infrastructure investment in their own in-house billing office. 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 division also has an ASP-based physician practice management
solution, named MedAxxis, that targets office-based physician groups.
The Hospital Services division products focus on optimizing the revenue
cycle and improving administrative efficiencies for 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, physician groups
in academic settings, hospitals and integrated delivery networks ("IDNs").
GENERAL OVERVIEW
Management believes the key elements for assessing the Company's
performance are the ability to generate stable and improving operating profit
margins on the Company's existing business, and to generate similar or better
operating profit margins on new business. An additional element is the ability
to generate positive cash flow from continuing operations. In assessing the
Company's performance, adjustments are made for items the Company considers to
be atypical, such as those noted below, to help ensure the analysis is performed
on a consistent, comparable basis from period to period.
Consolidated revenue for the three months ended June 30, 2005, increased
approximately 6% as compared to the same period of 2004 due to the
implementation of the record level of new business sold during 2004.
Consolidated operating margins increased from 7.1% in the second quarter of 2004
to 9.5% in the second quarter of 2005. During the second quarter of 2004, the
Company incurred approximately $2.5 million in costs associated with the
additional procedures as part of the year-end 2003 audit. Similar costs were not
incurred during the second quarter of 2005. Operating margins also increased due
to the increased revenue in the Physician Services division.
The Company generated approximately $22.6 million in cash from continuing
operations during the six months ended June 30, 2005 as compared to $10.5
million during the same period of 2004. The increase in cash flow from
continuing operations was driven by the Company's increase in profitability and
the timing of payments on certain liabilities.
During the latter part of 2004, the Company initiated a project to enhance
substantially its physician claims clearinghouse functionality. The Company
expects that the improved platform will provide efficiencies and competitive
advantages for its Physician Services division. The Company expects to incur
approximately $3 million in capital expenditures and capitalized software
development costs and approximately $1.5 million in expenses related to the
physician claims clearinghouse enhancement. During the six months ended June 30,
2005, the Company incurred approximately $0.7 million of expenses which are
reflected in the Hospital Services
14
division, and invested approximately $1.3 million for capital expenditures and
capitalized software development costs related to this project. The Company
expects the project to be completed in mid-2006.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005, AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2004
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $69,068 $66,075
Hospital Services........................................... 27,808 25,446
Eliminations................................................ (3,576) (3,380)
------- -------
$93,300 $88,141
======= =======
Revenue for the Physician Services division increased approximately 5% in
the three months ended June 30, 2005, as compared to the same period in 2004.
Pricing for the division's services and products was stable compared to the
prior year period. The revenue increase is due to the implementation of the
record level of new business sold during 2004. Net new business sold during the
second quarter of 2005 was $10 million compared to $2 million during the second
quarter of 2004. Current year net new business sold represents the Company's
strongest second quarter performance. Net new business sold is defined as the
annualized revenue value of new contracts signed in a period, less the
annualized revenue value of terminated business in that same period. Net backlog
at June 30, 2005, was approximately $10 million, compared to the net backlog of
approximately $5 million at March 31, 2005. 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 9% for
the three months ended June 30, 2005, as compared to the same period in 2004.
Pricing for the division's services and products was stable compared to the
prior year period. Revenue growth in the division is due to the implementation
of transaction processing new business sold during 2004. Medical transaction
volume increased approximately 16% for the period over the same period of 2004.
Revenue growth does not necessarily correlate directly to transaction volume due
to the mix of services and 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 Income. Segment operating income is revenue less cost of
services, selling, general and administrative expenses and other expenses.
