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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 SEPTEMBER 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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 OCTOBER 31, 2005
-------------- --------------------------------------
Common Stock $0.01 Par Value 33,114,590 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 SEPTEMBER 30, 2005
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004 (Unaudited)............................... 2
Consolidated Statements of Income for the three and nine
months ended September 30, 2005 and 2004 (Unaudited)........ 3
Consolidated Statements of Cash Flows for the nine months
ended September 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........................................................ 30
Item 4. Controls and Procedures..................................... 30
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 6. Exhibits.................................................... 31
1
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 56,130 $ 42,422
Restricted cash........................................... 31 51
-------- --------
Total cash and cash equivalents........................ 56,161 42,473
Accounts receivable, billed (less allowances of $2,998 and
$3,229 as of September 30, 2005, and December 31, 2004,
respectively).......................................... 56,171 49,105
Accounts receivable, unbilled (less allowances of $313 and
$371 as of September 30, 2005, and December 31, 2004,
respectively).......................................... 303 302
Deferred income taxes, net................................ 12,799 12,799
Prepaid expenses.......................................... 3,191 2,823
Other..................................................... 7,616 4,906
-------- --------
Total current assets................................... 136,241 112,408
Property and equipment, net of accumulated depreciation..... 16,354 15,512
Goodwill.................................................... 32,549 32,549
Other intangible assets, net of accumulated amortization.... 19,202 20,784
Deferred income taxes, net.................................. 15,316 15,316
Other....................................................... 6,653 6,122
-------- --------
Total assets........................................... $226,315 $202,691
======== ========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 7,398 $ 5,290
Accrued compensation...................................... 18,359 14,562
Accrued expenses.......................................... 12,453 14,628
Current portion of long-term debt and capital lease
obligations............................................ 133 98
Deferred revenue.......................................... 26,616 24,127
-------- --------
Total current liabilities.............................. 64,959 58,705
Long-term debt and capital lease obligations................ 125,535 125,527
Other obligations........................................... 5,358 5,484
-------- --------
Total liabilities...................................... 195,852 189,716
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 20,000 shares authorized;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 shares
authorized, 33,067 and 32,324 issued and 30,079 and
30,336 outstanding as of September 30, 2005, and
December 31, 2004, respectively........................ 331 323
Common stock, non-voting, $0.01 par value, 600 shares
authorized; none issued................................ -- --
Paid-in capital........................................... 801,375 795,263
Accumulated deficit....................................... (730,328) (757,128)
Treasury stock at cost, 3,105 and 2,125 as of September
30, 2005, and December 31, 2004, respectively.......... (41,731) (26,510)
Deferred stock unit plan obligation....................... 1,343 1,511
Accumulated other comprehensive loss...................... (527) (484)
-------- --------
Total stockholders' equity............................. 30,463 12,975
-------- --------
Total liabilities and stockholders' equity............. $226,315 $202,691
======== ========
See notes to consolidated financial statements.
2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.............................................. $94,006 $90,641 $279,336 $263,383
------- ------- -------- --------
Operating expenses:
Cost of services................................... 63,089 60,486 185,596 172,823
Selling, general and administrative................ 19,918 20,578 63,032 64,327
Other (income) expenses............................ -- (654) -- 5,845
------- ------- -------- --------
Operating income..................................... 10,999 10,231 30,708 20,388
Interest expense..................................... 1,431 1,410 4,360 5,483
Interest income...................................... (427) (88) (1,075) (332)
Loss on extinguishment of debt....................... -- -- -- 5,896
------- ------- -------- --------
Income before income taxes......................... 9,995 8,909 27,423 9,341
Income tax expense................................... 172 102 623 314
------- ------- -------- --------
Income from continuing operations.................. 9,823 8,807 26,800 9,027
------- ------- -------- --------
Discontinued operations (see Note 8)
Loss from discontinued operations, net of
tax -- Patient1................................. -- -- -- (18)
(Loss) gain on sale of Patient1, net of tax........ -- (106) -- 3,649
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.................................... -- (1) -- (94)
------- ------- -------- --------
-- (107) -- 3,104
------- ------- -------- --------
Net income...................................... $ 9,823 $ 8,700 $ 26,800 $ 12,131
======= ======= ======== ========
Net income per common share -- basic:
Income from continuing operations.................. $ 0.33 $ 0.29 $ 0.89 $ 0.29
Gain on sale of Patient1, net of tax............... -- -- -- 0.11
Loss from discontinued operations, net of
tax -- Business1................................ -- -- -- (0.01)
------- ------- -------- --------
Net income per common share -- basic............ $ 0.33 $ 0.29 $ 0.89 $ 0.39
======= ======= ======== ========
Weighted average shares used in computing basic
earnings per share................................. 29,994 30,088 30,019 31,046
======= ======= ======== ========
Net income per common share -- diluted:
Income from continuing operations.................. $ 0.29 $ 0.27 $ 0.81 $ 0.27
Gain on sale of Patient1, net of tax............... -- -- -- 0.10
Loss from discontinued operations, net of
tax -- Business1................................ -- -- -- (0.01)
------- ------- -------- --------
Net income per common share -- diluted.......... $ 0.29 $ 0.27 $ 0.81 $ 0.36
======= ======= ======== ========
Weighted average shares used in computing diluted
earnings per share................................. 33,792 32,168 32,917 33,273
======= ======= ======== ========
See notes to consolidated financial statements.
3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2005 2004
-------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 26,800 $ 12,131
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 11,233 11,778
Loss from discontinued operations......................... -- 545
Gain on sale of Patient1, net of tax...................... -- (3,649)
Amortization of deferred financing costs.................. 1,011 963
Loss on extinguishment of debt............................ -- 5,896
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Accounts receivable, billed............................ (7,066) (3,170)
Accounts receivable, unbilled.......................... (1) 257
Accounts payable....................................... 342 357
Accrued compensation................................... 3,957 (2,453)
Accrued expenses....................................... (2,024) 731
Deferred revenue....................................... 2,489 4,927
Other, net............................................. (1,204) 13,075
-------- ---------
Net cash provided by continuing operations........... 35,537 41,388
Net cash used for discontinued operations............ -- (514)
-------- ---------
Net cash provided by operating activities............ 35,537 40,874
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (6,098) (4,624)
Software development costs.................................. (4,544) (5,334)
Capitalized acquisition costs............................... (1,484) --
Net proceeds from sale of Patient1 and Business1, net of
tax....................................................... -- 3,520
Acquisition, net of cash acquired........................... -- (1,141)
Other....................................................... (216) (66)
-------- ---------
Net cash used for investing activities............... (12,342) (7,645)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................... -- 125,000
Treasury stock purchase..................................... (15,404) (24,999)
Proceeds from the exercise of stock options................. 5,967 5,853
Debt issuance costs......................................... -- (6,013)
Payments of debt............................................ (32) (121,875)
Other....................................................... (18) 107
-------- ---------
Net cash used for financing activities............... (9,487) (21,927)
-------- ---------
CASH AND CASH EQUIVALENTS:
Net change.................................................. 13,708 11,302
Balance at beginning of period.............................. 42,422 25,271
-------- ---------
Balance at end of period.................................... $ 56,130 $ 36,573
======== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 2,387 $ 3,587
Extinguishment of debt.................................... -- 2,375
Income taxes.............................................. 487 342
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
U.S. generally accepted accounting principles ("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.
