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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 Identification No.)
Incorporation or Organization)
1145 SANCTUARY PARKWAY, SUITE 200 30004
ALPHARETTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(770) 237-4300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated
filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of the last business day of the Registrant's most recently
completed second fiscal quarter, based on the closing price of the Registrant's
common stock as reported on the NASDAQ National Market was approximately
$500,987,737.
As of March 8, 2006, there were 38,883,986 outstanding shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 25, 2006, are incorporated herein by reference in Part III.
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PER-SE TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
PAGE OF
FORM 10-K
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ITEM 1. BUSINESS.................................................... 1
ITEM 1A. RISK FACTORS................................................ 7
ITEM 1B. UNRESOLVED STAFF COMMENTS................................... 14
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 17
ITEM 6. SELECTED FINANCIAL DATA..................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 35
ITEM 9A. CONTROLS AND PROCEDURES..................................... 35
ITEM 9B. OTHER INFORMATION........................................... 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 37
ITEM 11. EXECUTIVE COMPENSATION...................................... 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................. 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................... 37
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES................. 37
PART I
ITEM 1. BUSINESS
INTRODUCTION
Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is focused on
providing solutions that improve the administrative functions of the healthcare
industry. Specifically, Per-Se provides Connective Healthcare solutions that
help physicians, hospitals and pharmacies achieve their income potential.
Connective Healthcare solutions support and unite healthcare providers, payers
and patients with innovative technology processes that improve and accelerate
reimbursement and reduce the administrative cost of care.
The Company markets its products and services to constituents of the
healthcare industry, primarily to hospital-affiliated physician practices,
physician groups in academic settings, hospitals, healthcare organizations,
integrated delivery networks ("IDN's") and retail, mail order and managed care
pharmacies.
The Company focuses on the administrative functions of the healthcare
market, with the majority of its business based in the United States. Healthcare
spending in the United States is to have surpassed $1.9 trillion or
approximately 16% of gross domestic product in 2005. It has been estimated that
administrative costs in the U.S. healthcare system comprise about 25% of total
healthcare spending. The Company's solutions help make the reimbursement of
healthcare more efficient and help improve the overall patient care experience
by simplifying the revenue cycle process for physicians, hospitals and
pharmacies. The Company's services and solutions are not capital-intensive for
providers, making them a cost-effective solution as providers focus on their
financial health.
For the years ended December 31, 2005, 2004, and 2003, and as of December
31, 2005, and 2004, the Company served the healthcare industry through two
divisions: Physician Solutions (formerly Physician Services) and Hospital
Solutions (formerly Hospital Services). Refer to Note 18 of Notes to
Consolidated Financial Statements included in Item 8. Financial Statements and
Supplementary Data for financial information regarding the Company's Physician
Solutions and Hospital Solutions divisions.
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. The transaction was completed on January 6, 2006. In the acquisition,
Per-Se acquired the physician, hospital and retail pharmacy businesses of
NDCHealth. The retail pharmacy business will be operated as a new division known
as the Pharmacy Solutions division. Accordingly, the Company will serve the
healthcare industry through three divisions, Physician Solutions, Hospital
Solutions and Pharmacy Solutions, effective January 6, 2006. Those divisions are
described below. As the transaction was not completed in 2005, this annual
report on Form 10-K includes limited discussion and does not include results of
the business acquired as part of the NDCHealth acquisition.
The Physician Solutions division provides Connective Healthcare solutions
that manage the revenue cycle for physician groups. The division provides a
complete outsourcing service, therefore, allowing physician groups to avoid the
infrastructure investment and administrative costs in their own in-house billing
office. The division is the largest provider of business management outsourced
services that supplant all or most of the administrative functions of a
physician group. Its 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. Services include clinical data collection, data
input, medical coding, billing, contract management, cash collections, accounts
receivable management and extensive reporting of metrics related to the
physician practice. These services help physician groups to be financially
successful by improving cash flows and reducing administrative costs and
burdens. Fees for these services are primarily based on a percentage of net
collections on the clients' accounts receivable. The division recognizes revenue
and bills customers when the customers receive payment on those accounts
receivable, which aligns the division's interests
1
with the interests of the physician groups it services. The Company also
generates revenue from one-time sales of physician practice management ("PPM")
software or monthly usage fees for software used via an Application Service
Provider ("ASP") model. The division's revenue model is approximately 95%
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 Hospital Solutions division provides Connective Healthcare solutions
that focus on revenue cycle and resource management to improve the financial
health of hospitals and healthcare organizations. The division has one of the
largest electronic clearinghouses in the medical industry, which provides an
important infrastructure to support its revenue cycle management offerings. The
clearinghouse delivers dedicated electronic and Internet-based
business-to-business solutions that focus on electronic processing of medical
transactions as well as complementary transactions, such as electronic
remittance advices, real-time eligibility verification and high-speed print and
mail services. Other revenue cycle management solutions provide insight into a
hospital's revenue cycle inefficiencies, such as denial management. Denial
management allows hospitals to identify charges denied reimbursement by a payer
and to facilitate corrective actions such as resubmitting for reimbursement.
Hospitals may opt to outsource portions of their revenue cycle management
process to the Company, such as secondary insurance billing. The division also
provides resource management solutions that enable hospitals to efficiently
manage resources to reduce costs and improve their bottom line. The division's
staff scheduling software efficiently plans nurse schedules, accommodating
individual preferences as well as environmental factors, such as acuity levels,
and can schedule all the personnel across the hospital enterprise. The
division's patient scheduling software helps effectively manage a hospital's
most expensive and profitable area, the operating room, as well as schedules
patients across the enterprise. 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. Greater than 90% of the
division's revenue is recurring due to its transaction-based business and the
maintenance revenue from its substantial installed base for the revenue cycle
management solutions and resource management software.
The Pharmacy Solutions division provides Connective Healthcare solutions
that focus on transaction clearinghouse services and point-of-service systems to
improve administrative efficiencies and optimize the revenue and cash flow of
retail, mail order and managed care pharmacies in the U.S. This division has a
leading market position in pharmacy services and systems with connectivity to
approximately 90% of the retail pharmacy stores, processing more than six
billion total pharmacy transactions annually, and has systems installed in more
than 20% of pharmacies in the U.S. The division's electronic clearinghouse for
pharmacy transactions provides real-time processing related to claims
submission, eligibility verification, remittance advice, referral authorization,
drug formulary and inventory management, as well as claim status and tracking.
The division also provides value-added transaction services and claims edits
that perform financial and administrative reviews on transactions to help
pharmacies enhance the accuracy of submitted claims, decrease receivable days
outstanding and improve labor efficiency. As part of the Medicare Modernization
Act of 2003, the Centers for Medicare & Medicaid Services ("CMS") awarded the
division a one-year contract in May 2005 with three potential one-year
extensions to provide the network services as part of a system for calculating
beneficiaries' True Out-Of-Pocket ("TrOOP") costs. The TrOOP infrastructure
helps CMS ensure that what seniors pay at pharmacy counters takes into account
the out-of-pocket payments and the proper level of their Medicare coverage. CMS
also contracted the division to be the primary facilitator for Medicare Part D
enrollee benefit eligibility, which enables retail pharmacies to electronically
check primary and supplemental coverage for seniors who have not received their
new coverage information. Medicare beneficiaries who have enrolled in the
program began receiving prescription drugs under the new benefit program
starting January 1, 2006. The division's point-of-service systems offerings help
retail, mail order and managed care pharmacies streamline workflow, improve cash
flow and reduce costs while also serving as an additional source of transaction
volume for the division's electronic clearinghouse. Historically, the division
has generated pharmacy systems revenue through the sale of software licenses,
upgrades and recurring maintenance and support fees. The Company's new line of
systems products is being sold to customers with varying pricing and
2
revenue models that may include per-transaction fees, a license fee plus annual
maintenance or a monthly per store fee, depending on the customer. The
division's revenue model is more than 90% recurring in nature due to the
transaction-based or fixed-fee nature of its revenue in the services business
and the licensing and maintenance-based nature of revenue in its systems
business.
RECENT DEVELOPMENTS
On March 10, 2006, the Company concluded binding arbitration for a claim of
breach of contract arising from an acquisition completed in 2000. The binding
arbitration resulted in an award to be paid by Per-Se of approximately $1.3
million, including interest of $0.3 million. The Company included the award in
Other Expenses and the interest in Interest Expense in the Company's 2005
Consolidated Statement of Income. In Note 18 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data, the
costs associated with the award are classified in the Corporate segment.
On January 6, 2006, Per-Se acquired Atlanta, GA-based NDCHealth. The
acquisition included the physician, hospital and retail pharmacy businesses, for
total consideration of approximately $665 million. As part of the transaction,
Wolters Kluwer Health, Inc., wholly owned by Wolters Kluwer, NV, based in
Amsterdam, the Netherlands, purchased the pharmaceutical information management
business from NDCHealth for $382 million in cash. The transaction resulted in
consideration to NDCHealth's shareholders of $19.50 per share, with $14.05 paid
in cash and $5.45 paid in Per-Se stock. As of December 31, 2005, the Company had
incurred approximately $3.8 million of transaction costs that are included in
other long-term assets in the Company's Consolidated Balance Sheet.
In connection with the acquisition, the Company secured financing in the
form of a new senior credit facility consisting of a $435 million Term Loan B
and a $50 million revolving credit facility ("Senior Credit Facility"). The Term
Loan B bears interest at a rate of LIBOR plus 2.25% or Base Rate, as defined by
the Senior Credit Facility agreement, plus 1.25% and matures in seven years. The
revolving credit facility has an interest rate that varies between LIBOR plus
1.50% and LIBOR plus 2.50% or between Base Rate plus 0.5% and Base Rate plus
1.50%, based on performance, and matures in five years. While $435 million is
currently outstanding under the Term Loan B, the Company has incurred no
borrowings under the revolving credit facility. All outstanding debt of
NDCHealth was retired in connection with the closing of the transaction.
On December 1, 2005, the Company acquired privately held Integra Solutions
("Integra"), a hospital revenue cycle management outsourcing firm located in
Norcross, Georgia, for a purchase price of approximately $10.8 million. The
Company paid approximately $5.4 million of the purchase price at closing and
will pay the remaining purchase price of approximately $5.4 million at the
one-year anniversary. In addition, if Integra achieves certain revenue
objectives over the first two years, the Company will pay an additional purchase
price amount of approximately $3.8 million. Since the amount is contingent, the
additional purchase price is not included in the Company's December 31, 2005,
Consolidated Balance Sheets or Consolidated Statements of Income. Integra
Solutions offers a comprehensive suite of services designed to help healthcare
providers improve their bottom line results. This includes a full range of
outsourcing options, from health information and patient accounting management
consulting to auditing and accounts receivable services. The Company currently
provides outsourcing services to more than 80 hospitals, and Integra will be a
key component of its outsourcing growth strategy in the hospital market.
During the latter part of 2004, the Company initiated a project to enhance
its physician claims clearinghouse functionality. The Company expects that the
improved platform will provide efficiencies and competitive advantages for its
Physician Solutions division. During 2005, the Company incurred approximately
$1.9 million in capital expenditures and capitalized software development costs
and approximately $1.6 million in expenses related to the physician claims
clearinghouse enhancement which are reflected in the Hospital Solutions
division. During 2006, the Company expects to incur between $3 and $4 million in
capital expenditures and capitalized software development costs and between $2
and
3
$3 million in expenses related to the physician claims clearinghouse
enhancement. The enhancement is expected to be substantially complete in 2006.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 18 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
PHYSICIAN SOLUTIONS
BUSINESS MANAGEMENT OUTSOURCED SERVICES FOR PHYSICIANS
Approximately 225,000 U.S.-based hospital-affiliated physicians represent
the Company's target market for business management outsourced services. The
target market consists of large physician groups -- typically 10 or more
physicians depending upon the specialty -- and represents an estimated market
opportunity of approximately $7 billion. The Company estimates that
approximately 20% to 30% of the physicians in the target market currently
outsource their business management needs, with the remainder of physicians
performing these services in house. The Company believes its Physician Solutions
division is the largest provider of comprehensive business management
outsourcing services to the U.S. hospital-based physician market. The business
of providing integrated business management outsourcing services is highly
competitive. The division competes with regional and local billing companies as
well as physician groups performing these services in house. Competition among
outsourcing companies is based upon the relationship with the client or
prospective client, the efficiency and effectiveness of converting medical
services to cash while minimizing compliance risk, the ability to provide
proactive practice management services and, to the extent that service offerings
are comparable, price. The Company believes there is a trend toward outsourcing
among physician groups performing these revenue cycle management services in
house due to the complexity of reimbursement regulations and the financial
pressures physician groups face.
PRACTICE MANAGEMENT SYSTEMS FOR PHYSICIANS
The Company's PPM solutions are targeted at office-based physician groups
in the United States, typically those practices with less than ten physicians.
The Company provides the software necessary to streamline billing and other
internal processes (such as scheduling), increase productivity and help ensure
accurate reimbursement. Sold through the Company's value-added reseller ("VAR")
channel and through a direct sales force, the Company's enhanced PPM solutions
also include interactive training, electronic claims processing to payers,
patient statements processing, electronic prescription capabilities and other
electronic commerce services designed to automate processes and improve the
business of healthcare. The PPM market is highly competitive with large national
competitors including Cerner Corporation, Emdeon Corporation, and Misys plc, as
well as small regionally or locally focused competition.