Segment operating income, classified by the Company's divisions, is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 7,487 $ 7,117
Hospital Services........................................... 5,261 6,368
Corporate................................................... (3,892) (7,189)
------- -------
$ 8,856 $ 6,296
======= =======
15
Physician Services' segment operating income increased approximately 5% in
the three months ended June 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 10.8% in both periods. Margins
in the current year period were negatively impacted by results for the
division's physician practice management ("PPM") solution, which represents less
than 5% of the division's total revenue. The Company is in the final stages of
converting its PPM customers to a new platform. During the conversion, which is
expected to be completed by the end of 2005, the Company is incurring costs to
support both the legacy platform and the new platform, resulting in lower than
normal margins for this business.
Hospital Services' segment operating income decreased approximately 17% in
the three months ended June 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 18.9% versus approximately 25.0%
in the prior year period. Included in the current year quarter is approximately
$0.4 million of costs associated with the Company's physician claims
clearinghouse enhancement. Also, operating margins in the prior year period were
higher due to the previously unbilled maintenance revenue that was being
recognized upon receipt of payment.
Corporate overhead expenses, which include certain executive and
administrative functions, decreased approximately $3.3 million or approximately
46% in the three months ended June 30, 2005, compared to the same period in
2004. The decrease is attributable primarily to approximately $2.5 million of
expenses incurred in the three months ended June 30, 2004, to perform the
additional procedures discussed below.
Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's external auditors advised the Company and the Audit
Committee of the Board of Directors that additional procedures should be
performed related to the allegations. These additional procedures were required
due to Statement of Auditing Standards ("SAS") No. 99, Consideration of Fraud in
a Financial Statement Audit ("SAS No. 99), that became effective for periods
beginning on or after December 15, 2002. Due to the volume and, in some cases,
vague nature of many of the allegations, the scope of the additional procedures
was broad and extensive. The additional procedures included the review of
certain of the Company's revenues, expenses, assets and liabilities accounts for
the years 2001 through 2003.
The Company recorded costs related to the additional procedures totaling
approximately $2.5 million during the three months ended June 30, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Income. In Note 13 of Notes to Financial Statements, these expenses are
classified in the Corporate segment.
Interest. Interest expense was approximately $1.4 million for the three
months ended June 30, 2005, as compared to $2.0 million for the same period in
2004. The decrease is attributable to the Company refinancing its debt in June
2004, by issuing $125 million aggregate principal amount of 3.25% Convertible
Subordinated Debentures due 2024. Prior to this refinancing, the interest rate
on the Term Loan B was LIBOR plus 4.25%, or approximately 5.36%, in the second
quarter of 2004. Interest income was approximately $0.3 million for the
three-month period ended June 30, 2005, as compared to approximately $0.2
million for the same period in 2004.
Loss on Extinguishment of Debt. During the three months ended June 30,
2004, in connection with the retirement of the Company's then-outstanding $118.8
million under the Term Loan B component of the Credit Agreement (the "Term Loan
B"), the Company wrote off approximately $3.5 million of deferred debt issuance
costs associated with the Term Loan B. Additionally, the Company incurred a
prepayment penalty of approximately $2.4 million due to the early retirement of
the Term Loan B.
Income Taxes. Income tax expense, which was primarily related to federal,
state and local income taxes, was approximately $0.2 million and ($20,000) for
the three months ended June 30, 2005, and 2004, respectively. The Company has
historically had a full valuation allowance against its deferred tax asset due
to the uncertainty regarding its ability to generate sufficient future taxable
income prior to the expiration of its net operating loss carryforwards. In the
fourth quarter of 2004, the Company reassessed the valuation allowance
previously established and determined that it was more likely than not that a
portion of the deferred tax asset would be realized in the foreseeable future.
This determination was based upon the Company's projection of taxable income for
2005 and 2006. Accordingly, a portion of the valuation allowance was released
during the fourth quarter of 2004. The Company will continue to assess the
potential realization of the remaining deferred tax
16
asset, and will adjust the valuation allowance in future periods, as
appropriate. During the current period, the Company utilized net operating
losses to offset current period taxable income which significantly reduced the
Company's effective tax rate.