At September 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.
5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
2005 2004 2005 2004
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income as reported........................... $9,823 $8,700 $26,800 $12,131
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects........................................ (1,088) (1,093) (3,686) (3,318)
------ ------ ------- -------
Pro forma net income............................. $8,735 $7,607 $23,114 $ 8,813
====== ====== ======= =======
Net income per common share:
Basic -- as reported........................... $ 0.33 $ 0.29 $ 0.89 $ 0.39
====== ====== ======= =======
Basic -- pro forma............................. $ 0.29 $ 0.25 $ 0.77 $ 0.29
====== ====== ======= =======
Diluted -- as reported......................... $ 0.29 $ 0.27 $ 0.81 $ 0.36
====== ====== ======= =======
Diluted -- pro forma........................... $ 0.26 $ 0.23 $ 0.70 $ 0.27
====== ====== ======= =======
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 nine months ended September 30, 2005, the Company repurchased one
million shares of its outstanding Common Stock at a cost of approximately $15.4
million.
NOTE 4 -- OTHER (INCOME) EXPENSES
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 $6.3 million during the nine months ended September 30, 2004, and
included these costs in other (income) expenses in the Company's Consolidated
Statements of Income. In Note 13, these expenses are classified in the Corporate
segment.
6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
GAIN ON SETTLEMENT WITH LLOYD'S
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). On July 7, 2004, pursuant to the settlement, as amended, Lloyd's
paid the Company $16.2 million in cash. As of the payment date, the Company had
an approximately $14.7 million receivable from Lloyd's and recognized a gain of
approximately $1.5 million on the settlement in the three months ended September
30, 2004. The gain is included in other (income) expenses in the Company's
Consolidated Statements of Income for the three and nine months ended September
30, 2004.
EXECUTIVE OFFICE RELOCATION
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable operating lease
for that office space commencing July 1, 2004, which will expire in June 2014.
While the new landlord assumed the payments for the lease of the Company's
former corporate office space, the Company recorded a non-cash expense related
to the former space of approximately $1.0 million upon its exit of the former
office facility. Amounts received from the landlord are considered incentives,
which were recorded as a liability and are being amortized over the lease term.
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 and other securities. The following sets
forth the
7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
computation of basic and diluted net income per share for the three and nine
months ended September 30, 2005, and 2004:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2005 2004 2005 2004
-------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income..................................... $ 9,823 $ 8,700 $26,800 $12,131
======= ======= ======= =======
Common shares outstanding:
Shares used in computing net income per
common share -- basic..................... 29,994 30,088 30,019 31,046
Effect of potentially dilutive stock options
and other securities...................... 3,798 2,080 2,898 2,227
------- ------- ------- -------
Shares used in computing net income per
common share -- diluted................... 33,792 32,168 32,917 33,273
======= ======= ======= =======
Net income per common share:
Basic........................................ $ 0.33 $ 0.29 $ 0.89 $ 0.39
======= ======= ======= =======
Diluted...................................... $ 0.29 $ 0.27 $ 0.81 $ 0.36
======= ======= ======= =======
Options to purchase 0.1 million and 0.5 million shares of Common Stock
outstanding during the three and nine months ended September 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 and nine months ended September 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
earnings per share includes approximately 0.9 million and 0.3 million shares,
respectively, related to the convertible debt instrument (see Note 10 for
additional information).
Options to purchase 1.9 million and 1.8 million shares of Common Stock
outstanding during the three and nine months ended September 30, 2004,
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.
NOTE 7 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE (LOSS) 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 and nine month periods ended September 30, 2005, and 2004,
the only component of other comprehensive (loss) income was the net foreign
currency translation.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2005 2004 2005 2004
----- ----- ----- -----
(IN THOUSANDS)
Net foreign currency translation........................... $(58) $31 $(43) $16
8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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:
NINE MONTHS ENDED
SEPTEMBER 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)
==== ===== =====
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. Per-Se has produced documents and provided testimony
relating to these allegations to the SEC. 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
9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
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 September 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 September 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 $0.6 million for the three and
nine months ended September 30, 2005, respectively, as compared to income tax
expense of approximately $0.1 for the three months ended September 30, 2004, and
approximately $0.3 million for the nine months ended September 30, 2004. Prior
to December 31, 2004, the Company 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
10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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 nine months ended September 30, 2005, is as
follows:
PAYMENTS RESERVE BALANCE
RESERVE BALANCE APPLIED AGAINST SEPTEMBER 30,
DECEMBER 31, 2004 RESERVE 2005
----------------- --------------- ---------------
(IN THOUSANDS)
Lease termination costs................. $1,104 $237 $867
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.
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 to efficiently 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.
11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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.
The Company's segment information from continuing operations is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Segment revenue:
Physician Services......................... $69,805 $66,059 $206,063 $195,317
Hospital Services.......................... 27,860 28,057 84,032 78,274
Eliminations............................... (3,659) (3,475) (10,759) (10,208)
------- ------- -------- --------
$94,006 $90,641 $279,336 $263,383
======= ======= ======== ========
Segment operating expenses:
Physician Services......................... $61,430 $58,884 $181,633 $175,072
Hospital Services.......................... 21,720 21,624 66,202 59,671
Corporate.................................. 3,516 3,377 11,552 18,460
Eliminations............................... (3,659) (3,475) (10,759) (10,208)
------- ------- -------- --------
$83,007 $80,410 $248,628 $242,995
======= ======= ======== ========
Segment operating income:
Physician Services......................... $ 8,375 $ 7,175 $ 24,430 $ 20,245
Hospital Services.......................... 6,140 6,433 17,830 18,603
Corporate.................................. (3,516) (3,377) (11,552) (18,460)
------- ------- -------- --------
$10,999 $10,231 $ 30,708 $ 20,388
======= ======= ======== ========
Interest expense............................. $ 1,431 $ 1,410 $ 4,360 $ 5,483
======= ======= ======== ========
Interest income.............................. $ (427) $ (88) $ (1,075) $ (332)
======= ======= ======== ========
Loss on extinguishment of debt............... $ -- $ -- $ -- $ 5,896
======= ======= ======== ========
Income before income taxes................... $ 9,995 $ 8,909 $ 27,423 $ 9,341
======= ======= ======== ========
Depreciation and amortization:
Physician Services......................... $ 1,996 $ 2,508 $ 6,153 $ 7,273
Hospital Services.......................... 1,616 1,414 4,827 4,114
Corporate.................................. 82 119 253 391
------- ------- -------- --------
$ 3,694 $ 4,041 $ 11,233 $ 11,778
======= ======= ======== ========
Capital expenditures and capitalized software
development costs:
Physician Services......................... $ 1,734 $ 2,544 $ 5,223 $ 5,234
Hospital Services.......................... 958 1,469 5,008 4,006
Corporate.................................. 48 416 411 718
------- ------- -------- --------
$ 2,740 $ 4,429 $ 10,642 $ 9,958
======= ======= ======== ========
12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN THOUSANDS)
Identifiable assets:
Physician Services....................................... $ 69,387 $ 63,611
Hospital Services........................................ 63,255 59,964
Corporate................................................ 93,673 79,116
-------- --------
$226,315 $202,691
======== ========
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 $2.5 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 nine months ended
September 30, 2005, the Company incurred approximately $1.1 million of expenses
which are reflected in the Hospital Services division, and invested
approximately $1.6 million for capital expenditures and capitalized software
development costs related to this project. The Company expects the project to be
completed in mid-2006.