HOSPITAL SOLUTIONS
REVENUE CYCLE MANAGEMENT SOLUTIONS FOR HOSPITALS AND HEALTHCARE FACILITIES
The market for hospital revenue cycle management solutions ranges from
providing technology tools that allow a hospital's central billing office
("CBO") to more effectively manage its cash flow to full or partial outsourced
solutions. Technology tools include electronic transactions, such as claims
processing, that can be delivered via the Web or through dedicated electronic
data interfaces as well as license-based solutions, such as automated cash
posting solutions which are deployed at the CBO. Competition in the revenue
cycle management market is based on providing solutions that enable hospitals to
improve their cash flow, and the Company believes that it is the largest
provider of revenue cycle -- electronic transaction solutions to hospitals and
healthcare facilities in the U.S. The Company's hospital revenue cycle
management solutions are offered through its direct sales force as well as
through strategic alliances. Competitors include traditional electronic data
interface companies, Internet healthcare companies,
4
outsourcing companies and specialized software vendors such as CareMedic, Emdeon
Corporation, McKesson, SSI Group and other national and regional providers.
RESOURCE MANAGEMENT SOLUTIONS FOR HOSPITALS
The market for resource management solutions for hospitals focuses on
license-based and Internet solutions to help hospitals efficiently and
effectively manage their costs. The Company's resource management business
focuses on the areas of staff and patient scheduling. The Company's Hospital
Solutions division has the market-leading staff scheduling solution and a
market-leading patient scheduling solution. Competition in this market segment
is based on enabling a hospital to decrease costs by improving the utilization
of its personnel and facilities. The Company competes against national software
vendors, specialized software vendors and Internet healthcare companies.
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's Physician Solutions and Hospital
Solutions segments, including revenue, segment operating expenses, segment
operating income and identifiable assets attributable to each division for each
of the fiscal years ended 2005, 2004, and 2003, and as of December 31, 2005, and
2004, is presented in Note 18 of Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary Data.
HEALTHCARE INDUSTRY
Trends in the United States healthcare industry affect Per-Se's business.
Over the past two decades, there have been changes in the U.S. healthcare
delivery system. For example, the proportion of patients requiring intensive
care in acute-care facilities has increased while the number of acute-care
facilities has decreased. The U.S. government estimates that national health
expenditures are expected to reach $4 trillion in 2015, growing from
approximately $2 trillion in health-related spending during 2005.
As healthcare expenditures have become a larger percentage of the gross
domestic product, increasing focus has been placed on the administrative costs
and burdens associated with the delivery of care. As a result, payers have
sought to control costs by changing from the traditional fee-for-service
reimbursement model to managed care, fixed fee and capitation arrangements.
These reimbursement models, coupled with extensive regulatory control and
government healthcare fraud and abuse initiatives, have resulted in a
significantly more complex accounting, coding, billing, and collection
environment. Such industry changes create a more positive market for solutions
that reduce a healthcare provider's administrative burdens, help ensure
compliance in the complex regulatory environment and minimize medical coding and
billing errors, while improving reimbursement and reducing costs.
Both governmental and private payers continue to restrict payments for
healthcare services, using measures such as payment bundling, medical necessity
edits and post-payment audits. These measures may decrease revenue to the
Company's provider clients and consequently decrease revenue derived by the
Company from such clients, as well as increase the cost of providing services.
The healthcare industry continues to focus on the impact that regulations
governing standards for electronic transactions, privacy and information
security issued under the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") have on operations and information technology systems. HIPAA was
designed to reduce administrative waste in healthcare and protect the privacy
and security of patients' health information. HIPAA regulations identify and
impose standards for all aspects of handling patient health information. These
regulations, which are described in more detail below under the subheading
"Regulation," may require the Company to enhance its internal systems and
software applications sold, but HIPAA may also create an increased demand for
the Company's services and solutions. While the Company has incurred and will
continue to incur costs to comply with HIPAA, management believes these
compliance costs will not have a material impact on the Company's results of
operations.
5
REGULATION
Per-Se's business is subject to numerous federal and state laws, programs
to combat healthcare fraud and abuse, and increasing restrictions on
reimbursement for healthcare services. Each of the major federal healthcare
payment programs (Medicare, Medicaid and TRICARE) has its own set of complex and
sometimes conflicting regulations. The Balanced Budget Act of 1997 and HIPAA
have mandated additional regulations, and many states have passed legislation
addressing billing and payment for healthcare services.
The federal government is making significant efforts to detect and
eliminate healthcare fraud and abuse, particularly through its enforcement of
the False Claims Act, the Medicare and Medicaid Patient and Program Protection
Act of 1987 and HIPAA, all of which provide the federal government with the
authority to impose both civil and criminal sanctions and penalties for
submission of false claims to governmental payers. The federal government may
impose civil monetary penalties up to $50,000 per offense as well as exclude a
provider from participation in Medicare and other governmental healthcare
programs. In addition, the False Claims Act allows a private party to bring a
"qui tam" or "whistleblower" suit alleging the filing of false or fraudulent
Medicare or Medicaid claims and potentially share in damages and civil penalties
paid to the government. The CMS offers rewards for information leading to the
recovery of Medicare funds, and CMS engages private contractors to detect and
investigate fraudulent billing practices.
The Company's compliance program, which is modeled after the Office of
Inspector General's Compliance Program Guidance for Third-Party Medical Billing
Companies, is designed and maintained to detect and prevent regulatory
violations. The Company believes its compliance program is effective; however, a
compliance program cannot be expected to provide absolute compliance with the
law. The existence of an effective compliance program may, nevertheless,
mitigate civil and criminal sanctions for certain healthcare-related offenses.
Under HIPAA, the federal government published final rules regarding the
standards for electronic transactions as well as standards for privacy and
security of individually identifiable health information. These rules set new or
higher standards for the healthcare industry in handling healthcare transactions
and information, with penalties for noncompliance.
The HIPAA rules regarding standards for electronic transactions require
healthcare providers, healthcare clearinghouses and health plans that send or
receive healthcare transaction data electronically to use standard data formats.
The compliance deadline for standard electronic transactions was October 16,
2002, which was later extended to October 16, 2003, by filing a compliance
extension plan. In September 2003, CMS issued transitional guidance that allowed
noncompliant electronic transactions after the October 2003 compliance deadline.
The industry continues to work toward compliance. The Company has substantially
modified the operations of its subsidiaries that are engaged in the electronic
transmission of such data to comply with HIPAA's electronic transaction
standards.
The HIPAA rules regarding privacy of patient health information require
organizations that handle such information to establish safeguards regarding
access, use and disclosure, and to restrict how other entities use that
information. The privacy rules had a compliance deadline of April 14, 2003, and
the Company implemented policies and procedures and other processes (e.g.,
Company-wide privacy training) before the deadline. The Company believes that
its operations are in compliance with the privacy rule requirements. Although
the HIPAA privacy rules do not provide a private right of action for
individuals, individuals could bring a privacy action under applicable state law
for misuse or improper disclosure of their health information.
The HIPAA rules regarding the security of medical information became final
on February 20, 2003. Under these rules, health insurers, certain healthcare
providers and healthcare clearinghouses must establish procedures and mechanisms
to protect the confidentiality, integrity and availability of electronic
protected health information. The Company established the required security
procedures and mechanisms to protect the confidentiality, integrity and
availability of electronic protected health information that had a
6
compliance deadline of April 20, 2005. Management believes that the costs of
compliance with the HIPAA security rules will not materially impact the
Company's results of operations.
EMPLOYEES
As of December 31, 2005, the Company employed approximately 5,100 full-time
and part-time employees. The Company has no labor union contracts and believes
relations with its employees are satisfactory.
AVAILABLE INFORMATION
The Company's Internet address is www.per-se.com. On its Internet website,
the Company makes available, free of charge, its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) of 15(d) of the
Exchange Act as soon as reasonably practicable after the Company electronically
files such material with the SEC. The reference to the website address does not
constitute incorporation by reference of the information contained on the
website, which should not be considered part of this document. Additionally,
materials that the Company files with the SEC may be read and copied at the
SEC's Public Reference Room at 100 F. Street, N.E. Washington, D.C. 20544, or by
visiting the SEC's website at http://www.sec.gov. Information may be obtained on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
FORWARD-LOOKING STATEMENTS
Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report,
including certain statements set forth under the captions "Recent Developments,"
"Description of Business by Industry Segment," "Healthcare Industry,"
"Regulation," "Employees," "Legal Proceedings," "Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities," "Recent Accounting Pronouncements," "Overview of Critical
Accounting Policies," "Other," "Results of Operations," "Liquidity and Capital
Resources," "Interest Rate Sensitivity," "Exchange Rate Sensitivity," "Controls
and Procedures," "Summary of Significant Accounting Policies," "Discontinued
Operations," "Long-term Debt," and "Legal Matters," are "forward-looking
statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Forward-looking statements include the Company's
expectations with respect to meritorious defenses to the claims and other issues
asserted in pending legal matters, industry growth segments, effect of industry
and regulatory changes on the Company's customer base, the state of employee
relations, use of estimates for revenue recognition, bad debt accruals in
reserve for doubtful accounts receivable and other estimates used for accounting
purposes, effect of adoption of recent accounting pronouncements, timing of
arbitration, overall profitability, our ability to successfully integrate
NDCHealth and capitalize on synergies associated with the acquisition, the
availability of capital and other similar matters. Although the Company believes
that the statements it has made are based on reasonable assumptions, they are
based on current information and beliefs and, accordingly, the Company can give
no assurance that its expectations will be achieved and such statements speak
only as of their dates. In addition, these statements are subject to factors
that could cause actual results to differ materially from those suggested by the
forward-looking statements. These factors include, but are not limited to,
factors identified under the caption "Factors That May Affect Future Results of
Operations, Financial Condition or Business" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 and those
risk factors set forth below. The Company disclaims any responsibility to update
any forward-looking statements.
As discussed above in Item 1, on January 6, 2006, Per-Se completed its
acquisition of NDCHealth. These risk factor disclosures include a number of risk
factors relating to that acquisition.
7
THE COMPANY'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. The Company competes with regional and local physician
reimbursement organizations as well as physician groups that provide their own
business management services in-house. Potential industry and market changes
that could adversely affect the Company'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. The Company
competes with traditional electronic data interface companies, outsourcing
companies and specialized software vendors with national, regional and local
bases. Some competitors have longer operating histories and greater financial,
technical and marketing resources than us. The Company's successful competition
within this industry is dependent on industry and market changes.
The business of providing value-added claims processing and pre- and
post-editing services to retail pharmacies is highly competitive. The Company
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 a number of industry and market conditions including functionality
of products and services, price, quality and innovation. In addition, some of
the Company's competitors may have greater access to capital and marketing and
technological resources, and the Company cannot guarantee that it will be able
to compete successfully with them.
THE MARKETS FOR THE COMPANY'S SERVICES AND SOLUTIONS ARE CHARACTERIZED BY
RAPIDLY CHANGING TECHNOLOGY, EVOLVING INDUSTRY STANDARDS AND FREQUENT NEW
PRODUCT INTRODUCTIONS AND AN INABILITY TO KEEP PACE COULD ADVERSELY AFFECT THE
COMPANY.
The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including the
Company's ability to:
- enhance existing products and services;
- introduce new products and services quickly and cost effectively;
- achieve market acceptance for new products and services; and
- respond to emerging industry standards and other technological changes.
Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing the Company's technology. The
costs associated with refining, enhancing and developing these systems may
increase significantly in the future. Existing software and technology may
become obsolete as a result of ongoing technological developments in the
marketplace.
THE HEALTHCARE MARKETPLACE IS CHARACTERIZED BY CONSOLIDATION, WHICH MAY RESULT
IN FEWER POTENTIAL CUSTOMERS FOR THE COMPANY'S SERVICES.
In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
types of initiatives include employer initiatives such as creating 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
8
services through integrated delivery systems may result in a decrease in demand
for the Company's business management outsourcing services for particular
physician practices. In addition, consolidation among the Company's customers
may result in such customers having greater leverage, which could adversely
affect the price the Company is able to charge for the Company's products.
THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE THE COMPANY'S
COSTS OF OPERATION OR HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESSES.
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 participants operate. Current or future government
regulations or healthcare reform measures may affect the Company's businesses.
Healthcare industry participants may respond by reducing their investments or
postponing investment decisions, including investments in the Company's products
and services.
Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services, 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 that provide software
and other services used by healthcare providers to support their billing and
collection activities. In connection with these laws, the Company may be
subjected to federal or state government investigations and possible penalties
may be imposed upon us, false claims actions may have to be defended, private
payers may file claims against us, and the Company may be excluded from
Medicare, Medicaid or other government-funded healthcare programs. In the past,
Per-Se has been the subject of federal investigations relating to the Company's
billing and collection activities, and the Company may become the subject of
future false claims litigation or additional investigations. Any such proceeding
or investigation could have a material adverse effect on the Company's
businesses.
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 the Company's activities and its 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. The
Company carefully reviews its business practices in an effort to ensure that it
complies 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 us to civil
or criminal penalties and require us to change or terminate some portions of the
Company'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 against us or the Company's customers seeking
monetary damages.
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
9
of individually identifiable health information. The HIPAA rules set new or
higher standards for the healthcare industry in handling healthcare transactions
and information, with penalties for noncompliance. The Company has incurred and
will continue to incur costs to comply with these rules. Although management
believes that future compliance costs will not have a material impact on the
Company's results of operations, compliance with these rules may prove to be
more costly than anticipated. Failure to comply with such rules may have a
material adverse effect on the Company's businesses and may subject us to civil
and criminal penalties as well as loss of customers.