Discontinued Operations. The Company completed the sale of Patient1 to
Misys Healthcare Systems, a division of Misys plc ("Misys") on July 28, 2003.
The Company completed the sale of Business1 effective January 31, 2004, to a
privately held company for $0.6 million, which will be received in periodic
payments through June 2006. No cash consideration was received at closing.
Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, 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 as part of
the Hospital Services division.
SIX MONTHS ENDED JUNE 30, 2005, AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2004
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $136,258 $129,258
Hospital Services........................................... 56,172 50,217
Eliminations................................................ (7,100) (6,733)
-------- --------
$185,330 $172,742
======== ========
Revenue for the Physician Services division increased approximately 5% in
the six months ended June 30, 2005, as compared to the same period in 2004.
Pricing for the division's services and products was stable compared to the
prior year period. The revenue increase is due to the implementation of the
record net new business sold during 2004 and the recognition of approximately
$1.5 million of revenue delayed in the quarter ended December 31, 2004, caused
by a technical problem in the claims clearinghouse. Net new business sold during
the second quarter of 2005 was $10 million compared to $2 million during the
second quarter of 2004. The current year quarter represents the second highest
net new business sold performance for the division. Net new business sold is
defined as the annualized revenue value of new contracts signed in a period,
less the annualized revenue value of terminated business in that same period.
Net backlog at June 30, 2005, was approximately $10 million, compared to the net
backlog of approximately $3 million at June 30, 2004. 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 12% for
the six months ended June 30, 2005, as compared to the same period in 2004.
Pricing for the division's services and products was stable compared to the
prior year period. Revenue growth in the division is due to the implementation
of new transaction processing business sold during 2004. Medical transaction
volume increased approximately 20% for the period over the same period of 2004.
Revenue growth does not necessarily correlate directly to transaction volume due
to the mix of services and 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.
17
Segment Operating Income. Segment operating income is revenue less cost of
services, selling, general and administrative expenses and other expenses.
Segment operating income, classified by the Company's divisions, is as follows:
SIX MONTHS ENDED
JUNE 30,
------------------
2005 2004
------- --------
(IN THOUSANDS)
Physician Services.......................................... $16,055 $ 13,070
Hospital Services........................................... 11,690 12,170
Corporate................................................... (8,036) (15,083)
------- --------
$19,709 $ 10,157
======= ========
Physician Services' segment operating income increased approximately 23% in
the six months ended June 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 11.8% in the six months ended
June 30, 2005, versus approximately 10.1% in the same period in 2004. Margin
expansion in the current year period is the result of revenue growth as well as
the recognition of approximately $1.5 million of revenue delayed in the quarter
ended December 31, 2004, caused by a technical problem in the claims
clearinghouse. Margins in the current year were negatively impacted by results
for the division's PPM solution, which represents less than 5% of the division's
total revenue. The Company is in the final stages of converting its PPM
customers to a new platform. During the conversion, which is expected to be
completed by the end of 2005, the Company is incurring costs to support both the
legacy platform and the new platform, resulting in lower than normal margins for
this business.
Hospital Services' segment operating income decreased approximately 4% in
the six months ended June 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 20.8% versus approximately 24.2%
in the prior year period. The current year includes approximately $0.7 million
of costs associated with the Company's physician claims clearinghouse
enhancement. Also, operating margins in the prior year period were higher due to
the previously unbilled maintenance revenue that was being recognized upon
receipt of payment.
Corporate overhead expenses, which include certain executive and
administrative functions, decreased approximately $7.0 million or approximately
47% in the six months ended June 30, 2005, compared to the same period in 2004.
The decrease is attributable primarily to approximately $6.5 million of expenses
incurred in the six months ended June 30, 2004, to perform the additional
procedures discussed below.
Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's external auditors advised the Company and the Audit
Committee of the Board of Directors that additional procedures should be
performed related to the allegations. These additional procedures were required
due to SAS No. 99, that became effective for periods beginning on or after
December 15, 2002. Due to the volume and, in some cases, vague nature of many of
the allegations, the scope of the additional procedures was broad and extensive.