NOTE 15 -- ACQUISITION OF NDCHEALTH CORPORATION
On August 29, 2005, Per-Se and NDCHealth Corporation ("NDCHealth")
announced that they had signed definitive agreements for the acquisition of
NDCHealth, a leading provider of healthcare technology and information
solutions.
Per-Se will acquire Atlanta, GA-based NDCHealth, including the physician,
hospital and retail pharmacy businesses, for total consideration of
approximately $665 million, which includes refinancing NDCHealth's outstanding
debt at closing. NDCHealth's debt totaled approximately $270 million at the time
the agreements were signed. As part of the transaction, Wolters Kluwer based in
Amsterdam, the Netherlands, will purchase the pharmaceutical information
management business from NDCHealth for $382 million in cash. The transaction
will result in consideration to NDCHealth's shareholders of $19.50 per share,
with at least $13.00 paid in cash and up to $6.50 paid in Per-Se stock, to be
determined by Per-Se and to be announced prior to the Per-Se and NDCHealth
shareholder meetings. As of September 30, 2005, the Company had incurred
approximately $3.3 million of transaction costs that are included in other
current assets in the Company's Consolidated Balance Sheet.
The transaction is subject to regulatory approval and the approval by the
shareholders of both Per-Se and NDCHealth. On September 27, 2005, the Company,
together with NDCHealth, filed a registration statement on Form S-4 containing a
joint proxy statement/prospectus with the SEC related to this transaction. The
SEC staff has provided the Company with comments on the Form S-4 and the Company
is currently in the process of addressing those comments. On September 29, 2005,
Per-Se announced it had received notification of early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
with respect to the transaction. The acquisition remains subject to other
closing conditions including the closing of Wolters Kluwer's purchase of the
Information Management business.
For a description of certain risk factors relating to the transaction, see
"Factors That May Affect Future Results of Operations, Financial Condition or
Business."
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 September 30, 2005,
increased approximately 4% as compared to the same period of 2004 primarily due
to the implementation of new business sold during 2004 and 2005. Consolidated
operating margins increased from 11.3% in the third quarter of 2004 to 11.8% in
the third quarter of 2005 due to revenue growth.
The Company generated approximately $35.5 million in cash from continuing
operations during the nine months ended September 30, 2005 as compared to $41.4
million during the same period of 2004. Cash flow from continuing operations in
2004 included the receipt of the approximately $16.2 million settlement from the
Company's former insurance carrier offset by approximately $5.7 million in
expenses and legal settlements related to this litigation. Also, 2004 included
cash payments related to additional procedures totaling approximately $6.3
million.
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 $2.5 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 nine months ended
September 30, 2005, the Company incurred approximately $1.1 million of expenses
which are reflected in the Hospital Services division, and invested
approximately $1.6 million for capital expenditures and capitalized
14
software development costs related to this project. The Company expects the
project to be completed in mid-2006.
RECENT DEVELOPMENTS
On August 29, 2005, Per-Se and NDCHealth Corporation ("NDCHealth")
announced that they had signed definitive agreements for the acquisition of
NDCHealth, a leading provider of healthcare technology and information
solutions.
Per-Se will acquire Atlanta, GA-based NDCHealth, including the physician,
hospital and retail pharmacy businesses, for total consideration of
approximately $665 million, which includes refinancing NDCHealth's outstanding
debt at closing. NDCHealth's debt totaled approximately $270 million at the time
the agreements were signed. As part of the transaction, Wolters Kluwer based in
Amsterdam, the Netherlands, will purchase the pharmaceutical information
management business from NDCHealth for $382 million in cash. The transaction
will result in consideration to NDCHealth's shareholders of $19.50 per share,
with at least $13.00 paid in cash and up to $6.50 paid in Per-Se stock, as to be
determined by Per-Se and to be announced prior to the Per-Se and NDCHealth
shareholder meetings.
The transaction is subject to regulatory approval and the approval by the
shareholders of both Per-Se and NDCHealth. On September 27, 2005, the Company,
together with NDCHealth, filed a registration statement on Form S-4 containing a
joint proxy statement/prospectus with the SEC related to this transaction. The
SEC staff has provided the Company with comments on the Form S-4 and the Company
is currently in the process of addressing those comments. On September 29, 2005,
Per-Se announced it had received notification of early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
with respect to the transaction. The acquisition remains subject to other
closing conditions including the closing of Wolters Kluwer's purchase of the
Information Management business.
For a description of certain risk factors relating to the transaction, see
"Factors That May Affect Future Results of Operations, Financial Condition or
Business."
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2004
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $69,805 $66,059
Hospital Services........................................... 27,860 28,057
Eliminations................................................ (3,659) (3,475)
------- -------
$94,006 $90,641
======= =======
Revenue for the Physician Services division increased approximately 6% in
the three months ended September 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 new
business sold during 2004 and 2005. Net new business sold during the third
quarter of 2005 was $2 million compared to $1 million during the third quarter
of 2004. 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 September 30, 2005, was
approximately $7 million, compared to the net backlog of approximately $10
million at June 30, 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.
15
Revenue for the Hospital Services division decreased approximately 1% for
the three months ended September 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 decreased due to previously unbilled maintenance
revenue for certain customers that the Company recognized upon receipt of
payment in 2004. Medical transaction volume increased approximately 3% 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
SEPTEMBER 30,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $ 8,375 $ 7,175
Hospital Services........................................... 6,140 6,433
Corporate................................................... (3,516) (3,377)
------- -------
$10,999 $10,231
======= =======
Physician Services' segment operating income increased approximately 17% in
the three months ended September 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 12.0% in the quarter ended
September 30, 2005 as compared to 10.8% in the quarter ended September 30, 2004.
Operating margins in 2004 were negatively impacted by the deferral of
approximately $0.9 million in revenue related to a large Physician Services
contract. While the division was unable to recognize all the revenue related to
the contract during the quarter, all expenses related to the contract were
recorded during the third quarter of 2004. 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 system 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 5% in
the three months ended September 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 22.0% versus approximately 22.9%
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 receipt of previously unbilled maintenance revenue that was
being recognized upon receipt of payment.
Corporate overhead expenses, which include certain executive and
administrative functions, increased approximately $0.1 million or approximately
4.1% in the three months ended September 30, 2005, compared to the same period
in 2004. Corporate expenses in 2004 included the approximately $1.5 million gain
recognized on the settlement with the Company's former insurance carrier, which
was partially offset by the non-cash expense of approximately $1.0 million
related to the Company's exit of its former corporate office facility in 2004.
Other (Income) Expenses. On May 10, 2004, the Company reached a settlement
with the Company's former insurance carrier, Certain Underwriters at Lloyd's of
London (collectively "Lloyd's"). On July 7, 2004, pursuant to the settlement, as
amended, Lloyd's paid the Company $16.2 million in cash. As of the payment date,
the Company had an approximately $14.7 million receivable from Lloyd's and
recognized a gain of approximately $1.5 million on the settlement in the three
months ended September 30, 2004. The gain has been reflected
16
in the Company's Corporate segment. In the Consolidated Statement of Operations,
the gain is included in other (income) expenses.