Per-Se relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA-compliant format. While Per-Se believes it
is fully and properly prepared to process electronic medical claims in a
HIPAA-compliant format, there can be no assurance that third parties, including
healthcare providers and payers, will likewise be prepared to supply all the
data elements required to process electronic medical claims and make electronic
remittance under HIPAA's standards. If payers reject electronic medical claims
and such claims are processed manually rather than electronically, there could
be a material adverse affect on the Company's businesses. The Company has made
and expects to continue to make investments in product enhancements to support
customer operations that are regulated by HIPAA. Responding to HIPAA's impact
may require us to make investments in new products or charge higher prices.
Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that the debate on healthcare reform will continue. The Company
also expects that the federal government as well as state governments will pass
laws and issue regulations addressing healthcare issues and reimbursement of
healthcare providers. We cannot predict whether the government will enact new
legislation and regulations, and, if enacted, whether such new developments will
affect the Company's businesses.
Payment restrictions by governmental and private payers and the use of
measures such as payment bundling, medical necessity edits, and post-payment
audits may decrease revenue to the Company's provider clients and consequently,
decrease revenue derived by the Company and increase the cost of services.
THE TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE VOLATILE AND MAY
NEGATIVELY AFFECT YOUR INVESTMENT.
The trading price of Per-Se common stock may be volatile. The market for
Per-Se common stock may experience significant price and volume fluctuations in
response to a number of factors including actual or anticipated quarterly
variations in operating results, changes in expectations of future financial
performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments
and other factors, many of which are beyond the Company's control. Furthermore,
the stock market in general and the market for software, healthcare business
services and high technology companies in particular, has experienced volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of the Company's common stock, regardless of actual operating
performance.
PER-SE HAS SIGNIFICANTLY INCREASED ITS LONG-TERM DEBT AS A RESULT OF THE
NDCHEALTH ACQUISITION, WHICH COULD LIMIT FUNDS AVAILABLE TO PER-SE TO FINANCE
OTHER ACTIVITIES.
Per-Se has increased its long-term debt from approximately $125 million to
approximately $560 million. 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
the Company's future operating performance, which may be affected by conditions
beyond the Company's control.
10
THE AGREEMENTS GOVERNING PER-SE'S DEBT LIMIT THE COMPANY'S FINANCIAL AND
OPERATING FLEXIBILITY.
Per-Se's debt agreements contain restrictive covenants that limit its
financial and operating flexibility. Those agreements contain restrictions
regarding, among other things:
- incurring additional indebtedness or guarantee obligations;
- declaring or paying dividends and other distributions;
- prepaying or modifying the terms of indebtedness;
- creating liens;
- making capital expenditures;
- making investments or acquisitions;
- entering into acquisitions or consolidations;
- making sales of assets; and
- engaging in transactions with affiliates.
In addition, Per-Se is required to comply with specified financial
covenants, including a maximum leverage ratio, a minimum fixed charge coverage
ratio and a minimum interest expense ratio.
The covenants summarized above could place Per-Se at a disadvantage
compared to some of its competitors, which may have fewer restrictive covenants
and may not be required to operate under these restrictions.
LOSS OF KEY MANAGEMENT COULD ADVERSELY AFFECT THE 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 will continue to
serve as Per-Se's Chairman, President and Chief Executive Officer. In addition,
Per-Se does not carry key employee insurance on Mr. Pead or other members of
management. The combined 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.
PER-SE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE BUSINESSES OF PER-SE AND
NDCHEALTH AND MAY BE UNABLE TO REALIZE THE ANTICIPATED BENEFITS OF THE
ACQUISITION.
Per-Se is required to devote significant management attention and resources
to integrating NDCHealth's business practices and operations with those of
Per-Se. Potential difficulties that the Company may encounter in the integration
process include the following:
- the inability to achieve the cost savings and operating synergies
anticipated in the acquisition, including a reduction in costs associated
with the acquisition;
- complexities associated with managing the geographic scope 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
acquisition.
The process of integrating operations could cause a disruption of, or loss
of momentum in, the activities of the combined business, the loss of key
personnel and/or the loss of key or large customers. In addition, customer
contracts of NDCHealth contain provisions that may permit the customer to
terminate the contract upon consummation of the acquisition. The diversion of
management's attention and any
11
delays or difficulties encountered in connection with the integration of the two
companies' operations could have an adverse effect on business and financial
results.
The integration process may result in additional and unforeseen expenses,
and the anticipated benefits of such integration plans may not be realized.
IF PER-SE 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 company's future financial results depend in part on managing growth
profitably. Management needs 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 Per-Se is
unable to manage its growth profitably, its business and financial results could
suffer.
AS PART OF THE ACQUISITION, PER-SE AND NDCHEALTH ENTERED INTO, AND ARE BOUND
BY THE TERMS OF, LONG-TERM DATA SHARING AGREEMENTS WITH WOLTERS KLUWER THAT
PLACE CERTAIN RESTRICTIONS ON THE COMPANY'S ABILITY TO SELL CERTAIN PRODUCTS
TO THIRD PARTIES AND COMPETE IN CERTAIN MARKETS.
In connection with the completion of the acquisition and the related sale
of NDCHealth's information management business to Wolters Kluwer, Per-Se and
NDCHealth entered into 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. Those 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 data purchased by,
or sold by, Wolters Kluwer in specified markets for various time periods set
forth in those 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. These restrictions and limitations will limit the
types of products and customers to whom the Company can market such products and
could have a material and adverse impact on the Company's operating and
financial results.
Additionally, because the healthcare marketplace is rapidly changing, it is
difficult to predict whether the data sharing agreements will be favorable to us
over the full 20-year term of the agreements. In the event those agreements
prove to be unfavorable to us, they could have a long-term negative impact on
the Company's results of operations.
THE COMPANY IS REGULARLY INVOLVED IN LITIGATION, WHICH MAY EXPOSE US TO
SIGNIFICANT LIABILITIES.
The Company is involved in litigation arising in the ordinary course of
business, which may expose us to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of the Company's businesses. The Company has 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
price 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 (the "Exchange Act"), and Rule 10b-5
thereunder, and seeks unspecified monetary damages and
12
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 former stockholder of NDCHealth. This lawsuit is generally based
on the same allegations contained in the securities class-action lawsuit.
NDCHealth filed motions to transfer the action to the same federal district
court hearing the securities class-action lawsuit and to dismiss the action.
Following oral argument, the motions were denied on September 28, and October
18, 2005, respectively.
The Company may not be able to successfully resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, the Company's insurance coverage may not fully
cover resulting losses. Although the Company maintains insurance coverage in
amounts that the Company believes are sufficient, such coverage may prove to be
inadequate or may become unavailable on acceptable terms, if at all. A
successful claim brought against the Company that is uninsured or under-
insured, could materially harm the Company's businesses, results of operations
or financial condition.
PER-SE AND NDCHEALTH ARE EACH THE SUBJECT OF SEPARATE SEC INVESTIGATIONS, THE
RESOLUTION OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMBINED
COMPANIES.
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
Per-Se's 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
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 produced documents relating to the restatement to the SEC,
and the SEC took 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. Either or both companies could face civil
or criminal penalties that could have a material adverse effect on the combined
companies.
PRIOR TO ITS ACQUISITION BY PER-SE, NDCHEALTH IDENTIFIED MATERIAL WEAKNESSES
IN ITS INTERNAL CONTROL OVER FINANCIAL REPORTING. IF SUCH DEFICIENCIES
PERSIST, 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.
NDCHealth's former 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 (1) the revenue
recognition and billing processes, (2) the financial statement close process and
(3) NDCHealth's accounting for income taxes resulted in more than a remote
likelihood that a 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 related to NDCHealth and 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 the Company's common stock.
13
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Company's principal executive office is leased and is located in
Alpharetta, Georgia. The lease for that office expires in July 2014.
PHYSICIAN SOLUTIONS
Physician Solutions' principal office is leased and is located in the
Company's principal executive office. In addition to its principal office,
Physician Solutions operates 62 business offices throughout the United States.
One of the business offices is owned. All of the remaining facilities are leased
with various expiration dates through March 2016.
HOSPITAL SOLUTIONS
Hospital Solutions' principal office is leased and is located in the
Company's principal executive office. In addition to its principal office,
Hospital Solutions operates 9 offices in the United States. These facilities are
leased with various expiration dates through September 2010.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is included in Note 11 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
page F-22.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 2005.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of March 10, 2006:
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
---- --- -------- ---------------
Philip M. Pead............................ 53 Chairman, President and Chief 1999
Executive Officer
Chris E. Perkins.......................... 43 Executive Vice President, 2001
Chief Operating Officer and
Interim Chief Financial
Officer
Patrick J. Leonard........................ 40 President, Physician 2004
Solutions
G. Scott MacKenzie........................ 42 President, Pharmacy Solutions 2006
David F. Mason............................ 48 President, Hospital 2004
Solutions -- Revenue Cycle
Management
Karl E. Straub............................ 48 Senior Vice President & 2006
General Manager, Hospital
Solutions -- Resource
Management
Philip J. Jordan.......................... 58 Chief of Products Strategy 2003
Paul J. Quiner............................ 46 Senior Vice President, 2001
General Counsel and Secretary
14
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
Philip M. Pead has served as the Chairman, President and Chief Executive
Officer of the Company since May 2003. He was named President and Chief
Executive Officer in November 2000. He has also been a member of Per-Se's Board
of Directors since November 2000. From August 1999 to November 2000, Mr. Pead
served as Executive Vice President and Chief Operating Officer of the Company.
Mr. Pead joined the Company in April 1997 as a senior executive in the hospital
software business and formed the Company's electronic transaction processing
business segment in 1999. He served as President of the hospital software
business from May 1997 until August 1999. From May 1996 to April 1997, Mr. Pead
was employed by Dun & Bradstreet Software as a senior executive, with
responsibility for international operations.
Chris E. Perkins was named to the position of Chief Operating Officer of
the Company in January 2006. He has served as Executive Vice President and Chief
Financial Officer of the Company since February 2001, and will continue to serve
as the Company's Chief Financial Officer until a successor to that position is
named. From April 2000 to February 2001, Mr. Perkins served as Senior Vice
President of Corporate Development. Prior to joining Per-Se in April 2000, Mr.
Perkins held various executive management positions with AGCO Corporation. He
was appointed as AGCO's Chief Financial Officer in January 1996, after serving
as Vice President of Finance and Administration for the Europe, Africa and
Middle East division, and in various roles within corporate development. In July
1998, Mr. Perkins was named Vice President of AGCO's parts division, a $500
million global business unit, for which he was responsible for all operations.
Mr. Perkins also spent seven years in public accounting with Arthur Andersen
LLP.
Patrick J. Leonard has served as President, Physician Solutions, since
January 2006. From March 2005 to January 2006, Mr. Leonard served as President,
Specialty Service Operations for the Physician Services division. From April
2004 to March 2005, Mr. Leonard served as Senior Vice President, Specialty
Services Operations for that division. From June 2002 to April 2004, Mr. Leonard
served as the division's Senior Vice President, Radiology Operations, with
responsibility for the entire operations of the Radiology specialty. From June
2000 to June 2002, Mr. Leonard was responsible for the division's Central
Radiology operation. Prior to June 2000, Mr. Leonard held various operations and
account management positions with Per-Se. Before joining Per-Se in 1994, Mr.
Leonard was employed by Rockwell International as a consultant and spent four
years in public accounting with Deloitte & Touche LLP.
G. Scott MacKenzie has served as President, Pharmacy Solutions, since
January 2006. From February 2005 to January 2006, he served as NDCHealth
Corporation's Executive Vice President and General Manager of Pharmacy Systems
and Services and ePrescribing. Prior to joining NDCHealth, he served for four
years as Vice President and General Manager of Providing Care, a unit of Cerner
Corporation. While at Cerner, he also held senior management positions in
physician solutions and business development. Prior to joining Cerner, Mr.
MacKenzie held executive positions at AT&T Outsourcing Solutions, a unit of AT&T
Solutions; Commercial Processing Services, a unit of GE Capital Corp.; and
several senior management positions at Electronic Data Systems Corp.
David F. Mason has served as President, Hospital Solutions -- Revenue Cycle
Management, since January 2006. From March 2005 to January 2006, Mr. Mason
served as President, Academic and Multi-Specialty Operations for the Physician
Services division. From February 2004 to March 2005, Mr. Mason served as Senior
Vice President, Academic and Multi-Specialty Operations for that division. From
October 2000 to February 2004, Mr. Mason served as the division's Senior Vice
President, Account Management. In this position, Mr. Mason was responsible for
client retention and cross-specialty initiatives. Prior to joining Per-Se in
October 2000, Mr. Mason served as the Chief Executive Officer and Executive
Director of Optimum Physician Services, a privately-held physician management
company. Mr. Mason also held various practice management and administration
positions with the Georgetown University Hospital and Georgia's Northside
Hospital systems.
15
Karl E. Straub was named Senior Vice President & General Manager, Hospital
Solutions -- Resource Management, in January 2006, continuing responsibilities
that he has had since 2005 for resource management tools delivered to hospitals
and healthcare organizations, including the Company's patient and staff
scheduling systems, ORSOS One-Call and ANSOS One-Staff. From 2001 to 2005, he
served as Senior Vice President of Sales the Hospital Services division. Prior
to joining Per-Se in 2001, he was vice president of national accounts for
McKesson Information Solutions. From 1991 to 1999, he was sales and business
director with SmithKline Beecham Clinical Laboratories.