The additional procedures included the review of certain of the Company's
revenues, expenses, assets and liabilities accounts for the years 2001 through
2003.
The Company recorded costs related to the additional procedures totaling
approximately $6.5 million during the six months ended June 30, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Income. In Note 13 of Notes to Financial Statements, these expenses are
classified in the Corporate segment.
Interest. Interest expense was approximately $2.9 million for the six
months ended June 30, 2005, as compared to $4.1 million for the same period in
2004. The decrease is attributable to the Company refinancing its debt in June
2004, by issuing $125 million aggregate principal amount of 3.25% Convertible
Subordinated Debentures due 2024. Prior to this refinancing, the interest rate
on the Term Loan B was LIBOR plus 4.25%, or approximately 5.39%, in the first
six months of 2004. Interest income was approximately $0.6 million for the six-
month period ended June 30, 2005, as compared to approximately $0.2 million for
the same period in 2004.
18
Income Taxes. Income tax expense, which was primarily related to federal,
state and local income taxes, was approximately $0.5 million and $0.2 million
for the six months ended June 30, 2005, and 2004, respectively. The Company has
historically had a full valuation allowance against its deferred tax asset due
to the uncertainty regarding its ability to generate sufficient future taxable
income prior to the expiration of its net operating loss carryforwards. In the
fourth quarter of 2004, the Company reassessed the valuation allowance
previously established and determined that it was more likely than not that a
portion of the deferred tax asset would be realized in the foreseeable future.
This determination was based upon the Company's projection of taxable income for
2005 and 2006. Accordingly, a portion of the valuation allowance was released
during the fourth quarter of 2004. The Company will continue to assess the
potential realization of the remaining deferred tax asset, and will adjust the
valuation allowance in future periods, as appropriate. During the current
period, the Company utilized net operating losses to offset current period
taxable income which significantly reduced the Company's effective tax rate.
Discontinued Operations. The Company completed the sale of Patient1 to
Misys on July 28, 2003. The Company completed the sale of Business1 effective
January 31, 2004, to a privately held company for $0.6 million, which will be
received in periodic payments through June 2006. No cash consideration was
received at closing.
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 as part of the Hospital Services division.
Summarized operating results for the discontinued operations are as
follows:
SIX MONTHS ENDED
JUNE 30, 2004
----------------------------
PATIENT1 BUSINESS1 TOTAL
-------- --------- -----
(IN THOUSANDS)
Revenue.................................................... $ -- $ 106 $ 106
==== ===== =====
Loss from discontinued operations before income taxes...... $(18) $(303) $(321)
Income tax expense......................................... -- -- --
---- ----- -----
Loss from discontinued operations, net of tax.............. $(18) $(303) $(321)
==== ===== =====
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the Company's cash balances as of June
30, 2005, and December 31, 2004, and cash flows from continuing operations for
the six months ended June 30, 2005, and 2004, (in thousands):
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
Unrestricted cash and cash equivalents...................... $46,166 $42,422
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
Cash provided by continuing operations...................... $ 22,612 $ 10,466
Cash used for investing activities.......................... $ (8,065) $ (3,080)
Cash used for financing activities.......................... $(10,803) $(22,447)
Unrestricted cash and cash equivalents include all highly liquid
investments with an initial maturity of no more than three months at the date of
purchase.
Restricted cash of approximately $44,000 and $51,000 at June 30, 2005, and
December 31, 2004, respectively, represent amounts collected on behalf of
certain Physician Services and Hospital Services clients, a portion of which is
held in trust until it is remitted to such clients.
19
During the six months ended June 30, 2005, the Company generated
approximately $22.6 million in cash from continuing operations as a result of
increased profitability and the timing of payments on certain liabilities.