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable operating lease
for that office space in February 2004, which will expire in June 2014. While
the new landlord assumed the payments for the lease of the Company's former
corporate office, which expired in February 2005, the Company recorded a
non-cash expense of approximately $1.0 million related to the exit of the former
office facility. The expense has been reflected in the Company's Corporate
segment. In the Consolidated Statement of Operations, the expense is included in
other (income) expenses.
Interest. Interest expense was approximately $1.4 million for each of the
three months ended September 30, 2005 and 2004. Interest income was
approximately $0.4 million for the three-month period ended September 30, 2005,
as compared to approximately $0.1 million for the same period in 2004.
Income Taxes. Income tax expense, which was primarily related to federal,
state and local income taxes, was approximately $0.2 million and $0.1 million
for the three months ended September 30, 2005, and 2004, respectively. Prior to
December 31, 2004, the Company 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.
NINE MONTHS ENDED SEPTEMBER 30, 2005, AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2004
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $206,063 $195,317
Hospital Services........................................... 84,032 78,274
Eliminations................................................ (10,759) (10,208)
-------- --------
$279,336 $263,383
======== ========
Revenue for the Physician Services division increased approximately 6% in
the nine months ended September 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 net
new business sold during 2004 and 2005 as well as the recognition of
approximately $1.5 million of revenue in 2005 that was delayed from the quarter
ended December 31, 2004, due to a technical problem in the claims clearinghouse.
Net new business sold during the first nine months of 2005 and 2004 was $16
million. 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 September 30, 2005, was
approximately $7 million, compared to the net backlog of approximately $3
million at September 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 7% for
the nine months ended September 30, 2005, as compared to the same period in
2004. Pricing for the division's services and products was
17
stable compared to the prior year period. Revenue growth in the division is due
to the implementation of new business sold during 2004 and 2005. Additionally,
2004 revenue includes previously unbilled maintenance revenue for certain
customers that the Company recognized upon receipt of payment. Medical
transaction volume increased approximately 14% 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:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2005 2004
------- -------
(IN THOUSANDS)
Physician Services.......................................... $24,430 $20,245
Hospital Services........................................... 17,830 18,603
Corporate................................................... (11,552) (18,460)
------- -------
$30,708 $20,388
======= =======
Physician Services' segment operating income increased approximately 21% in
the nine months ended September 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 11.9% in the nine months ended
September 30, 2005, versus approximately 10.4% 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 in 2005 that
was delayed from the quarter ended December 31, 2004, due to a technical problem
in the claims clearinghouse. Operating margins in 2004 were negatively impacted
by the deferral of approximately $0.9 million in revenue related to a large
Physician Services contract. While the division was unable to recognize all the
revenue related to the contract during the quarter, all expenses related to the
contract were recorded during the third quarter of 2004. 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 system 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 nine months ended September 30, 2005, compared to the same period in 2004,
resulting in operating margins of approximately 21.2% versus approximately 23.8%
in the prior year period. The current year includes approximately $1.1 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 $6.9 million or approximately
37.4% in the nine months ended September 30, 2005, compared to the same period
in 2004. The decrease is attributable primarily to approximately $6.3 million of
expenses incurred in the nine months ended September 30, 2004, to perform the
additional procedures discussed below.
Other (Income) 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 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
18
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 $6.3 million during the nine months ended September 30, 2004, and
included these costs in other (income) 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.
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). On July 7, 2004, pursuant to the settlement, as amended, Lloyd's
paid the Company $16.2 million in cash. As of the payment date, the Company had
an approximately $14.7 million receivable from Lloyd's and recognized a gain of
approximately $1.5 million on the settlement in the three months ended September
30, 2004. The gain has been reflected in the Company's Corporate segment. In the
Consolidated Statement of Operations, the gain is included in other (income)
expenses.
On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable operating lease
for that office space in February 2004, which will expire in June 2014. While
the new landlord assumed the payments for the lease of the Company's former
corporate office, the Company recorded a non-cash expense of approximately $1.0
million upon its exit of the former office facility. The expense has been
reflected in the Company's Corporate segment. In the Consolidated Statement of
Operations, the expense is included in other (income) expenses.
Interest. Interest expense was approximately $4.4 million for the nine
months ended September 30, 2005, as compared to $5.5 million for the same period
in 2004. The decrease is attributable to the Company refinancing its debt in
September 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 nine months of 2004. Interest income was approximately $1.1 million
for the nine-month period ended September 30, 2005, as compared to approximately
$0.3 million for the same period in 2004. The increase in interest income is
attributable to an increase in cash available for investments in 2005.
Income Taxes. Income tax expense, which was primarily related to federal,
state and local income taxes, was approximately $0.6 million and $0.3 million
for the nine months ended September 30, 2005, and 2004, respectively. Prior to
December 31, 2004, the Company 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.
19
Summarized operating results for the discontinued operations are as
follows:
NINE MONTHS ENDED
SEPTEMBER 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
September 30, 2005, and December 31, 2004, and cash flows from continuing
operations for the nine months ended September 30, 2005, and 2004, (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Unrestricted cash and cash equivalents..................... $56,130 $42,422
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2005 2004
-------- --------
Cash provided by continuing operations...................... $ 35,537 $ 41,388
Cash used for investing activities.......................... $(12,342) $ (7,645)
Cash used for financing activities.......................... $ (9,487) $(21,927)
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 $31,000 and $51,000 at September 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.
During the nine months ended September 30, 2005, the Company generated
approximately $35.5 million in cash from continuing operations as a result of
increased profitability.
During the nine months ended September 30, 2004, the Company generated
approximately $41.4 million in cash from continuing operations, which includes
cash generated from normal operations as well as the receipt of the $16.2
million settlement from the Company's former insurance carrier offset by cash
payments related to additional procedures necessary under SAS No. 99 totaling
approximately $6.3 million (refer to "Note 4 -- Other Expenses" in the Company's
Notes to Consolidated Financial Statements for more information), the payment of
approximately $5.7 million in expenses and legal settlements related to the
matter with the Company's former insurance carrier and interest payments of
approximately $3.5 million.
During the nine months ended September 30, 2005, the Company used
approximately $12.3 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 $2.5
million in capital expenditures and capitalized software development costs
during 2005. During the nine months ended September 30, 2005, the Company
invested approximately $1.6 million for capital expenditures and capitalized
software development costs related to this project. Additionally, the Company
used approximately $1.5 million for capitalized acquisition costs related to the
proposed NDCHealth acquisition.
20
During the nine months ended September 30, 2004, the Company used
approximately $7.6 million in cash for investing activities primarily for
capital expenditures and investment in software development costs.
During the nine months ended September 30, 2005, the Company used
approximately $9.5 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 $6.0 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 nine months ended
September 30, 2005, the Company repurchased one million shares of its
outstanding Common Stock at a cost of approximately $15.4 million.
During the nine months ended September 30, 2004, the Company used
approximately $21.9 million of 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 $3.5 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 $5.9 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.