Philip J. Jordan has served as Chief of Products Strategy since January
2006. From August 2003 to January 2006, Mr. Jordan served as President of the
Hospital Services division. Prior to joining Per-Se in August 2003, Mr. Jordan
led Kelvick Ltd., an investment and management consulting company that he
founded. Previously, he was Chief Executive Officer of SmartStream Technologies
Ltd., a company specializing in "straight through processing" solutions for the
banking industry. Mr. Jordan also has held positions at Geac Computers Ltd.
overseeing its operations in Europe, Africa, Middle East and Latin America. He
also has held various leadership positions with software and services companies
that include Pilot Executive Software, TECS Ltd., and Comshare Computers Ltd.
Paul J. Quiner has served as Senior Vice President, General Counsel and
Secretary of the Company since May 2001. Prior to joining the Company, Mr.
Quiner was a private investor from January 2000 to May 2001. He served as Senior
Vice President, Mergers & Acquisitions of Coram Healthcare Corporation from July
1998 to December 1999. Prior to serving in that position, he had six years of
experience in Coram's legal department, including service from March 1995 to
July 1998 as Senior Vice President and General Counsel. Prior to joining Coram,
Mr. Quiner was a partner in the Atlanta/New York/ Washington, D.C. law firm of
Alston & Bird LLP, where he specialized in healthcare, medical malpractice
defense, media and general corporate litigation.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PSTI."
The prices in the table below represent the high and low sales price for
the Common Stock as reported on Nasdaq for the periods presented. Such prices
are based on inter-dealer bid and asked prices without markup, markdown or
commissions and may not represent actual transactions.
YEAR ENDED DECEMBER 31, 2005 HIGH LOW
---------------------------- ------ ------
First Quarter............................................... $16.25 $14.15
Second Quarter.............................................. 21.55 14.94
Third Quarter............................................... 23.55 17.97
Fourth Quarter.............................................. 25.64 19.63
YEAR ENDED DECEMBER 31, 2004 HIGH LOW
---------------------------- ------ ------
First Quarter............................................... $18.26 $10.68
Second Quarter.............................................. 14.90 8.10
Third Quarter............................................... 15.10 11.47
Fourth Quarter.............................................. 16.35 12.89
The last reported sales price of the Common Stock as reported on Nasdaq on
March 8, 2006, was $23.65 per share. As of March 8, 2006, the Company's Common
Stock was held by 6,322 stockholders of record.
Per-Se has never paid cash dividends on its Common Stock. The Amended and
Restated Credit Agreement entered into on January 6, 2006, and the Credit
Agreement entered into on September 11, 2003, as amended, contain restrictions
on the Company's ability to pay dividends (see Note 9 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data for more information).
17
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Per-Se for and as of each of the five fiscal years in the period ended
December 31, 2005.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA
Revenue.................................. $372,718 $352,791 $335,169 $325,564 $305,822
Operating income......................... 40,102 28,934 36,508 29,888 10,957
Interest expense......................... 6,088 6,825 14,646 18,069 18,009
Interest income.......................... (1,655) (525) (297) (471) (1,121)
Loss on extinguishment of debt........... -- 5,896 6,255 -- --
Income tax (benefit) expense(1).......... (1,286) (28,101) 27 800 343
Income (loss) from continuing
operations............................. 36,955 44,839 15,877 11,490 (6,274)
Net income (loss)(2)..................... 37,369 48,158(3) 11,989 8,989 (6,109)(4)
Shares used in computing net income
(loss) per common share -- basic....... 30,084 30,843 30,594 30,061 29,915
Shares used in computing net income
(loss) per common share -- diluted..... 33,386 33,082 32,661 31,966 29,915
PER SHARE DATA
Income (loss) from continuing
operations -- basic.................... $ 1.23 $ 1.45 $ 0.52 $ 0.38 $ (0.21)
Net income (loss) per common
share -- basic......................... $ 1.24 $ 1.56 $ 0.39 $ 0.30 $ (0.20)
Income (loss) from continuing
operations -- diluted.................. $ 1.11 $ 1.36 $ 0.49 $ 0.36 $ (0.21)
Net income (loss) per common share --
diluted................................ $ 1.12 $ 1.46 $ 0.37 $ 0.28 $ (0.20)
AS OF DECEMBER 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital......................... $ 61,968 $ 44,168 $ 20,313 $ 20,602 $ 22,519
Intangible assets....................... 60,145 53,333 52,336 55,494 61,929
Total assets............................ 239,523 202,691 172,084 210,586 203,220
Total debt.............................. 125,625 125,625 121,875 175,020 175,091
Stockholders' equity (deficit)(2)....... 44,516 12,975 (17,612) (37,972) (49,901)
---------------
(1) Includes the release of $2.2 million and $28.1 million of the valuation
allowance against the Company's deferred tax asset resulting in an income
tax benefit that was recorded in the fourth quarters of 2005 and 2004,
respectively.
(2) Reflects the results from discontinued operations of $0.4 million, $3.3
million, $(3.9) million, $(2.5) million and $0.2 million for 2005, 2004,
2003, 2002 and 2001, respectively.
(3) Reflects an expense of approximately $6.3 million related to the additional
procedures performed in 2004, a gain of approximately $1.5 million on the
settlement with Lloyd's of London and an expense of approximately $1.0
million related to the relocation of the Company's principal executive
office.
(4) Reflects expenses of $3.4 million related to a process improvement project.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements about events that
have not yet occurred. All statements, trend analysis and other information
contained below relating to markets, products and trends in revenue, as well as
other statements including words such as "anticipates," "believes" or "expects"
and statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks, and
actual events or the Company's actual future results could differ materially
from those set forth in the forward-looking statements due to such risks and
uncertainties. The Company disclaims any responsibility to update any
forward-looking statement. Risks and uncertainties that may affect future
results and performance include, but are not limited to, those discussed under
the heading "Risk Factors" at pages 7 to 13 of this Annual Report on Form 10-K.
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. The transaction was completed on January 6, 2006. In the acquisition,
Per-Se acquired the physician, hospital and retail pharmacy businesses of
NDCHealth. The retail pharmacy business will be operated as a new division known
as the Pharmacy Solutions division. Accordingly, the Company will serve the
healthcare industry through three divisions, Physician Solutions, Hospital
Solutions and Pharmacy Solutions, effective January 6, 2006. The following
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" addresses the Company's business as of December 31, 2005. Therefore,
discussion related to the business acquired as part of the NDCHealth
acquisition, which closed on January 6, 2006, is not included.
PERFORMANCE MEASUREMENTS IMPORTANT TO MANAGEMENT
The Company's management is focused on profitable revenue growth. The
Company's business model is designed such that revenue is generally recurring in
nature and cash flow generation is relatively consistent. Management follows
certain key metrics in monitoring its performance. Such key metrics include, but
are not limited to:
- net new business sold in the Physician Solutions division (defined by the
Company 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 in the Physician Solutions division (defined by the Company
as 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);
- transaction volume in the Hospital Solutions division;
- new business sold in the Hospital Solutions division;
- sales pipelines and sales personnel productivity in both divisions;
- EBITDA (a non-Generally Accepted Accounting Principle ("GAAP") measure
defined as earnings before interest, taxes, depreciation and
amortization) and operating margins in both divisions;
- days in accounts receivable in both divisions;
- cash flow generated from operations; and
- free cash flow (a non-GAAP measure defined as net cash provided by
continuing operations less investments in capitalized software
development costs and capital expenditures and represents cash flow
available for activities unrelated to operations, such as debt
reduction).
19
The financial health of the Company is also dependent upon its capital
structure. Management tracks its debt-to-EBITDA ratio and interest expense
coverage ratio in monitoring the appropriateness of its capital structure.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes
and Error Correction, ("SFAS No. 154"). SFAS No. 154 supersedes Accounting
Principles Board ("APB") Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
requires the retroactive application of changes in accounting principles to
prior periods' financial statements, unless it is impracticable to determine
either the period specific effects or the cumulative effect of the change. SFAS
No. 154 does not change the guidance for reporting the correction of an error in
previously issued financial statements or the change in an accounting estimate.
SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 31, 2005. The Company does not believe
SFAS No. 154 will have a significant impact on the Company.
On December 16, 2004, the FASB issued 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 APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25"), and amends SFAS No. 95, Statement of Cash Flows. Statement 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 adopted SFAS No. 123(R) on
January 1, 2006 and elected the modified prospective method.
For the years ended December 31, 2005, 2004, and 2003, the Company
accounted for share-based payments to employees using APB Opinion No. 25 and the
intrinsic value method and, as a result, generally recognized no compensation
cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s
fair value method could have a significant impact on the Company's results of
operations, although it will have no impact on the Company's overall cash flow
or financial position. 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 of that standard would have approximated the impact of SFAS No. 123
as described in Note 1 of Notes to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.
In September 2004, the FASB Emerging Issues Task Force ("EITF") reached a
tentative conclusion on Issue Number 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share ("EITF No. 04-08"). The EITF
concluded that contingently convertible debt instruments should be included in
diluted earnings per share computations regardless of whether the market price
trigger has been met. The effective date is for periods ending after December
15, 2004. In November 2004, the Company exercised its irrevocable option to pay
the principal of its contingently convertible debt, its 3.25% Convertible
Subordinated Debentures due 2024, in cash and therefore, EITF No. 04-08 did not
have any effect on the Company's Consolidated Statements of Income.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
20
financial statements as well as the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are those accounting policies that management
believes are both most important to the portrayal of the Company's financial
condition and results, and/or they require management's most difficult,
subjective and/or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
REVENUE RECOGNITION
The Company's revenue is derived from services and products delivered to
the healthcare industry through its two operating divisions:
Physician Solutions provides Connective Healthcare solutions that
manage the revenue cycle for physician groups. The division provides
outsourced revenue cycle management services that are targeted at
hospital-affiliated and academic physician practices. Fees for these
services are primarily based on a percentage of net collections on the
Company's clients' accounts receivable. The division recognizes revenue and
bills its customers when the customers receive payment on those accounts
receivable. Contracts are typically multi-year in length and require no
payment from the customer upon contract signing. Since this is an
outsourced service delivered on the Company's proprietary technology, there
are no license or maintenance fees to be paid by the physician group
customers. The division also recognized approximately 3%, 4% and 5% of its
revenue (or 2%, 3% and 3% of total Company revenue), on a monthly service
fee and per-transaction basis from the physician practice management
("PPM") product line, for the years ended December 31, 2005, 2004, and
2003, respectively. An unbilled receivable is recorded when revenue is
earned, but the customer has not been invoiced due to the terms of the
contract. The Physician Solutions division does not rely, to any material
extent, on estimates in the recognition of revenue. Revenue is recognized
in accordance with Staff Accounting Bulletin ("SAB") No. 104, Revenue
Recognition ("SAB No. 104").
Hospital Solutions provides Connective Healthcare solutions that
improve revenue cycle and resource management for hospitals.
Revenue cycle management solutions primarily include services that
allow a hospital's central billing office ("CBO") to more effectively
manage its cash flow. These services include electronic and paper
transactions, such as claims processing, which can be delivered via the Web
or through dedicated electronic data interfaces and high-speed print and
mail services. Revenue related to these transactions is billed and
recognized when the services are performed on a per-transaction basis.
Contracts are typically multi-year in length. The division also recognizes
revenue related to direct and indirect payments it receives from payers for
the electronic transmission of transactions to the payers. The division
recognizes revenue on these transactions at the time the electronic
transactions are sent. Revenue is recognized on these transactions in
accordance with SAB No. 104.
Resource management solutions include staff and patient scheduling
software that enable hospitals to efficiently manage their resources, such
as personnel and the operating room, to reduce costs and improve their
bottom-line. The resource management software is sold as a one-time license
fee plus implementation services and an annual maintenance fee. Contracts
are typically structured to require a portion of the license fee and
implementation services to be paid periodically throughout the installation
process, including a portion due upon signing. For software contracts that
require the division to make significant production, modification or
customization changes, the division recognizes revenue for the license fee
and implementation services using the percentage-of-completion method over
the implementation period.
The division relies on estimates of work to be completed to determine
the amount of revenue to be recognized on each contract using the
percentage-of-completion method. Because estimates of the extent of
completion that differ from actual results could affect revenue, the
division periodically reviews the estimated hours to complete major
projects and compares these estimates to budgeted
21
hours to support the revenue recognized on that project. Approximately 7%,
8% and 9% of the division's revenue (or 2%, 2% and 2% of total Company
revenue) was determined using the percentage-of-completion method of
accounting for the years ended December 31, 2005, 2004, and 2003,
respectively.
When the division receives payment prior to shipment or fulfillment of
its significant obligations, the Company records such payments as deferred
revenue and recognizes them as revenue upon shipment or fulfillment of
significant vendor obligations. An unbilled receivable is recorded when the
division recognizes revenue on the percentage-of-completion basis prior to
achieving a contracted billing milestone. Additionally, an unbilled
receivable is recorded when revenue is earned, but the customer has not
been invoiced due to the terms of the contract. For minor add-on software
license sales where no significant customization remains outstanding, the
fee is fixed, an agreement exists and collectibility is probable, the
division recognizes revenue upon shipment. For software maintenance, the
division defers billed maintenance and recognizes revenue ratably over the
term of the maintenance agreement, which is typically one year. Revenue
recognized on the percentage-of-completion basis is done so in accordance
with AICPA Statement of Position ("SOP") 81-1, Accounting for Performance
of Construction Type and Certain Production Type Contracts. Revenue
recognized upon software shipment is done so in accordance with Statement
of Position 97-2, Software Revenue Recognition ("SOP 97-2").