During the six months ended June 30, 2004, the Company generated
approximately $10.5 million in cash from continuing operations, which includes
cash generated from normal operations offset by cash payments related to
additional procedures necessary under SAS No. 99 totaling approximately $6.0
million (refer to "Note 4 -- Additional Procedures" in the Company's Notes to
Consolidated Financial Statements for more information), the payment of
approximately $5.4 million in expenses and legal settlements related to the
matter with Lloyd's of London (refer to "Note 12 -- Legal Matters" in the
Company's Notes to Consolidated Financial Statements in the Company's 2004 Form
10-K for more information) and interest payments of approximately $3.5 million.
During the six months ended June 30, 2005, the Company used approximately
$8.1 million in cash for investing activities primarily for capital expenditures
and investment in software development costs. During the latter part of 2004,
the Company initiated a project to enhance substantially its physician claims
clearinghouse functionality. The Company expects that the improved platform will
provide efficiencies and competitive advantages for its Physician Services
division. The Company expects to incur approximately $3 million in capital
expenditures and capitalized software development costs during 2005. During the
six months ended June 30, 2005, the Company invested approximately $1.3 million
for capital expenditures and capitalized software development costs related to
this project.
During the six months ended June 30, 2004, the Company used approximately
$3.1 million in cash for investing activities primarily for capital expenditures
and investment in software development costs.
During the six months ended June 30, 2005, the Company used approximately
$10.8 million in cash for financing activities which included approximately
$15.4 million used for the repurchase of the Company's Common Stock which was
partially offset by proceeds from the exercise of stock options of approximately
$4.6 million.
On March 9, 2005, the Company announced that the Board authorized the
repurchase of up to 1 million shares of the Company's outstanding Common Stock.
Under the share repurchase program, the Company was able to repurchase shares
from time to time at management's discretion in the open market, by block
purchase, in privately negotiated transactions or as otherwise allowed by
securities laws and regulations. All shares repurchased were placed into
treasury to be used for general corporate purposes. During the six months ended
June 30, 2005, the Company repurchased one million shares of its outstanding
Common Stock at a cost of approximately $15.4 million.
During the six months ended June 30, 2004, the Company used approximately
$22.4 million in cash for financing activities. On June 30, 2004 the Company
raised $125 million from the sale of 3.25% Convertible Subordinated Debentures
due 2024 (the "Debentures") and retired the $118.8 million then outstanding
under the Term Loan B concurrently with the completion of the Convertible
Debenture offering. On June 30, 2004, the Company also completed an amendment to
the Revolving Credit Facility to increase its capacity and lower the Company's
borrowing rate. The Revolving Credit Facility's capacity was expanded from $50
million to $75 million and the facility's maturity was extended to three years.
The Company incurred a prepayment penalty on the early retirement of the Term
Loan B totaling $2.4 million in addition to financing costs of $3.3 million
related to the Debentures offering and amendment to the Revolving Credit
Facility. The Company also repurchased, for approximately $25 million, an
aggregate of approximately 2.0 million shares of the Company's outstanding
common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. The cost of the
refinancing and purchase of common stock is offset by proceeds from the exercise
of stock options of approximately $5.3 million.
For more information about the Company's long-term debt, refer to "Note 10
-- Long-Term Debt" in the Company's Notes to Consolidated Financial Statements.
The level of the Company's indebtedness could adversely impact the
Company's ability to obtain additional financing. A substantial portion of the
Company's cash flow from operations could be dedicated to the payment of
principal and interest on its indebtedness.
20
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include pending
lawsuits involving claims that are not required to be separately described in
this report, including a claim for breach of contract arising from a prior
acquisition. That claim has been submitted to binding arbitration, which
commenced in the second quarter of 2005 and is expected to reconvene in the
third quarter of 2005. The Company believes that it has meritorious defenses to
the claims and other issues asserted in such 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.