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 be concluded in the
first quarter of 2006. 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated by reference herein contain
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
reflect management's current expectations, estimates, projections and
assumptions with respect to the future and include, in particular, any statement
relating to future revenues, income, earnings per share, capital expenditures,
capital structure, prospects, plans and objectives. Statements in this report
and the documents incorporated by reference herein that are not historical facts
are hereby identified as "forward-looking statements" for the purpose of the
safe harbor provided by the Reform Act. Words such as "estimate," "project,"
"plan," "intend," "expect," "anticipate,"
21
"believe," "would," "should," "could" and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
not guarantees of future performance and involve certain risks and
uncertainties, which are difficult to predict. Actual future results and trends
may differ materially from what is suggested by forward-looking statements due
to a variety of factors, including without limitation the risks described below
under the caption "Factors That May Affect Future Results of Operations,
Financial Condition or Business," and the following:
- demand for and market acceptance of new and existing products and
services;
- successful development of new products and services;
- the timing of new product and service introductions;
- pricing pressures and other competitive factors;
- product and service obsolescence;
- the ability to develop and implement new technologies and to obtain
protection for the related intellectual property;
- the prospect of changes in laws and regulations governing the Company's
business;
- the uncertainties of litigation; and
- the completion of and costs related to the proposed NDCHealth merger.
You are cautioned not to place undue reliance on any forward-looking
statements, which speak only as of the date of this report, or in the case of
documents incorporated by reference, as of the date of those documents. The
Company does not undertake any obligation to update or publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this report or to reflect the occurrence of unanticipated
events, except as required by law.
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. In addition to the matters addressed above in
the section entitled "Cautionary Statement Regarding Forward-Looking
Statements," the following important factors currently known to management could
cause actual results to differ materially from those in forward-looking
statements.
As described above in the section entitled "Recent Developments," Per-Se
has signed definitive agreements providing for its acquisition of NDCHealth.
These risk factor disclosures include risk factors relating to that pending
acquisition.
THE EXACT NUMBER OF SHARES OF PER-SE COMMON STOCK TO BE ISSUED IN THE PROPOSED
NDCHEALTH MERGER IS NOT YET ESTABLISHED AND MAY NOT BE DETERMINED UNTIL AFTER
THE PER-SE STOCKHOLDERS' MEETING.
If the proposed NDCHealth merger is completed, each outstanding share of
NDCHealth common stock will be converted into the right to receive a combination
of (i) $13.00 in cash and (ii) a number of shares of Per-Se common stock equal
to $6.50 divided by the price per share of Per-Se common stock as determined in
accordance with the terms of the merger agreement. Per-Se may, however, at its
option, increase the cash portion of the per share merger consideration and
correspondingly decrease the stock portion. Except in the event that Per-Se
issues any of its capital stock (other than pursuant to stock-based
compensation) during the 33 business day period prior to the closing, the price
per share of Per-Se common stock used to determine the number of shares of
Per-Se common stock to be issued to NDCHealth stockholders will be the average
of the volume weighted sales prices per share of Per-Se common stock on the
Nasdaq National Market as reported by Bloomberg Financial Markets for the 20
consecutive trading days in which shares of Per-Se common stock are traded on
the Nasdaq National Market ending on the third trading day prior to, but not
including, the completion of the merger.
22
Because the closing date of the merger may not be within three days of the
Per-Se stockholders' meeting, at the time of the meeting, Per-Se stockholders
may not know the applicable price per share of Per-Se common stock which will be
used to calculate the exchange ratio and, therefore, may not know the exact
number of shares of Per-Se common stock to be issued in the merger. In addition,
the price of Per-Se common stock at the completion of the merger could be higher
or lower than the volume weighted average trading price used to determine the
exchange ratio. Therefore, holders of NDCHealth common stock could receive
Per-Se common stock with an initial value of more or less than $6.50 per share
(or such lesser amount established by Per-Se in the event it increases the cash
portion of the per share merger consideration) of NDCHealth common stock.
THE PRICE OF PER-SE'S COMMON STOCK MAY DECLINE AS A RESULT OF THE DISPOSITION
OF A SUBSTANTIAL NUMBER OF SHARES OF STOCK AFTER COMPLETION OF THE NDCHEALTH
MERGER.
Per-Se may issue a significant number of shares of Per-Se common stock in
the NDCHealth merger, which number will be based upon the applicable exchange
ratio and the number of outstanding shares and options of NDCHealth common
stock. Because the receipt of Per-Se common stock will generally be a taxable
event to NDCHealth stockholders and optionholders and/or because NDCHealth
stockholders or optionholders may not want to be stockholders of Per-Se, there
may be substantial sales of Per-Se common stock following the completion of the
NDCHealth merger. Additionally, Per-Se will not have lock-up or similar
arrangements with any NDCHealth stockholders or optionholders in place following
completion of the NDCHealth merger. If significant numbers of NDCHealth
stockholders or optionholders determine to sell a substantial portion of their
Per-Se common stock following completion of the NDCHealth merger, or there is a
perception that such sales may occur or are occurring, the price of Per-Se
common stock may decline.
IF THE PROPOSED NDCHEALTH MERGER IS COMPLETED, PER-SE MAY BE UNABLE TO
INTEGRATE SUCCESSFULLY THE BUSINESSES OF PER-SE AND NDCHEALTH AND REALIZE THE
ANTICIPATED BENEFITS OF THE MERGER.
The NDCHealth merger involves the combination of two companies that
currently operate as independent public companies. Per-Se will be required to
devote significant management attention and resources to integrating its
business practices and operations with those of NDCHealth. If the proposed
NDCHealth merger is completed, potential difficulties Per-Se may encounter in
the integration process include the following:
- the inability to achieve the cost savings and operating synergies
anticipated in the NDCHealth merger, including a reduction in costs
associated with the NDCHealth merger;
- complexities associated with managing the geographic separation of the
combined businesses, coupled with those of consolidating multiple
physical locations where management may determine consolidation is
desirable;
- integrating personnel from diverse corporate cultures while maintaining
focus on providing consistent, high quality customer service; and
- potential unknown liabilities and increased costs associated with the
NDCHealth merger.
The process of integrating operations could cause a disruption of, or loss
of momentum in, the activities of the combined business and/or the loss of key
personnel. In addition, customer contracts of NDCHealth contain provisions that
may permit the customer to terminate the contract upon consummation of the
NDCHealth merger. The diversion of management's attention and any delays or
difficulties encountered in connection with the NDCHealth merger and the
integration of the two companies' operations could have an adverse effect on the
business and financial results of Per-Se after the NDCHealth merger.
The actual integration may result in additional and unforeseen expenses,
and the anticipated benefits of such integration plans may not be realized.
23
IF THE PROPOSED NDCHEALTH MERGER IS COMPLETED AND THE COMBINED COMPANY IS
UNABLE TO MANAGE ITS GROWTH PROFITABLY, ITS BUSINESS AND FINANCIAL RESULTS
COULD SUFFER.
Over the past several years, each of Per-Se and NDCHealth has engaged in
the identification of, and competition for, growth and expansion opportunities.
The combined company's future financial results will depend in part on its
ability to manage its growth profitably. Management will need to maintain
existing customers and attract new customers, recruit, train, retain and
effectively manage employees as well as expand operations, customer support and
financial control systems. If the combined company is unable to manage its
growth profitably, its business and financial results could suffer.