For arrangements that include one or more elements, or
multiple-element arrangements, to be delivered at a future date, revenue is
recognized in accordance with SOP 97-2 as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2, as amended, requires the Company to allocate
revenue to each element in a multiple-element arrangement based on the
element's respective vendor-specific objective evidence, or VSOE, of fair
value. Where VSOE does not exist for all delivered elements (typically
software license fees) revenue from multiple-element arrangements is
recognized using the residual method. Under the residual method, if VSOE of
the fair value of the undelivered elements exists, the Company defers
revenue recognition of the fair value of the undelivered elements. The
remaining portion of the arrangement fee is then recognized either by using
the percentage-of-completion method if significant production, modification
or customization is required or upon delivery, assuming all other
conditions for revenue recognition have been satisfied. VSOE of fair value
of maintenance services is based upon the amount charged for maintenance
when purchased separately, which is the renewal rate. Maintenance services
are typically stated separately in an arrangement. VSOE of fair value of
professional services (i.e. implementation, consulting services and
training classes not essential to the functionality of the software) is
based upon the price charged when professional services are sold separately
and is based on an hourly rate or per training class fee.
AMORTIZATION AND VALUATION OF INTANGIBLES
Amortization of intangible assets includes the amortization of client
lists, developed technology and software development costs. The Company relies
on estimates of the useful lives and net realizable value, as appropriate, of
these assets on which to base its amortization. The Company bases these
estimates on historical experiences, market conditions, expected future revenues
and maintenance costs and the products or services provided. The Company
periodically evaluates whether to revise estimates of the remaining useful lives
of the intangible. Additionally the Company evaluates whether any changes would
render its intangibles impaired or indicate that an asset has a different useful
life. Conditions that may indicate an impairment include an economic downturn or
change in future operations. In the event such a condition exists, the Company
performs an assessment using a variety of methodologies, including cash flow
analysis, estimates of sales proceeds and independent appraisals. Where
applicable, the estimate uses an appropriate interest rate based on appropriate
discount rates.
Goodwill -- Goodwill represents the excess of the cost of businesses
acquired and the value of their workforce in the Physician Solutions
division in 1995 and the Hospital Solutions division from 1995 to 2005,
over the fair market value of their identifiable net assets. As a result of
the Company's
22
reorganization in July 2003, the Company transferred the estimated fair
value of the goodwill associated with the PPM assets to the Physician
Solutions division from the Hospital Solutions division. In accordance with
SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), the
Company no longer amortizes goodwill but reviews it annually for
impairment.
Trademarks -- Trademarks represent the value of the trademarks
acquired in the Hospital Solutions division from 2000 to 2005. The Company
expects the trademarks to contribute to cash flows indefinitely and
therefore deems the trademarks to have indefinite useful lives. In
accordance with SFAS No. 142, the Company no longer amortizes trademarks
but reviews them annually for impairment.
SFAS No. 142 requires companies with goodwill and other indefinite
lived intangible assets to complete a periodic review and impairment test
of its goodwill and other indefinite lived intangible assets. The Company
performed its periodic review of its goodwill and other indefinite lived
intangible assets for impairment as of December 31, 2005, and did not
identify an asset impairment as a result of the review. The Company's
periodic review of its goodwill and other indefinite lived intangible
assets was based upon a discounted future cash flow analysis that included
revenue and cost estimates, market growth rates and appropriate discount
rates. The Company will continue to test its goodwill and other indefinite
lived intangible assets annually for impairment as of December 31 or sooner
if indicators of impairment exist.
Client Lists -- Client lists represent the value of clients acquired
in the Physician Solutions division from 1992 to 1996 and the Hospital
Solutions division from 1995 to 2005. The Company amortizes client lists
using the straight-line method over their estimated useful lives, which
range from five to ten years.
Developed Technology -- Developed technology represents the value of
the systems acquired in the Hospital Solutions division from 2000 to 2005.
The Company amortizes these intangible assets using the straight-line
method over their estimated useful lives of five years.
Software Development Costs -- Software development includes costs
incurred in the development or the enhancement of software in the Physician
Solutions and Hospital Solutions divisions for resale or internal use.
Software development costs related to external use software are
capitalized upon the establishment of technological feasibility for each
product and capitalization ceases when the product or process is available
for general release to customers. Technological feasibility is established
when all planning, designing, coding and testing activities required to
meet a product's design specifications are complete. The Company amortizes
external use software development costs over the greater of the ratio that
current revenues bear to total and anticipated future revenues for the
applicable product or straight-line method over the estimated economic
lives of the assets, which are generally three to five years. The Company
monitors the net realizable value of all capitalized external use software
development costs to ensure that it can recover the investment through
future sales.
Software development costs related to internal use software are
capitalized after the preliminary project stage is complete, when
management with the relevant authority authorizes and commits to the
funding of the software project, when it is probable that the project will
be completed, and the software will be used to perform the function
intended. Capitalization ceases no later than the point at which the
project is substantially complete and ready for its intended use. The
Company expenses software development costs related to internal use
software as incurred during the planning and post-implementation phases of
development. Internal-use software is amortized on a straight-line basis
over its estimated useful life, generally five years.
23
GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken by issuing the guarantee. FIN No. 45 also
requires additional disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees it
has issued. Certain of the Company's sales agreements contain infringement
indemnity provisions that are covered by FIN No. 45. Under these sales
agreements, the Company agrees to defend and indemnify a customer in connection
with infringement claims made by third parties with respect to the customer's
authorized use of the Company's products and services. The indemnity obligations
contained in sales agreements generally have no specified expiration date and
generally limit the award to the amount of fees paid. The Company has not
previously incurred costs to settle claims or pay awards under these
indemnification obligations. Also, the Company maintains membership in a group
captive insurance company for its workers compensation insurance. The member
companies agree to jointly insure the group's liability risks up to a certain
threshold. As a member, the Company guarantees to pay an assessment, if an
assessment becomes due, as a result of insured losses by its members. This
guarantee will never exceed a percentage of the Company's loss funds (an amount
that is based on the Company's insured five-year loss history). The Company
issues a letter of credit to the group captive insurance company as security for
potential assessments and to meet any surplus needs. At December 31, 2005, and
2004, the Company had outstanding letters of credit to the group captive
insurance company amounting to approximately $1.8 million and $1.5 million,
respectively. As a result, the Company's estimated fair value of the
infringement indemnity provision obligations and the captive insurance guarantee
is nominal.
OTHER
Additionally, the Company does not have:
-- Material exposure to foreign exchange fluctuations
-- Any derivative financial instruments
-- Any material off-balance sheet arrangements other than its operating
leases disclosed in Notes 9 and 10 of Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data and certain vendor
financing arrangements in the ordinary course of business or
-- Any material related party transactions
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 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.
The Company's business is focused on the U.S. healthcare industry,
specifically on the administrative functions of healthcare providers. The
healthcare industry is generally not impacted by wider trends in the U.S.
economy. The Company's revenue may be impacted by payer reimbursement rates for
physicians, but typically the mix of rate increases or decreases for the
different physician specialties the Company supports results in a typically
nominal impact on the Physician Solutions division as well as consolidated
results, as was the case during 2005. The Hospital Solutions division may be
impacted by the overall hospital-spending environment, but as revenue for the
division's services and products are generated primarily by either
transaction-based fees or supported by the maintenance fees from its substantial
installed base,
24
versus software license and implementation fees, division or consolidated
results are not typically materially impacted.
Consolidated revenue and operating income for the year ended December 31,
2005, increased as compared to the same period of 2004. Consolidated operating
margins increased from 8.2% in 2004 to 10.8% in 2005 due to an improvement in
operating performance that was partially offset by an approximate $1.0 million
expense in 2005 related to the conclusion of binding arbitration of a claim of
breach of contract arising from an acquisition completed in 2000. In addition,
several atypical items contributed to increased operating expenses in 2004 that
did not occur during 2005. In particular, the Company incurred expenses of
approximately $6.3 million in 2004 related to the additional procedures as part
of the year-end 2003 audit. The Company also incurred approximately $1.9 million
of expenses related to the initiative to comply with the requirements of Section
404(a) of the Sarbanes-Oxley Act, compared to $1.4 million in 2005, as well as
approximately $1.0 million in expenses associated with the relocation of the
Company's corporate office in July 2004. All three of these items were
classified in the Corporate segment. Margins were also negatively impacted in
2004 by the deferral and delay of revenue in the Physician Solutions division.
Specifically, the division deferred approximately $0.8 million in revenue
related to a large contract for which the division has performance targets as
well as the delay of approximately $1.5 million in revenue related to a
technical problem in transmitting electronic claims to payers. The $0.8 million
in revenue was deferred and all expenses related to the contract were recorded
during 2004. The $1.5 million in revenue was delayed during the fourth quarter
of 2004, and was recognized during the first quarter of 2005. All expenses
related to generating the claims were recorded in the fourth quarter of 2004.
Partially offsetting these negative items was a gain of $1.5 million that the
Company recognized in the third quarter of 2004 in conjunction with a settlement
with its former insurance underwriters, Lloyd's of London, which was recorded in
the Corporate segment.
The Company has improved its capital structure, evidenced by decreased
interest expense. Interest expense in 2005 decreased by $0.7 million, or 11%,
compared to 2004, and interest expense in 2004 decreased approximately $7.8
million, or 53%, compared to 2003. Both reductions were due to decreases in the
Company's effective interest rate. These reductions resulted from the debt
refinancing undertaken in September 2003 combined with another refinancing in
June 2004, which further lowered the Company's interest rate to a fixed 3.25%.
The Company incurred expenses of approximately $6.3 million related to the
September 2003 refinancing and approximately $5.9 million related to the June
2004 refinancing. The Company believes these refinancings, which improved its
borrowing rate, earnings and cash flow generation, were important steps in
effectively managing its capital structure.
In addition, the business continued to generate positive cash flow from
continuing operations in 2005. Cash flow from continuing operations in 2005 was
relatively flat at $48.8 million as compared to 2004. However, 2004 included
several atypical items that increased cash flow, as mentioned previously. Cash
flow from continuing operations was $48.9 million for the year ended December
31, 2004, which was an increase of approximately 72% over the Company's
performance in 2003.
RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes.
25
YEARS ENDED DECEMBER 31, 2005 AND 2004
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004
---------- ----------
(IN THOUSANDS)
Physician Solutions......................................... $274,576 $260,473
Hospital Solutions.......................................... 112,282 105,923
Eliminations................................................ (14,140) (13,605)
-------- --------
$372,718 $352,791
======== ========
Revenue for the Physician Solutions division increased approximately 5% in
2005 compared to 2004. Pricing for the division's services and products was
stable compared to the prior year period. The revenue increase in the physician
outsource business is due to the implementation of the record levels of net new
business sold during 2004 and 2005. Approximately $1.5 million of the $14.1
million revenue increase in 2005 related to revenue that was delayed from the
quarter ended December 31, 2004, due to a technical problem in the claims
clearinghouse. Net new business sold during 2005 was a record $25 million
compared to the record level of net new business sold in 2004 of $19 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 December 31, 2005, was
approximately $12 million, compared to the net backlog of approximately $5
million at December 31, 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 Solutions division increased approximately 6% in
2005 compared to 2004. Pricing for the division's services and products was
stable compared to the prior year period. Revenue growth in the division is due
to the implementation of new business sold during 2004 and 2005. Additionally,
2004 revenue included previously unbilled maintenance revenue that was not
included in 2005 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 Solutions division revenue includes intersegment revenue for
services provided to the Physician Solutions division, which is shown as
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:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004
---------- ----------
(IN THOUSANDS)
Physician Solutions......................................... $ 31,345 $ 27,566
Hospital Solutions.......................................... 24,367 23,323
Corporate................................................... (15,610) (21,955)
-------- --------
$ 40,102 $ 28,934
======== ========
Physicians Solutions' segment operating income increased 14% in 2005 over
2004, resulting in an operating margin of approximately 11.4% versus
approximately 10.6% in the prior year. 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 also negatively impacted
26
by the deferral of approximately $0.8 million in revenue related to a large
Physician Solutions contract. While the division was unable to recognize the
revenue related to the revenue delay and the revenue deferral, all related
expenses were recorded during 2004. Margins in the current year were negatively
impacted by results for the division's PPM solution, which represents
approximately 3% of the division's total revenue in 2005. The Company completed
the conversion of its PPM customers to a new system platform in 2005. The
Company incurred costs during 2005 to support both the legacy platform and the
new platform, resulting in negative margins for this business.
Hospital Solutions' segment operating income increased approximately 4% in
2005 over 2004, and operating margins were approximately 21.7% versus
approximately 22.0% in the prior year. The current year includes approximately
$1.6 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.
The Company's corporate overhead expenses, which include certain executive
and administrative functions, decreased approximately $6.3 million, or
approximately 29% in 2005 over 2004. Expenses in 2005 were negatively impacted
by an approximate $1.0 million related to the conclusion of binding arbitration
of a claim of breach of contract arising from an acquisition completed in 2000.
In 2004, Corporate overhead expenses included approximately $6.3 million of
expenses related to the additional procedures performed in 2004, approximately
$1.9 million of professional services expense related to the Company's
initiative to comply with the requirements of Section 404(a) of the
Sarbanes-Oxley Act as compared to $1.4 in 2005, a gain of approximately $1.5
million on the settlement with Lloyd's of London and an expense of approximately
$1.0 million related to the relocation of the Company's principal executive
office (refer to Note 2 of Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data on pages F-14 to F-15 for more information).