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 2 -- Stock-Based
Compensation Plans," "Note 9 -- Legal Matters," "Note 10 -- Long-Term Debt,"
"Note 11 -- Income Taxes," "Results of Operations" and "Liquidity and Capital
Resources," are "forward-looking statements" within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Forward-looking statements include, but are not limited to, 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,
adoption of accounting standard regarding expensing of stock options, payment of
additional interest to convertible debenture holders, future appropriateness of
deferred tax asset valuation allowance, 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:
THE COMPANY HAS A SIGNIFICANT AMOUNT OF LONG-TERM DEBT AND OBLIGATIONS TO MAKE
PAYMENTS, WHICH COULD LIMIT THE COMPANY'S FUNDS AVAILABLE FOR OTHER
ACTIVITIES.
The Company has approximately $125 million of long-term indebtedness and
$0.6 million in capital lease obligations and, as a result, is required to make
interest and principal payments. 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 the Company's indebtedness, or seek
additional equity capital. The Company's ability to make payments on the
Company's debt obligations will depend on future operating performance, which
may be affected by conditions beyond the Company's control.
THE COMPANY IS REGULARLY INVOLVED IN LITIGATION, WHICH MAY EXPOSE THE COMPANY
TO SIGNIFICANT LIABILITIES.
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 the Company's business. The Company has also received written
demands from customers and former customers that have not yet resulted in legal
action.
21
The Company may not be able to successfully resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, the Company's insurance coverage 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 the Company's
business, results of operations or financial condition.
THE PHYSICIAN MANAGEMENT OUTSOURCING BUSINESS IS HIGHLY COMPETITIVE AND THE
COMPANY'S INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY
AFFECT THE COMPANY.
The physician business management outsourcing business, especially for
revenue cycle management, is highly competitive. The Company competes with
regional and local physician reimbursement organizations as well as physician
groups that provide their own business management services in house. Successful
competition within this industry is dependent on numerous industry and market
conditions. Potential industry and market changes that could adversely affect
the Company's ability to compete for business management outsourcing services
include an increase in the number of local, regional or national competitors
providing comparable services and new alliances between healthcare providers and
third-party payers in which healthcare providers are employed by such
third-party payers.
THE BUSINESS OF PROVIDING SERVICES AND SOLUTIONS TO HOSPITALS FOR BOTH REVENUE
CYCLE AND RESOURCE MANAGEMENT IS ALSO HIGHLY COMPETITIVE AND THE COMPANY'S
INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY AFFECT THE
COMPANY.
The business of providing services and solutions to hospitals for both
revenue cycle and resource management is also highly competitive. The Company
competes with traditional electronic data interface companies, outsourcing
companies and specialized software vendors with national, regional and local
bases. Some competitors have longer operating histories and greater financial,
technical and marketing resources than the Company. The Company's successful
competition within this industry is dependent on numerous industry and market
conditions.
THE MARKETS FOR THE COMPANY'S SERVICES AND SOLUTIONS ARE CHARACTERIZED BY
RAPIDLY CHANGING TECHNOLOGY, EVOLVING INDUSTRY STANDARDS AND FREQUENT NEW
PRODUCT INTRODUCTIONS AND THE COMPANY'S INABILITY TO KEEP PACE COULD ADVERSELY
AFFECT THE COMPANY.
The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including the
Company's 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 the Company's technology
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.
THE HEALTHCARE MARKETPLACE IS CHARACTERIZED BY CONSOLIDATION, WHICH MAY RESULT
IN FEWER POTENTIAL CUSTOMERS FOR THE COMPANY'S SERVICES.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into
22
comprehensive delivery systems. Consolidation of management and billing services
through integrated delivery systems may result in a decrease in demand for the
Company's business management outsourcing services for particular physician
practices.
THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE THE COMPANY'S
COSTS OF OPERATION.