OBTAINING REGULATORY APPROVALS MAY DELAY OR PREVENT COMPLETION OF THE
NDCHEALTH MERGER OR REDUCE THE BENEFITS OF THE NDCHEALTH MERGER TO
STOCKHOLDERS. ANY SIGNIFICANT DELAY IN COMPLETING THE NDCHEALTH MERGER COULD
ADVERSELY AFFECT THE COMBINED COMPANY.
Per-Se and NDCHealth cannot assure their stockholders that the NDCHealth
merger will be completed, that there will not be a delay in the completion of
the NDCHealth merger, that the NDCHealth merger will be completed on the terms
contemplated by the NDCHealth merger agreement or that the anticipated benefits
of the NDCHealth merger will be realized. Any delay could also, among other
things, result in additional transaction costs, loss of revenue or other
negative effects associated with uncertainty about completion of the NDCHealth
merger.
WHETHER OR NOT THE NDCHEALTH MERGER IS COMPLETED, THE ANNOUNCEMENT AND
PENDENCY OF THE NDCHEALTH MERGER COULD CAUSE DISRUPTIONS IN THE BUSINESSES OF
PER-SE AND NDCHEALTH, WHICH COULD HAVE AN ADVERSE EFFECT ON THEIR BUSINESS AND
FINANCIAL RESULTS.
Whether or not the NDCHealth merger is completed, the announcement and
pendency of the NDCHealth merger could cause disruptions in the businesses of
Per-Se and NDCHealth. Specifically:
- current and prospective Per-Se and NDCHealth employees may experience
uncertainty about their future roles with the combined company, which
might adversely affect Per-Se's and NDCHealth's ability to recruit and
retain key managers and other employees;
- the attention of management of each of Per-Se and NDCHealth may be
directed toward the completion of the NDCHealth merger; and
- current or potential NDCHealth customers may delay or modify decisions
regarding new programs or changes in services, products or providers.
These disruptions could be exacerbated by a delay in the completion of the
NDCHealth merger or termination of the NDCHealth merger agreement and could have
an adverse effect on the businesses and financial results of Per-Se if the
NDCHealth merger is not completed or of the combined company if the NDCHealth
merger is completed.
IF THE PROPOSED NDCHEALTH MERGER IS COMPLETED, PER-SE WILL SIGNIFICANTLY
INCREASE ITS LONG-TERM DEBT WHICH COULD LIMIT FUNDS AVAILABLE TO PER-SE TO
FINANCE OTHER ACTIVITIES.
As of September 30, 2005, Per-Se had approximately $125 million of
long-term debt and $0.7 million in capital lease obligations. If the proposed
NDCHealth merger is completed, Per-Se intends to raise approximately $410
million of new debt to refinance NDCHealth's outstanding debt and fund cash to
be paid to NDCHealth stockholders. If unable to make the required debt payments,
Per-Se could be required to reduce or delay capital expenditures, sell certain
assets, restructure or refinance its indebtedness, or seek additional equity
capital. The ability of Per-Se to make payments on its debt obligations will
depend on future operating performance of Per-Se and NDCHealth, which may be
affected by conditions beyond Per-Se's control.
In addition, these debt agreements will contain restrictive covenants that
will limit Per-Se's financial and operating flexibility, which covenants could
place Per-Se at a disadvantage compared to some of its competitors that may have
fewer restrictive covenants and may not be required to operate under these
restrictions.
24
PER-SE'S ABILITY TO OBTAIN FINANCING MAY DELAY OR PREVENT COMPLETION OF THE
NDCHEALTH MERGER.
Per-Se has obtained a commitment letter from Bank of America, N.A. to
provide certain financing in connection with the closing of the NDCHealth
merger, but such financing is subject to the completion of definitive
documentation. Although obtaining financing is not a condition to the completion
of the NDCHealth merger, if Per-Se is unable to obtain financing, it may not be
able to consummate the NDCHealth merger. If the NDCHealth merger agreement is
terminated because Per-Se is unable to obtain sufficient funds to consummate the
NDCHealth merger, Per-Se must reimburse NDCHealth for its reasonable,
out-of-pocket expenses, not to exceed $10,000,000.
FAILURE TO COMPLETE THE NDCHEALTH MERGER COULD NEGATIVELY IMPACT THE STOCK
PRICE AND THE FUTURE BUSINESS AND FINANCIAL RESULTS OF PER-SE.
If the NDCHealth merger is not completed, the ongoing business of Per-Se
may be adversely affected and Per-Se will be subject to several risks, including
the following:
- having to pay certain costs relating to the NDCHealth merger, such as
legal, accounting, financial advisor and printing fees or, in certain
circumstances, termination fees; and
- the focus of management of the company on the NDCHealth merger instead of
on pursuing other opportunities that could be beneficial to the company
without realizing any of the benefits of having the transaction
completed.
If the NDCHealth merger is not completed, these risks could materially and
adversely affect the business, financial results and stock price of Per-Se.
IF THE PROPOSED NDCHEALTH MERGER IS COMPLETED, PER-SE WILL ENTER INTO, AND BE
BOUND BY THE TERMS OF, LONG-TERM DATA SHARING AGREEMENTS WITH WOLTERS KLUWER
WHICH PLACE CERTAIN RESTRICTIONS ON PER-SE'S AND NDCHEALTH'S ABILITY TO SELL
CERTAIN PRODUCTS TO THIRD PARTIES AND COMPETE IN CERTAIN MARKETS.
Upon the completion of the NDCHealth merger and the related sale of
NDCHealth's information management business to Wolters Kluwer, Per-Se and
NDCHealth will each be a party to long-term data sharing agreements with Wolters
Kluwer, pursuant to which Per-Se and NDCHealth will share with, and receive from
Wolters Kluwer, certain specified information used in their respective
businesses for the consideration specified in these agreements. These agreements
provide, among other things, that Per-Se and NDCHealth will sell certain
information exclusively to Wolters Kluwer, and that neither Per-Se nor NDCHealth
will compete with Wolters Kluwer with respect to certain uses of the purchased
data in specified markets for various time periods set forth in these
agreements. In addition, the stock purchase agreement with Wolters Kluwer
prohibits NDCHealth from competing with Wolters Kluwer in the provision of
certain products and services to specified markets traditionally served by
NDCHealth's information management business for five years from the closing of
that transaction.
Additionally, because the healthcare marketplace is rapidly changing, it is
difficult to predict whether the data sharing agreements will be favorable to
Per-Se and NDCHealth over the full 20-year term of the agreements. In the event
these agreements prove to be unfavorable to Per-Se and/or NDCHealth, they could
have a long-term negative impact on Per-Se's results of operations.
LOSS OF KEY MANAGEMENT COULD ADVERSELY AFFECT THE COMBINED COMPANY'S BUSINESS.
The success of Per-Se is materially dependent upon its key managers and, in
particular, upon the continued services of Philip M. Pead, who serves as
Per-Se's Chairman, President and Chief Executive Officer. Per-Se does not carry
key employee insurance on Mr. Pead or other members of management. The company's
future business and financial results could be adversely affected if the
services of Mr. Pead or other key managers cease to be available.