Interest. In June 2004, the Company refinanced its debt and reduced its
interest rate by issuing $125 million aggregate principal amount of 3.25%
Convertible Subordinated Debentures due 2024. This resulted in the reduction of
interest expense of approximately $1.0 million in 2005 as compared to 2004
(refer to Note 9 of Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data on pages F-20 to F-22 for more information).
Interest expense was approximately $6.1 million for the year ended December 31,
2005, as compared to approximately $6.8 million for the same period in 2004.
Other Expenses. On March 10, 2006, the Company concluded binding
arbitration for a claim of breach of contract arising from an acquisition
completed in 2000. The binding arbitration resulted in an award to be paid by
Per-Se of approximately $1.3 million, including interest of $0.3 million. The
Company included the award in Other Expenses and the interest in Interest
Expense in the Company's 2005 Consolidated Statement of Income. In Note 18, the
costs associated with the award are classified in the Corporate segment.
Income Taxes. Income tax (benefit) expense, which is related to federal,
state, local and foreign income taxes, was a benefit of approximately ($1.3)
million and a benefit of $(28.1) during the years ended December 31, 2005, and
2004, respectively.
As of December 31, 2005, and 2004, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a partial valuation allowance of $125.3 and $137.4 million was
required as of December 31, 2005, and 2004, respectively. Realization of the net
deferred tax asset is dependent upon the Company generating sufficient taxable
income prior to the expiration of the federal and state net operating loss
carryforwards. The Company determined during 2005 and 2004 that it was more
likely than not that a portion of the deferred tax asset would be realized
during the foreseeable future; therefore, the valuation allowance was adjusted
accordingly. The Company recognized a non-cash tax benefit of approximately $2.2
million and $28.1 million during 2005 and 2004, respectively, as a result of the
valuation allowance adjustment. At December 31, 2005, the Company had federal
net operating loss carryforwards ("NOLs") for income tax purposes of
approximately $375.4 million. The NOLs will expire at various dates between 2006
and 2024 (refer to Note 15 of Notes
27
to Financial Statements in Item 8. Financial Statements and Supplementary Data
on pages F-27 to F-29 for more information regarding NOL expiration dates and
respective amounts).
Discontinued Operations. In June 2003, the Company announced that it
agreed to sell its Patient1 clinical product line ("Patient1") to Misys
Healthcare Systems, a division of Misys plc ("Misys") for $30 million in cash.
The Company entered into binding arbitration with Misys regarding the final
closing adjustments and on May 21, 2004, the arbitrator awarded the Company
approximately $4.3 million. On June 1, 2004, the Company received payment of
approximately $4.5 million, which included interest of approximately $0.2
million. In December 2005, the Company determined that payment was not required
on a Patient1 tax liability that was not included in the sale to Misys.
Therefore, the approximately $0.4 million liability was reversed and recognized
as income in the Company's Consolidated Statements of Income.
In September 2003, the Company initiated a process to sell its Business1
patient accounting product line ("Business1"). On February 2, 2004, the Company
announced the sale of Business1, effective January 31, 2004, to a privately held
company for $0.6 million. No cash consideration was received at closing and the
Company has not recognized proceeds on the sale. The Company does not anticipate
receiving payment for the sale of Business1, however, the sale improved the
Company's profitability and cash flow.
YEARS ENDED DECEMBER 31, 2004 AND 2003
Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
---------- ----------
(IN THOUSANDS)
Physician Solutions......................................... $260,473 $251,251
Hospital Solutions.......................................... 105,923 97,240
Eliminations................................................ (13,605) (13,322)
-------- --------
$352,791 $335,169
======== ========
Revenue for the Physician Solutions division increased approximately 4% in
2004 compared to 2003. The revenue increase is due to the implementation of net
new business sold during the first six months of 2004 as well as prior periods.
Pricing for the division's services during 2004 was consistent with the prior
year.
For the year ended December 31, 2004, the Company deferred approximately
$0.8 million in revenue related to a large contract signed in 2004. The revenue
deferral was required because the interim measurement periods specified in the
contract do not coincide with the Company's quarterly reporting periods. As a
result, a portion of the fees the Company received under this contract were
subject to an interim performance target for a fiscal quarter ending after
December 31, 2004, and consequently, were not considered fixed and determinable
for revenue recognition purposes at the end of the year. All expenses incurred
by the Company related to the contract for the year ended December 31, 2004,
were recorded during 2004.
During December 2004, the Company experienced a technical problem in its
physician claims clearinghouse that resulted in a delay in transmitting
electronic claims to payers for its Physician Solutions division. The delay in
transmitting claims adversely impacted the timing of reimbursement from payers,
and reduced revenue recognized by the Physician Solutions division during the
quarter ended December 31, 2004, by approximately $1.5 million. The Company
recognized this revenue during the first quarter of 2005.
The division had a positive net backlog of approximately $5 million as of
December 31, 2004, compared to a negative net backlog of approximately $2
million at December 31, 2003. The Company focuses on maintaining a positive net
backlog and believes it is a useful indicator of future revenue growth.
Revenue for the Hospital Solutions division increased approximately 9% in
2004 compared to 2003. Pricing for the division's products and services in 2004
was consistent with the prior year. Revenue growth
28
in the division was positively impacted by an increase in resource management
revenue of approximately 8%, which was equally attributable to the
implementation of new business sold as well as previously unbilled maintenance
for certain resource management software customers for which revenue was
recognized upon receipt of payment. Revenue growth was also positively impacted
by an increase in revenue cycle management revenue of approximately 9%. This
growth is evidenced by the medical transaction volume increase of approximately
14% for the period over 2003. The increase in revenue for revenue cycle
management services and the medical transaction volume increase primarily
resulted from new business sold during the second quarter of 2004. Transaction
volume growth and revenue growth can differ 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 Solutions division revenue includes intersegment revenue for
services provided to the Physician Solutions division, which is shown as
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:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
---------- ----------
(IN THOUSANDS)
Physician Solutions......................................... $ 27,566 $ 29,356
Hospital Solutions.......................................... 23,323 22,569
Corporate................................................... (21,955) (15,417)
-------- --------
$ 28,934 $ 36,508
======== ========
Physicians Solutions' segment operating income decreased 6% in 2004 over
2003, resulting in an operating margin of approximately 10.6% in 2004 versus
approximately 11.7% in 2003. Margins for 2004 were negatively impacted by costs
associated with the implementation of approximately $16 million of net new
business sold during the first nine months of 2004, compared to net new business
sold of $5 million in the first nine months of 2003. Because the division
recognizes revenue on a percentage of cash collections, costs are typically
incurred in the first three months of implementing a contract before revenue is
recognized. The operating margin for 2004 was negatively impacted by the
deferral of approximately $0.8 million of revenue, as well as the delay of
approximately $1.5 million of revenue, as previously mentioned, as all related
expenses were recorded during 2004.
Hospital Solutions' segment operating income increased approximately 3% in
2004 over 2003, and operating margins were approximately 22.0% in 2004 versus
approximately 23.2% in 2003. The operating margin decline can be attributed to a
large print and mail customer contract, signed in the second quarter of 2004,
which was profitable for 2004 but below the normal profitability level for print
and mail contracts, which negatively impacted margins by approximately 1.4% in
2004. As part of the transaction in signing the customer, the Company acquired
substantially all of the production assets and personnel of the customer's
hospital and physician patient statement and paper claims print and mail
business. The division consolidated this operation into its existing print and
mail facility located in Lawrenceville, Georgia during the first half of 2005,
which improved margins for this contract. The operating margin decline was
partially offset by unbilled maintenance revenue for certain resource management
software customers that was recognized upon receipt of payment, which positively
impacted margins by 1.2% in 2004.
The Company's corporate overhead expenses, which include certain executive
and administrative functions, increased approximately $6.5 million, or
approximately 42% in 2004 over 2003. Corporate overhead expenses included
approximately $6.3 million of expenses related to the additional procedures
performed in 2004, approximately $1.9 million of professional services expense
related to the Company's initiative to comply with the requirements of Section
404(a) of the Sarbanes-Oxley Act, a gain of approximately $1.5 million on the
settlement with Lloyd's of London, a decrease in insurance expense of
approximately $1.4 million, and an expense of approximately $1.0 million related
to the relocation of the
29
Company's principal executive office (refer to Note 2 of Notes to Financial
Statements in Item 8. Financial Statements and Supplementary Data on pages F-14
to F-15 for more information).
Interest. Interest expense was approximately $6.8 million for the twelve
months ended December 31, 2004, as compared to approximately $14.6 million for
the same period in 2003.
In 2003, the Company permanently retired $50 million of its then
outstanding debt of $175 million. The Company refinanced the remaining balance
of $125 million at substantially lower interest rates through the issuance of
term loan debt. Subsequently, in June 2004, the Company refinanced its debt and
further reduced its interest rate by issuing $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024. These actions
resulted in the reduction of interest expense of approximately $7.8 million in
2004 as compared to 2003 (refer to Note 9 of Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data on pages F-20 to F-22 for
more information).
Loss on Extinguishment of Debt. During the year ended December 31, 2004,
in connection with the retirement of the Company's then-outstanding $118.8
million under the Term Loan B, the Company wrote off approximately $3.5 million
of deferred debt issuance costs associated with the Term Loan B. Additionally,
the Company incurred a prepayment penalty of approximately $2.4 million due to
the early retirement of the Term Loan B.
During the year ended December 31, 2003, the Company incurred a write-off
of approximately $1.6 million of deferred debt issuance costs associated with
the retirement of its then outstanding debt and incurred expenses associated
with the retirement of approximately $4.7 million.
Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's external auditors advised the Company and the Audit
Committee of the Board of Directors that additional procedures should be
performed related to the allegations. These additional procedures were required
due to Statement of Auditing Standards No. 99, Consideration of Fraud in a
Financial Statement Audit, ("SAS No. 99"), which 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 Company recorded costs related to the additional procedures totaling
approximately $6.3 million during the twelve months ended December 31, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Income. In segment reporting, these costs 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 twelve months ended December
31, 2004. The gain has been reflected in the Company's Corporate segment. In the
Consolidated Statement of Income, the gain is included in other 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 July 2014. While the
new landlord assumed the payments for the lease of the Company's former
corporate office, the Company recorded an 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 Income, the
expense is included in other expenses.
During the year ended December 31, 2003, the Hospital Solutions and
Corporate divisions incurred approximately $0.5 million and $0.3 million,
respectively, of restructuring expenses related to the July 2003 realignment of
the Company into the Physician Solutions and Hospital Solutions divisions
following the Patient1 divestiture.
Income Taxes. Income tax (benefit) expense, which is related to federal,
state, local and foreign income taxes, was a benefit of approximately ($28.1)
million and an expense of $27,000 during the years ended December 31, 2004, and
2003, respectively. The 2003 income tax expense was offset by a benefit for
30
a federal income tax refund of approximately $0.8 million related to the gain on
the sale of Healthcare Recoveries, Inc. ("HRI"), resulting in a net tax expense
of $27,000.
As of December 31, 2004, and 2003, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a full valuation allowance against the deferred tax asset of $167.3
million was required as of December 31, 2003, and a partial valuation allowance
of $137.4 million was required as of December 31, 2004. Realization of the net
deferred tax asset is dependent upon the Company generating sufficient taxable
income prior to the expiration of the federal and state net operating loss
carryforwards. The Company determined during 2004 that it was more likely than
not that a portion of the deferred tax asset would be realized during the
foreseeable future; therefore, the valuation allowance was adjusted accordingly.
The Company recognized a non-cash tax benefit of approximately $28.1 million
during 2004 as a result of the valuation allowance adjustment. At December 31,
2004, the Company had federal net operating loss carryforwards ("NOLs") for
income tax purposes of approximately $393.7 million.
Discontinued Operations. In June 2003, the Company announced that it
agreed to sell Patient1 to Misys for $30 million in cash. Patient1 was the
Company's only clinical product line and its sale allowed the Company to better
focus on improving reimbursement and administrative efficiencies for physician
practices and hospitals. The sale was completed on July 28, 2003. The Company
recognized a gain on the sale of Patient1 of approximately $10.4 million,
subject to closing adjustments, in 2003. Net proceeds on the sale of Patient1
were approximately $27.9 million, subject to closing adjustments. The Company
entered into binding arbitration with Misys regarding the final closing
adjustments and on May 21, 2004, the arbitrator awarded the Company
approximately $4.3 million. On June 1, 2004, the Company received payment of
approximately $4.5 million, which included interest of approximately $0.2
million.
In September 2003, the Company initiated a process to sell Business1. As
with the sale of Patient1, the discontinuance of Business1 allowed the Company
to focus resources on solutions that provide meaningful, strategic returns for
the Company, its customers and its shareholders. Pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"),
the Company wrote down the net assets of Business1 to fair market value less
costs to sell and incurred an $8.5 million expense. On February 2, 2004, the
Company announced the sale of Business1, effective January 31, 2004, to a
privately held company for $0.6 million.
Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Summarized operating results for the
discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2004 2003
---------------------------- ---------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1(1) BUSINESS1 TOTAL
-------- --------- ----- ----------- --------- -------
(IN THOUSANDS)
Revenue..................... $ -- $ 106 $ 106 $15,247 $ 474 $15,721
==== ===== ===== ======= ======= =======
Loss from discontinued
operations before income
taxes..................... $(18) $(303) $(321) $(1,270) $(3,589) $(4,859)
Income tax expense.......... -- -- -- 46 -- 46
---- ----- ----- ------- ------- -------
Loss from discontinued
operations, net of tax.... $(18) $(303) $(321) $(1,316) $(3,589) $(4,905)
==== ===== ===== ======= ======= =======
---------------
(1) Patient1 financial information includes activity through the sale date of
July 28, 2003.