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Federal and state legislatures
have periodically considered programs to reform or amend the U.S. healthcare
system at both the federal and state level and to change healthcare financing
and reimbursement systems, such as the Balanced Budget Act of 1997 and the
Medicare Modernization Act of 2003. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Current or future government regulations or healthcare reform measures
may affect the Company's business. Healthcare industry participants may respond
by reducing their investments or postponing investment decisions, including
investments in the Company's products and services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid or other government-funded healthcare programs.
In the past, the Company has been the subject of federal investigations,
and the Company 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 Insurance 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. The HIPAA rules set new or higher standards for
the healthcare industry in handling healthcare transactions and information,
with penalties for noncompliance. The Company has incurred and will continue to
incur costs to comply with these rules. Although management believes that future
compliance costs will not have a material impact on the Company's results of
operations, compliance with these rules may prove to be more costly than
anticipated. Failure to comply with such rules may have a material adverse
effect on the Company's business and may subject the Company to civil and
criminal penalties as well as loss of customers.
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. The Company has made and expects to continue to make investments in
product enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require the Company to make investments in new
products or charge higher prices.
Numerous federal and state civil and criminal laws govern the collection,
use, storage and disclosure of health information for the purpose of
safeguarding the privacy and security of such information. Federal or state
governments may impose penalties for noncompliance, both criminal and civil.
Persons who believe their health information has been misused or disclosed
improperly may bring claims and payers who believe instances of noncompliance
with privacy and security standards have occurred may bring administrative
sanctions or remedial actions against offending parties.
Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that the debate on healthcare reform will continue. The Company
also expects that the federal government as well as state
23
governments will pass laws and issue regulations addressing healthcare issues
and reimbursement of healthcare providers. The Company cannot predict whether
the government will enact new legislation and regulations, and, if enacted,
whether such new developments will affect the Company's business.
THE TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE VOLATILE AND NEGATIVELY
AFFECT YOUR INVESTMENT.
The trading price of the Company's Common Stock may be volatile. The market
for the Company's Common Stock may experience significant price and volume
fluctuations in response to a number of factors including actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments
and other factors, many of which are beyond the Company's control. Furthermore,
the stock market in general and the market for software, healthcare business
services and high technology companies in particular, has experienced volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of the Company's Common Stock, regardless of actual operating
performance.
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 Revolving Credit Facility. As such, 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
has not incurred any borrowings under the Revolving Credit Facility since
inception.
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
In connection with the evaluation of the Company's disclosure controls and
procedures required by Rule 13a-15(b) under the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's chief executive officer and chief financial
officer concluded that, as of June 30, 2005, the Company's disclosure controls
and procedures were effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is (a) recorded, processed, summarized and reported,
within the time periods specified in the Commission's rules and forms, and (b)
accumulated and communicated to the Company's management, including its chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure. It should be noted, however, that a
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues within the
Company have been detected. Furthermore, the design of any control system is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how unlikely.
Because of these inherent limitations in a cost-effective control system,
misstatements or omissions due to error or fraud may occur and not be detected.
24
In connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act, no changes in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2005, and that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting were identified.
25
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in "Note 9 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.