25
PER-SE IS REGULARLY INVOLVED IN LITIGATION, WHICH MAY SUBJECT IT TO
SIGNIFICANT LIABILITIES. IN ADDITION, NDCHEALTH IS ALSO REGULARLY INVOLVED IN
LITIGATION, WHICH, IF THE PROPOSED MERGER IS COMPLETED, MAY ALSO SUBJECT THE
COMBINED COMPANY TO SIGNIFICANT LIABILITIES.
Per-Se and NDCHealth are involved in litigation arising in the ordinary
course of business, which may expose them to loss contingencies. These matters
include, but are not limited to, claims brought by former customers with respect
to the operation of the businesses of Per-Se and NDCHealth. Per-Se and NDCHealth
have also received written demands from customers and former customers that have
not yet resulted in legal action.
NDCHealth is a named defendant in certain other lawsuits, including a
putative securities class-action lawsuit, captioned Garfield v. NDCHealth
Corporation, et. al. The complaint in that action generally alleged, among
other things, that members of a purported class of stockholders who purchased
NDCHealth common stock between August 21, 2002, and August 9, 2004, were damaged
as a result of (i) improper revenue recognition practices in NDCHealth's
physician business unit; (ii) the failure to timely write-down NDCHealth's
investment in MedUnite; and (iii) the improper capitalization and amortization
of costs associated with software development. The second amended complaint
alleges that, as a result of such conduct, NDCHealth's previously issued
financial statements were materially false and misleading, thereby causing the
prices of NDCHealth's common stock to be inflated artificially. The second
amended complaint asserts violations of certain provisions of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, and seeks
unspecified monetary damages and other relief. A U.S. federal district court
judge granted NDCHealth's motion to dismiss these claims on July 27, 2005. The
plaintiffs have appealed this decision to the 11th Circuit Court of Appeals, and
that appeal is pending.
NDCHealth is also a defendant in a private securities lawsuit filed by MMI
Investments, a previously significant stockholder of NDCHealth. This lawsuit is
generally based on the same allegations contained in the securities class-action
lawsuit. A motion by NDCHealth to dismiss the complaint and/or transfer the
action to the same federal district court hearing the securities class-action
lawsuit is pending.
Per-Se and NDCHealth 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 Per-Se or NDCHealth may become involved, Per-Se's or NDCHealth's insurance
coverage may not fully cover any damages assessed against Per-Se or NDCHealth.
Although Per-Se and NDCHealth maintain all insurance coverage in amounts that
they believe is sufficient for their businesses, such coverage may prove to be
inadequate or may become unavailable on acceptable terms, if at all. A
successful claim brought against Per-Se or NDCHealth, which is uninsured or
under-insured, could materially harm the businesses, results of operations or
financial condition of Per-Se and NDCHealth.
PER-SE'S BUSINESSES ARE HIGHLY COMPETITIVE, AND AN INABILITY TO SUCCESSFULLY
COMPETE FOR BUSINESS COULD ADVERSELY AFFECT THE COMPANY.
The physician receivables management outsourcing business is highly
competitive. Per-Se 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 Per-Se's ability to compete for
receivables 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. Per-Se
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 Per-Se. Per-Se's successful competition
within this industry is dependent on numerous industry and market conditions.
NDCHealth's businesses are highly competitive as well. In addition to the
businesses in which Per-Se already competes, the business of providing
value-added claims processing and pre and post editing services to
26
retail pharmacies is highly competitive. NDCHealth competes not only with
independent providers of similar systems and services, but also with customers'
and potential customers' internal resources that provide similar services.
Successful competition within this industry is dependent on numerous industry
and market conditions. Some of these conditions include functionality of
products and services, price, quality and innovation. In addition, some of
NDCHealth's competitors have greater access to capital and marketing and
technological resources, and NDCHealth cannot guarantee that it will be able to
compete successfully with them.
If the merger is completed, an inability to successfully compete for
business could adversely affect the combined company.
THE MARKETS FOR PER-SE'S SERVICES AND SOLUTIONS ARE CHARACTERIZED BY RAPIDLY
CHANGING TECHNOLOGY, EVOLVING INDUSTRY STANDARDS AND FREQUENT NEW PRODUCT
INTRODUCTIONS AND THE INABILITY OF PER-SE TO KEEP PACE COULD ADVERSELY AFFECT
THE COMPANY.
The markets for Per-Se'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
ability of Per-Se 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 operating results of Per-Se. It is possible that Per-Se will be unsuccessful
in refining, enhancing and developing technology of Per-Se 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 markets for NDCHealth's services and solutions are characterized by
similar issues and the inability to keep pace could adversely affect the
combined company if the proposed merger is completed.
THE HEALTHCARE MARKETPLACE IS CHARACTERIZED BY CONSOLIDATION, WHICH MAY RESULT
IN FEWER POTENTIAL CUSTOMERS FOR PER-SE'S SERVICES.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for Per-Se's and, if the proposed
NDCHealth's merger is completed, the combined company's services. Some of these
types of initiatives include employer initiatives such as creating group
purchasing cooperatives (GPOs); provider initiatives, such as risk-sharing among
healthcare providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.
Consolidation of management and billing services through integrated delivery
systems may result in a decrease in demand for Per-Se's business management
outsourcing services for particular physician practices. In addition,
consolidation among Per-Se's customers may result in such customers having
greater leverage, which could adversely affect the price Per-Se is able to
charge for its products.
THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE PER-SE'S COSTS
OF OPERATION OR HAVE A MATERIAL ADVERSE EFFECT ON PER-SE'S BUSINESS AND, IF
THE PROPOSED NDCHEALTH MERGER IS COMPLETED, THE COMBINED COMPANY'S BUSINESS.
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 Prescription Drug, Improvement, and 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
27
participants operate. Current or future government regulations or healthcare
reform measures may affect Per-Se's and NDCHealth's businesses. Healthcare
industry participants may respond by reducing their investments or postponing
investment decisions, including investments in Per-Se's and NDCHealth'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, or that provide consulting services in connection with
billing and collection activities. Such laws also could potentially be used to
bring enforcement actions against companies like Per-Se and NDCHealth that
provide software and other services used by healthcare providers to support
their billing and collection activities. In connection with these laws, Per-Se
and NDCHealth may be subjected to federal or state government investigations and
possible penalties may be imposed upon the companies, false claims actions may
have to be defended, private payers may file claims against the companies, and
the companies may be excluded from Medicare, Medicaid or other government-funded
healthcare programs.
In the past, Per-Se has been the subject of federal investigations, and
Per-Se or NDCHealth may become the subject of false claims litigation or
additional investigations relating to their billing and collection activities.
Any such proceeding or investigation could have a material adverse effect on
Per-Se's and NDCHealth's businesses. 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 seeking
monetary damages.