On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment. Pursuant to APB No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, the
consolidated financial statements of the Company have been presented to reflect
the activity associated with MSC and Impact as discontinued operations for all
periods presented.
31
During the years ended December 31, 2004, and 2003, the Company incurred
expenses of approximately $14,000 and $0.9 million, respectively, which were
primarily legal costs associated with MSC and Impact. These expenses were
recognized through (loss) income from discontinued operations in the Company's
Consolidated Statements of Income.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of the Company's cash balances and cash
flows from continuing operations for the years ended December 31, 2005, and 2004
(in thousands):
2005 2004
-------- --------
Unrestricted cash and cash equivalents at December 31....... $ 61,161 $ 42,422
Cash provided by continuing operations...................... $ 48,773 $ 48,924
Cash used for investing activities from continuing
operations................................................ $(23,657) $(10,581)
Cash used for financing activities from continuing
operations................................................ $ (6,377) $(20,758)
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 at December 31, 2005, and December 31, 2004, of
approximately $20,000 and $51,000, respectively, represents amounts collected on
behalf of certain Physician Solutions and Hospital Solutions clients, a portion
of which is held in trust until it is remitted to such clients.
During 2005, the Company generated approximately $48.8 million in cash from
continuing operations which includes cash generated from normal operations
offset by interest payments of approximately $4.5 million.
During 2004, the Company generated approximately $48.9 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 Lloyd's of London
(refer to "Note 9 -- Legal Matters" in the Company's Notes to Consolidated
Financial Statements for more information), offset by cash payments related to
additional procedures necessary under SAS No. 99 totaling approximately $6.3
million (refer to "Note 2 -- 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 Lloyd's of London and interest payments of approximately $5.7
million.
During 2005, cash used for investing activities from continuing operations
was approximately $23.7 million consisting primarily of approximately $14.2
million for capital expenditures and investment in software development costs,
approximately $5.7 million of cash used for current and prior year acquisitions
and $3.8 million in transaction costs related to the acquisition of NDCHealth.
During the latter part of 2004, the Company initiated a project to enhance
substantially its physician claims clearinghouse functionality. During 2005, the
Company invested approximately $1.9 million for capital expenditures and
capitalized software development costs related to this project.
During 2004, cash used for investing activities from continuing operations
was approximately $10.6 million consisting primarily of approximately $13.0
million for capital expenditures and investment in software development costs
and approximately $1.1 million of cash used for an acquisition, partially offset
by approximately $3.7 million of net proceeds related to the final closing
adjustments from the July 2003 sale of Patient1.
During 2005, the Company used approximately $6.4 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 $9.2 million.
On March 9, 2005, the Company announced that the Board 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 to be used for general corporate purposes.
32
During 2005, the Company repurchased one million shares of its outstanding
Common Stock at a cost of approximately $15.4 million.
During 2004, the Company used approximately $20.8 million in cash for
financing activities. On June 30, 2004 the Company raised $125 million from the
sale of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
and retired the $118.8 million then outstanding under the Term Loan B
concurrently with the completion of the Convertible Debenture offering. On June
30, 2004, the Company also completed an amendment to the Revolving Credit
Facility to increase its capacity and lower the Company's borrowing rate. The
Revolving Credit Facility's capacity was expanded from $50 million to $75
million and the facility's maturity was extended to three years. The Company
incurred a prepayment penalty on the early retirement of the Term Loan B
totaling $2.4 million in addition to financing costs of approximately $3.5
million related to the Convertible Debenture 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 partially offset by proceeds from
the exercise of stock options of approximately $7.4 million.
For more information about the Company's long-term debt, refer to "Note
9 -- Long-Term Debt" in the Company's Notes to Consolidated Financial
Statements.
On January 6, 2006, Per-Se acquired Atlanta, GA-based NDCHealth. The
acquisition included the physician, hospital and retail pharmacy businesses, for
total consideration of approximately $665 million. As part of the transaction,
Wolters Kluwer Health, Inc., wholly owned by Wolters Kluwer NV, based in
Amsterdam, the Netherlands, purchased the pharmaceutical information management
business from NDCHealth for $382 million in cash. The transaction resulted in
consideration to NDCHealth's shareholders of $19.50 per share, with $14.05 paid
in cash and $5.45 paid in Per-Se stock. As of December 31, 2005, the Company had
incurred approximately $3.8 million of transaction costs that are included in
other long-term assets in the Company's Consolidated Balance Sheet.
In connection with the acquisition, the Company also secured financing in
the form of a new senior credit facility consisting of a $435 million Term Loan
B and a $50 million revolving credit facility ("Senior Credit Facility"). The
Term Loan B bears interest at a rate of LIBOR plus 2.25% or Base Rate, as
defined by the Senior Credit Facility, plus 1.25% and matures in seven years.
The revolving credit facility has an interest rate that varies between LIBOR
plus 1.50% and LIBOR plus 2.50% or between Base Rate plus 0.5% and Base Rate
plus 1.50%, based on performance, and matures in five years. The Company has
incurred no borrowings under the revolving credit facility. All outstanding debt
of NDCHealth was retired in connection with the closing of the transaction.
During 2004, the Company reached a settlement with Lloyd's. In the
settlement, Lloyd's agreed to pay the Company $20 million in cash by July 9,
2004. Lloyd's also agreed to defend, settle or otherwise resolve at their
expense the two remaining pending claims covered under the errors and omissions
("E&O") policies issued to the Company by Lloyd's. In exchange, the Company
provided Lloyd's with a full release of all E&O and directors and officers and
company reimbursement ("D&O") policies. The California Superior Court retained
jurisdiction to enforce any aspect of the settlement agreement.
As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O settlements covered by Lloyd's. Effective
on May 12, 2004, as a result of negotiations among the Company, Lloyd's, and a
party to a prior E&O settlement with the Company, the Lloyd's settlement was
amended to reduce by $3.8 million the additional amounts to be paid by the
Company under the prior E&O settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
Lloyd's receivable by $3.8 million. On July 7, 2004, pursuant to the settlement
as amended, Lloyd's paid the Company $16.2 million in cash.
33
During the course of litigation the Company funded the legal costs and any
litigation settlements related to E&O claims covered by the Lloyd's E&O
policies. These items negatively impacted the Company's cash flow for the year
ended December 31, 2004, by approximately $5.7 million, which consisted of
approximately $2.1 million related to the cost of pursuing the litigation
against Lloyd's and approximately $3.6 million related to the funding of legal
costs and litigation settlements covered by the Lloyd's E&O policies. The
negative impact of these items on the Company's cash flow for the year ended
December 31, 2003, was approximately $7.4 million, which consisted of
approximately $2.1 million related to insurance premium increases for new
insurance coverage and the cost of pursuing the litigation against Lloyd's and
approximately $5.3 million related to the funding of legal costs and litigation
settlements covered by the Lloyd's E&O policies.
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. 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.
The Company has not experienced material changes in the underlying
components of cash generated by operating activities from continuing operations.
The Company believes that existing cash and the cash provided by operations will
provide sufficient capital to fund its working capital requirements, contractual
obligations, investing and financing needs.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual obligations as of
December 31, 2005:
PAYMENTS DUE BY PERIOD AS OF DECEMBER 31, 2005
------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1 - 3 YEARS 3 - 5 YEARS 5 YEARS
-------- --------- -------------- -------------- ---------
(IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
Long-term debt................ $125,000 $ -- $ -- $ -- $125,000
Operating lease obligations... 59,216 12,028 17,764 13,002 16,422
Capital lease obligations..... 625 135 281 209 --
Purchase obligations
Capital expenditure
obligations.............. 1,791 1,791 -- -- --
Other purchase
obligations.............. 874 874 -- -- --
Other long-term liabilities
reflected on the Company's
Balance Sheet under GAAP:
Restructuring reserves and
other(1)................. 807 232 366 198 11
Software maintenance
agreements............... 551 275 276 -- --
-------- ------- ------- ------- --------
Total........................... $188,864 $15,335 $18,687 $13,409 $141,433
======== ======= ======= ======= ========
---------------
(1) The amounts reflected under restructuring reserves and other are amounts
reserved for estimated lease termination costs associated with the Company's
Physician Solutions division's 1995 restructuring. For more information, see
"Note 5 -- Restructuring Expenses" in the Company's Notes to Consolidated
Financial Statements.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, the Company does not expect any
fluctuation in the prevailing interest rates to have a material effect on its
financial statements.
The Company has the option of entering into loans based on LIBOR or on Base
Rates under the Revolving Credit Facility and Term Loan B. As such, the Company
could experience fluctuations in interest rates under the Revolving Credit
Facility and Term Loan B.
In connection with the acquisition of NDCHealth on January 6, 2006, the
Company secured financing in the form of a new senior credit facility consisting
of a $435 million Term Loan B and a $50 million revolving credit facility. Also
on January 6, 2006, the Company entered into a four-year interest rate swap
agreement, in order to hedge against potential interest rate fluctuations
resulting from the variable interest rate under the terms of the new senior
credit facility. Pursuant to the terms of the interest rate swap, the Company is
obligated to periodically pay an amount based on a fixed interest rate, and the
Company will receive an amount based on a variable rate. The variable rate is
based on the three-month LIBOR rate available at the time. By entering into the
interest rate swap, the Company has effectively fixed the maximum interest rate
that the Company will pay on a portion of the $435 million outstanding under the
Credit Facility at 4.76% per annum plus the applicable spread, which is 225
basis points. The amount of the Credit Facility that is covered by the swap is
$125 million in years one and two, decreasing to $100 million in year three and
$75 million in year four. The interest rate swap will terminate on December 31,
2009, unless sooner terminated pursuant to its terms.
The floating rate debt outstanding under the Term Loan B which is not
subject to the above referenced interest rate swap agreement subjects the
Company to risk resulting from changes in short-term interest rates. The
potential change in annual interest expense resulting from a hypothetical 100
basis point change in short-term interest rates applied to the Company's
floating rate debt at January 6, 2006 would be approximately $3.1 million.
EXCHANGE RATE SENSITIVITY
The majority of the Company's sales and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains or losses to date. The Company conducts only limited transactions
in foreign currencies and does not expect material foreign exchange gains or
losses in the future. The Company does not engage in any foreign exchange
hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING AND CONCLUSION REGARDING
THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of December 31,
2005. The Company's Chief Executive Officer and the Company's Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were effective as of December 31, 2005, to provide reasonable assurance that
information the Company is required to disclose in reports that the Company
files or submits under the Securities
35
Exchange Act of 1934 is recorded, processed, summarized and reported accurately.
It should be noted 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 efforts to comply with Section 404(a) of the
Sarbanes-Oxley Act in 2006, the Company will continue to enhance its internal
control structure, as necessary, on an ongoing basis.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Under the supervision and
with the participation of management, including the Company's Chief Executive
Officer and Chief Financial Officer, the Company has conducted an evaluation of
the effectiveness of its internal control over financial reporting based on the
framework in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon that evaluation,
management of the Company has concluded that the Company's internal control over
financial reporting was effective as of December 31, 2005.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005, has been audited by
Ernst & Young LLP, the independent registered public accounting firm that
audited the financial statements included herein, as stated in their report
which is included herein.
CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal controls over financial
reporting during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers that is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Board of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held on May 25, 2006, and is incorporated herein by
reference.
The Registrant has adopted Standards of Conduct, which meet the definition
of a "code of ethics" under Item 406 of the Securities and Exchange Commission's
Regulation S-K, and which are applicable to and binding upon all of the
Registrant's employees (including the principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions) and, as required by the context, directors. Any
waiver of the Standards of Conduct for officers or directors of the Registrant
must be approved by the Board of Directors of the Registrant and must be
publicly disclosed in accordance with Securities and Exchange Commission and
Nasdaq rules. The Standards of Conduct are posted in the corporate governance
area of the investors section of the Registrant's Internet website at
www.per-se.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 25, 2006, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is included in the sections entitled
"Director and Executive Officer Common Stock Ownership" "Principal Stockholders"
and "Equity Compensation Plan Information" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 25, 2006, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the sections entitled
"Certain Relationships and Related Transactions" of the Proxy Statement for the
Annual Meeting of Stockholders to be held on May 25, 2006, and is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is included in the section entitled
"Selection of Independent Auditors" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 25, 2006, and is incorporated herein
by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) 1. Financial Statements
Report of Independent Registered Public Accounting Firm;
Consolidated Balance Sheets -- as of December 31, 2005 and 2004;
37
Consolidated Statements of Income -- years ended December 31, 2005,
2004 and 2003;
Consolidated Statements of Cash Flows -- years ended December 31,
2005, 2004 and 2003;
Consolidated Statements of Stockholders' Equity (Deficit) -- years
ended December 31, 2005, 2004 and 2003; and
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Schedule II -- Valuation and Qualifying Accounts -- years ended
December 31, 2005, 2004 and 2003;
Schedules, other than Schedule II, are omitted because of the absence
of the conditions under which they are required.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference to
other filings:
EXHIBIT
NUMBER DOCUMENT
------- --------
2.1 -- Agreement and Plan of Merger, dated as of August 26, 2005,
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).