ITEM 2C. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
(C)
TOTAL NUMBER (D)
OF SHARES MAXIMUM
(A) PURCHASED AS NUMBER OF
TOTAL (B) PART OF SHARES THAT
NUMBER OF AVERAGE PUBLICLY MAY YET BE
SHARES PRICE PAID ANNOUNCED PURCHASED
PERIOD PURCHASED PER SHARE PLANS UNDER THE PLAN
------ --------- ---------- ------------ --------------
April 1, 2005 through April 7,
2005............................... 190,069 $15.40 1,000,000 --
The plan to repurchase the Common Stock of the Company was announced on
March 9, 2005. The Board of Directors of the Company authorized the repurchase
of up to one million shares of the Company's Common Stock. The Company purchased
809,931 of such shares in March 2005, and completed the share repurchase program
in April 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 18, 2005. The
following directors were elected at such meeting:
NOMINEE BOARD TERM VOTES FOR VOTES WITHHELD
------- ---------- ---------- --------------
John W. Clay, Jr. .............................. One Year 27,980,087 926,765
John W. Danaher, M.D. .......................... One Year 28,036,381 870,471
Craig Macnab.................................... One Year 28,747,222 159,630
David E. McDowell............................... One Year 28,794,320 112,532
Philip M. Pead.................................. One Year 28,734,374 172,478
C. Christopher Trower........................... One Year 27,904,535 1,002,317
Jeffrey W. Ubben................................ One Year 28,026,099 880,753
A proposal to ratify the appointment of the firm of Ernst & Young LLP as
independent auditors of the Company for 2005 also was voted upon at the Annual
Meeting of Stockholders and was approved by the stockholders. Votes cast were
28,883,630 for; 16,053 against; and 7,169 abstained.
26
ITEM 6. EXHIBITS
(A) Exhibits
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).
3.2 -- Restated By-laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to Current Report on Form 8-K filed
on July 29, 2005).
4.1 -- 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).
4.2 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- Fourth Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of February 18, 2005
(incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K filed on February 22, 2005).
4.6 -- Indenture dated as of June 30, 2004, between Registrant and
U.S. Bank National Association, as Trustee, relating to
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.5 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
4.7 -- Resale Registration Rights Agreement dated as of June 30,
2004, between Registrant and Banc of America Securities LLC,
as representative of the several initial purchasers of
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.6 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.1 -- Per-Se Technologies, Inc. 2005 Senior Executive Incentive
Compensation Plan (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed on May 23, 2005).
10.2 -- Per-Se Technologies, Inc. 2005 Senior Management Incentive
Compensation Plan (incorporated by reference to Exhibit 10.2
to Current Report on Form 8-K filed on May 23, 2005).
10.3 -- Per-Se Technologies, Inc. Employees' Retirement Savings Plan
(incorporated by reference to Exhibit 10.3 to Current Report
on Form 8-K filed on May 23, 2005).
31.1 -- Certification of Chief Executive Officer pursuant to
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 to
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.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment 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/ RICHARD A. FLYNT
------------------------------------
Richard A. Flynt
Vice President and Corporate
Controller
(Principal Accounting Officer)
Date: August 5, 2005
28
INDEX TO EXHIBITS
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).
3.2 -- Restated By-laws of Registrant, as amended (incorporated by
reference to Exhibit 3.2 to Current Report on Form 8-K filed
on July 29, 2005).
4.1 -- 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).
4.2 -- 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).
4.3 -- 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).
4.4 -- 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).
4.5 -- Fourth Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of February 18, 2005
(incorporated by reference to Exhibit 4.1 to Current Report
on Form 8-K filed on February 22, 2005).
4.6 -- Indenture dated as of June 30, 2004, between Registrant and
U.S. Bank National Association, as Trustee, relating to
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.5 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
4.7 -- Resale Registration Rights Agreement dated as of June 30,
2004, between Registrant and Banc of America Securities LLC,
as representative of the several initial purchasers of
Registrant's 3.25% Convertible Subordinated Debentures Due
2024 (incorporated by reference to Exhibit 4.6 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
10.1 -- Per-Se Technologies, Inc. 2005 Senior Executive Incentive
Compensation Plan (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed on May 23, 2005).
10.2 -- Per-Se Technologies, Inc. 2005 Senior Management Incentive
Compensation Plan (incorporated by reference to Exhibit 10.2
to Current Report on Form 8-K filed on May 23, 2005).
10.3 -- Per-Se Technologies, Inc. Employees' Retirement Savings Plan
(incorporated by reference to Exhibit 10.3 to Current Report
on Form 8-K filed on May 23, 2005).
31.1 -- Certification of Chief Executive Officer pursuant to
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 to
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.