The federal anti-kickback law prohibits any person or entity from offering,
paying, soliciting or receiving anything of value, directly or indirectly, for
the referral of patients covered by Medicare, Medicaid and other federal
healthcare programs or the leasing, purchasing, ordering or arranging for, or
recommending the lease, purchase, order or arrangement for, any item, good,
facility or service covered by these programs. The anti-kickback law is broad
and may apply to some of Per-Se's or NDCHealth's activities and the companies'
relationships with customers or business partners. Penalties for violating the
anti-kickback law include imprisonment, fines and exclusion from participating,
directly or indirectly, in Medicare, Medicaid and other federal healthcare
programs. Many states have similar anti-kickback laws that are not necessarily
limited to items or services for which payment is made by a federal healthcare
program. Per-Se and NDCHealth each carefully review their respective practices
in an effort to ensure that the companies' comply with all applicable laws.
However, the laws in this area are both broad and vague and it is often
difficult or impossible to determine precisely how the laws will be applied. Any
determination by a state or federal regulatory agency that any of these
practices violate any of these laws could subject the companies to civil or
criminal penalties and require Per-Se and/or NDCHealth to change or terminate
some portions of their businesses.
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. Per-Se and NDCHealth have incurred and will
continue to incur costs to comply with these rules. Although management of both
companies believe that future compliance costs will not have a material impact
on Per-Se's or NDCHealth'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 Per-Se's and NDCHealth's businesses and
may subject them to civil and criminal penalties as well as loss of customers.
NDCHealth and Per-Se rely upon third parties to provide data elements to
process electronic medical claims in a HIPAA-compliant format. While Per-Se
believes it and, if the proposed NDCHealth merger is completed, the combined
company 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 Per-Se's and the
combined company's businesses. Per-Se and NDCHealth have made and expect to
continue to make investments
28
in product enhancements to support customer operations that are regulated by
HIPAA. Responding to HIPAA's impact may require Per-Se and NDCHealth to make
investments in new products or charge higher prices.
Passage of HIPAA is part of a wider healthcare reform initiative. Per-Se
expects that the debate on healthcare reform will continue. Per-Se also expects
that the federal government as well as state governments will pass laws and
issue regulations addressing healthcare issues and reimbursement of healthcare
providers. Per-Se cannot predict whether the government will enact new
legislation and regulations, and, if enacted, whether such new developments will
affect Per-Se's business or, if the proposed NDCHealth merger is completed, the
combined company's business.
PER-SE IS THE SUBJECT OF AN SEC INVESTIGATION, THE RESOLUTION OF WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON PER-SE. NDCHEALTH IS THE SUBJECT OF A
SEPARATE SEC INVESTIGATION, THE RESOLUTION OF WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMBINED COMPANY IF THE PROPOSED MERGER IS COMPLETED.
On April 4, 2005, Per-Se announced that it had been notified by the SEC
staff of the issuance of an order of investigation, which Per-Se believes
relates to allegations of wrongdoing made by a former employee in 2003. These
allegations were the subject of a prior investigation by the audit committee of
the Per-Se board of directors and an outside accounting firm that resulted in
the performance of extensive additional procedures. Per-Se has produced
documents and provided testimony relating to these allegations to the SEC.
On December 14, 2004, the SEC staff obtained a Formal Order of
Investigation relating to certain NDCHealth accounting matters. NDCHealth has
restated its financial statements for the fiscal years ended May 28, 2004, May
30, 2003, and May 31, 2002, to correct errors relating to these accounting
matters. NDCHealth has produced documents relating to the restatement to the
SEC, and the SEC has taken the testimony of a number of current and former
employees in relation to its investigation.
Responding to these investigations requires significant defense costs,
attention and resources of management. In connection with its SEC investigation,
Per-Se could face civil or criminal penalties that could have a material adverse
effect on Per-Se. Similarly, in connection with its SEC investigation, NDCHealth
could face civil or criminal penalties that could have a material adverse effect
on the combined company if the merger is completed.
NDCHEALTH HAS IDENTIFIED MATERIAL WEAKNESSES IN ITS INTERNAL CONTROL OVER
FINANCIAL REPORTING. IF NDCHEALTH FAILS TO MAINTAIN AN EFFECTIVE SYSTEM OF
INTERNAL CONTROLS AND THE PROPOSED MERGER IS COMPLETED, THE COMBINED COMPANY
MAY NOT BE ABLE TO ACCURATELY REPORT ITS FINANCIAL RESULTS AND MANAGEMENT OF
PER-SE MAY NOT BE ABLE TO PROVIDE AN UNQUALIFIED REPORT ON THE EFFECTIVENESS
OF THE COMBINED COMPANY'S INTERNAL CONTROL OVER FINANCIAL REPORTING.
During the past year, NDCHealth's management and its independent registered
public accounting firm identified three "material weaknesses" in its internal
controls over financial reporting. As of May 27, 2005, NDCHealth's management
concluded that NDCHealth's documentation and procedures relating to (i) the
revenue recognition and billing processes, (ii) the financial statement close
process and (iii) NDCHealth's accounting for income taxes result in more than a
remote likelihood that material misstatement of the financial statements will
not be prevented or detected.
These control deficiencies could result in a material misstatement to the
financial statements of NDCHealth and, if the NDCHealth merger is completed,
could adversely impact the accuracy and future timeliness of the combined
company's financial reports filed pursuant to the Exchange Act. As a result,
current and potential stockholders could lose confidence in the combined
company's financial reporting which could harm the trading price of its common
stock.
THE TRADING PRICE OF PER-SE'S COMMON STOCK MAY BE VOLATILE AND MAY NEGATIVELY
AFFECT YOUR INVESTMENT.
The trading price of Per-Se's common stock may be volatile. The market for
Per-Se'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
29
changes in estimates of securities analysts, government regulatory action,
healthcare reform measures, client relationship developments and other factors,
many of which are beyond Per-Se'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
Per-Se'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 September 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.
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 September 30, 2005, and that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting were identified.
30
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 6. EXHIBITS
(A) Exhibits
EXHIBIT
NUMBER DOCUMENT
------- --------
2.1 -- Agreement and Plan of Merger, dated as of August 26, 2005,
by and among Registrant, Royal Merger Co. and NDCHealth
Corporation (incorporated by reference to Exhibit 2.1 to
Current Report on Form 8-K filed on August 30, 2005)
(schedules and similar attachments to this exhibit have not
been filed; Registrant agrees to furnish supplementally a
copy of any of these materials to the Securities and
Exchange Commission upon request).
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 -- Fifth Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of August 26, 2005 (incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K filed
on August 26, 2005).
4.7 -- 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).
10.1 -- First Amendment to the Per-Se Technologies, Inc. Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed on October
27, 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.
31
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: November 3, 2005
32
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT
------- --------
2.1 -- Agreement and Plan of Merger, dated as of August 26, 2005,
by and among Registrant, Royal Merger Co. and NDCHealth
Corporation (incorporated by reference to Exhibit 2.1 to
Current Report on Form 8-K filed on August 30, 2005)
(schedules and similar attachments to this exhibit have not
been filed; Registrant agrees to furnish supplementally a
copy of any of these materials to the Securities and
Exchange Commission upon request).
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 -- Fifth Amendment to Rights Agreement dated as of February 11,
1999, between Registrant and American Stock Transfer & Trust
Company, entered into as of August 26, 2005 (incorporated by
reference to Exhibit 4.1 to Current Report on Form 8-K filed
on August 26, 2005).
4.7 -- 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).
10.1 -- First Amendment to the Per-Se Technologies, Inc. Employees'
Retirement Savings Plan (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed on October
27, 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.