2.2 -- Stock Purchase Agreement, dated as of August 26, 2005, among
Wolters Kluwer Health, Inc., NDC Health Information Services
(Arizona) Inc., and NDCHealth Corporation (incorporated
herein by reference to Exhibit 2.1 to NDCHealth
Corporation's Current Report on Form 8-K filed on August 29,
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 (the "1999
Form 10-K")).
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 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1999 Form 10-K).
4.2 -- Form of Option Agreement relating to Registrant's Amended
and Restated Non-Employee Director Stock Option Plan
(incorporated by reference to Appendix B to Definitive Proxy
Statement dated April 1, 2003, relating to Registrant's 2003
Annual Meeting of Stockholders).
4.3 -- Form of Option Agreement relating to Registrant's Second
Amended and Restated Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the 1999 Form
10-K).
4.4 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees
(incorporated by reference to Exhibit 4.6 to the 1999 Form
10-K).
4.5 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Employees of Acquired
Companies (incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-3, File No. 33-71552).
4.6 -- 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).
38
EXHIBIT
NUMBER DOCUMENT
------- --------
4.7 -- 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).
4.8 -- Second Amendment to Rights Agreement dated as of February
11, 1999, between Registrant and American Stock Transfer &
Trust Company, entered into as of December 6, 2001, to be
effective as of March 6, 2002 (incorporated by reference to
Exhibit 4.12 to Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 Form 10-K")).
4.9 -- 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 (the "2002 Form 10-K")).
4.10 -- 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).
4.11 -- 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).
4.12 -- 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 -- Amended and Restated Credit Agreement, dated as of January
6, 2006, among Registrant, certain domestic subsidiaries of
Registrant, Bank of America, N.A., Wachovia Bank, National
Association, and the other lenders party thereto
(incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K filed on January 12, 2006).
10.2 -- Amended and Restated Per-Se Technologies, Inc. Non-Employee
Director Stock Option Plan (incorporated by reference to
Appendix B to Definitive Proxy Statement dated April 1,
2003, relating to Registrant's 2003 Annual Meeting of
Stockholders).
10.3 -- Second Amended and Restated Per-Se Technologies, Inc.
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10.1 to the 1999 Form 10-K).
10.4 -- First Amendment to Second Amended and Restated Per-Se
Technologies, Inc. Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.45 to the 1999 Form
10-K).
10.5 -- Registrant's Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 to Annual Report on Form 10-K for the year
ended December 31, 1996 (the "1996 Form 10-K")).
10.6 -- First Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.24 to the 1996 Form 10-K).
10.7 -- Second Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.25 to Annual Report on Form 10-K for the year
ended December 31, 1997 (the "1997 Form 10-K")).
10.8 -- Third Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.26 to the 1997 Form 10-K).
10.9 -- Fourth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.27 to the 1997 Form 10-K).
10.10 -- Fifth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.28 to the 1997 Form 10-K).
10.11 -- Sixth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.32 to Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 Form 10-K")).
10.12 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.24 to the 1999 Form 10-K).
39
EXHIBIT
NUMBER DOCUMENT
------- --------
10.13 -- Eighth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.26 to Annual Report on Form 10-K for the year
ended December 31, 2000 (the "2000 Form 10-K")).
10.14 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
10.15 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan for Non-Executive Employees (incorporated by reference
to Exhibit 10.31 to the 2002 Form 10-K).
10.16 -- Registrant's Non-Qualified Stock Option Plan for Employees
of Acquired Companies (incorporated by reference to Exhibit
99.1 to Registration Statement on Form S-8, File No.
33-67752).
10.17 -- First Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-71556).
10.18 -- Second Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-88442).
10.19 -- Third Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.14 to Annual Report on Form 10-K for
the year ended December 31, 1995).
10.20 -- Fourth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99.2 to Registration Statement on Form
S-8, File No. 333-3213).
10.21 -- Fifth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07627).
10.22 -- Sixth Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.21 to the 1996 Form 10-K).
10.23 -- Seventh Amendment to Registrant's Non-Qualified Stock Option
Plan for Employees of Acquired Companies (incorporated by
reference to Exhibit 10.23 to the 1998 Form 10-K).
10.24 -- Eighth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.12 to the 1999 Form 10-K).
10.25 -- Ninth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.12 to the 2000 Form 10-K).
10.26 -- Tenth Amendment to Registrant's Non-Qualified Stock Option
Plan For Employees of Acquired Companies (incorporated by
reference to Exhibit 10.1 to Quarterly Report of Form 10-Q
for the quarter ended June 30, 2002).
10.27 -- Per-Se Technologies, Inc. Employees' Retirement Savings Plan
(incorporated by reference to Exhibit 10.3 to Current Report
on Form 8-K filed on May 23, 2005).
10.28 -- 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).
10.29 -- Second 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 December
19, 2005).
10.30 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.31 -- Registrant's Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.32 -- First Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
40
EXHIBIT
NUMBER DOCUMENT
------- --------
10.33 -- Second Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997).
10.34 -- Third Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.76 to the 1997 Form
10-K).
10.35 -- Fourth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.32 to the 1999 Form
10-K).
10.36 -- Fifth Amendment to Registrant's Deferred Compensation Plan
(incorporated by reference to Exhibit 10.36 to the 2000 Form
10-K).
10.37 -- Per-Se Technologies, Inc. Executive Deferred Compensation
Plan effective as of January 1, 2002 (incorporated by
reference to Exhibit 10.40 to the 2001 Form 10-K).
10.38 -- Per-Se Technologies, Inc. Non-Qualified Deferred
Compensation Plan Trust Agreement dated as of February 12,
2002, between Registrant and Merrill Lynch Trust Company,
FSB (incorporated by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).
10.39 -- Written description of Registrant's Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit 10.2
to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
10.40 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan
(incorporated by reference to Exhibit 10.44 to the 2001 Form
10-K).
10.41 -- First Amendment to Per-Se Technologies, Inc. Deferred Stock
Unit Plan (incorporated by reference to Exhibit 10.3 to
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
10.42 -- Per-Se Technologies, Inc. Deferred Stock Unit Plan Trust
Agreement dated as of May 1, 2002, between Registrant and
Merrill Lynch Trust Company, FSB (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).
10.43 -- Per-Se Technologies, Inc. 2005 Senior Executive Incentive
Compensation Plan (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed on May 23, 2005).
10.44 -- Per-Se Technologies, Inc. 2005 Senior Management Incentive
Compensation Plan (incorporated by reference to Exhibit 10.2
to Current Report on Form 8-K filed on May 23, 2005).
10.45 -- Employment Agreement dated November 19, 1996, between
Registrant and David E. McDowell (incorporated by reference
to Exhibit 10.49 to the 1996 Form 10-K).
10.46 -- Amendment Number 1 to Employment Agreement between
Registrant and David E. McDowell, dated October 20, 1999
(incorporated by reference to Exhibit 10.37 to the 1999 Form
10-K).
10.47 -- Amendment Number 2 to Employment Agreement between
Registrant and David E. McDowell, dated December 14, 2005
(incorporated by reference to Exhibit 10.2 to Current Report
on Form 8-K filed on December 19, 2005).
10.48 -- Employment Agreement dated as of November 13, 2000, between
Registrant and Philip M. Pead (incorporated by reference to
Exhibit 10.42 to the 2000 Form 10-K).
10.49 -- Amendment No. 1 to Employment Agreement between Registrant
and Philip M. Pead, dated May 8, 2003 (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).
10.50 -- Employment Agreement dated April 14, 2000, between
Registrant and Chris E. Perkins (incorporated by reference
to Exhibit 10.43 to the 2000 Form 10-K).
10.51 -- Amendment Number 1 to Employment Agreement between
Registrant and Chris E. Perkins, dated as of February 7,
2001 (incorporated by reference to Exhibit 10.44 to the 2000
Form 10-K).
10.52 -- Employment Agreement dated July 1, 2003, between Registrant
and Philip J. Jordan (incorporated by reference to Exhibit
10.3 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
10.53 -- Employment Agreement dated as of May 31, 2001, between
Registrant and Paul J. Quiner (incorporated by reference to
Exhibit 10.57 to Annual Report on Form 10-K for the year
ended December 31, 2003).
41
EXHIBIT
NUMBER DOCUMENT
------- --------
10.54 -- Employment Agreement dated as of February 9, 2005, as
amended effective as of December 29, 2005, between G. Scott
MacKenzie and NDCHealth Corporation.
10.55 -- Data Supply and Services Agreement, dated as of January 6,
2006, among NDC Health Information Services (Arizona) Inc.,
NDCHealth Corporation and Registrant (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K
filed on January 12, 2006).
10.56 -- Retail Informatics Data and Services Agreement, dated as of
January 6, 2006, between NDC Health Information Services
(Arizona) Inc. and NDCHealth Corporation (incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K
filed on January 12, 2006).
10.57 -- Per-Se Technologies, Inc. 2006 Senior Management Incentive
Compensation Plan (incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K filed on March 7, 2006).
21 -- Subsidiaries of Registrant.
23 -- Consent of Ernst & Young LLP.
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.
The exhibits, which are referenced in the above documents, are hereby
incorporated by reference. Such exhibits have been omitted for purposes of this
filing but will be furnished supplementary to the Commission upon request.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PER-SE TECHNOLOGIES, INC.
(Registrant)
By: /s/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President, Chief
Operating Officer and
Interim Chief Financial Officer
/s/ RICHARD A. FLYNT
------------------------------------
Richard A. Flynt
Senior Vice President and Corporate
Controller
(Principal Accounting Officer)
Date: March 15, 2006
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 15, 2006 /s/ PHILIP M. PEAD
------------------------------
Philip M. Pead
Chairman, President, Chief Executive Officer
and Director
March 15, 2006 /s/ CHRIS E. PERKINS
------------------------------
Chris E. Perkins
Executive Vice President, Chief Operating
Officer and
Interim Chief Financial Officer
March 15, 2006 /s/ RICHARD A. FLYNT
------------------------------
Richard A. Flynt
Senior Vice President and Corporate
Controller
(Principal Accounting Officer)
March 15, 2006 /s/ JOHN W. CLAY, JR.
------------------------------
John W. Clay, Jr.
Director
March 15, 2006 /s/ JOHN W. DANAHER, M.D.
------------------------------
John W. Danaher, M.D.
Director
March 15, 2006 /s/ CRAIG MACNAB
------------------------------
Craig Macnab
Director
March 15, 2006 /s/ DAVID E. MCDOWELL
------------------------------
David E. McDowell
Director
March 15, 2006 /s/ C. CHRISTOPHER TROWER
------------------------------
C. Christopher Trower
Director
March 15, 2006 /s/ JEFFREY W. UBBEN
------------------------------
Jeffrey W. Ubben
Director
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Per-Se Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Per-Se
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of income, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2005. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)2. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Per-Se
Technologies, Inc. and subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Per-Se
Technologies, Inc. and subsidiaries' internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 13, 2006, expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 13, 2006
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Per-Se Technologies, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Per-Se Technologies, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Per-Se Technologies, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2005, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Per-Se Technologies, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Per-Se Technologies, Inc. and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of income, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2005, and our report dated March 13, 2006, expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 13, 2006
F-2
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
(IN THOUSANDS, EXCEPT PAR
VALUE DATA)
Current Assets:
Cash and cash equivalents................................. $ 61,161 $ 42,422
Restricted cash........................................... 20 51
--------- ---------
Total cash and cash equivalents................... 61,181 42,473
Accounts receivable, billed (less allowances of $3,035 and
$3,229, respectively).................................. 54,135 49,105
Accounts receivable, unbilled (less allowances of $313 and
$371, respectively).................................... 262 302
Deferred income taxes -- current, net..................... 4,056 3,264
Prepaid expenses.......................................... 3,004 2,823
Other..................................................... 3,535 4,906
--------- ---------
Total current assets.............................. 126,173 102,873
Property and equipment, net of accumulated depreciation..... 16,843 15,512
Goodwill.................................................... 38,199 32,549
Other intangible assets, net of accumulated amortization.... 21,946 20,784
Deferred income taxes, net.................................. 26,238 24,851
Other....................................................... 10,124 6,122
--------- ---------
Total assets...................................... $ 239,523 $ 202,691
========= =========
Current Liabilities:
Accounts payable.......................................... $ 5,982 $ 5,290
Accrued compensation...................................... 15,265 14,562
Accrued expenses.......................................... 17,002 14,628
Current portion of long-term debt and capital lease
obligations............................................ 135 98
Deferred revenue.......................................... 25,821 24,127
--------- ---------
Total current liabilities......................... 64,205 58,705
Long-term debt and capital lease obligations................ 125,490 125,527
Other obligations........................................... 5,312 5,484
--------- ---------
Total liabilities................................. 195,007 189,716
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Stockholders' Equity:
Preferred stock, no par value, 20,000 shares authorized;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 shares
authorized, 33,511 and 32,324 shares issued and 30,523
and 30,336 shares outstanding as of December 31, 2005,
and December 31, 2004, respectively.................... 335 323
Common stock, non-voting, $0.01 par value, 600 shares
authorized; none issued................................ -- --
Paid-in capital........................................... 804,875 795,263
Accumulated deficit....................................... (719,759) (757,128)
Treasury stock at cost, 2,988 and 1,988 shares as of
December 31, 2005, and December 31, 2004,
respectively........................................... (41,817) (26,510)
Deferred stock unit plan obligation....................... 1,429 1,511
Accumulated other comprehensive loss...................... (547) (484)
--------- ---------
Total stockholders' equity........................ 44,516 12,975
--------- ---------
Total liabilities and stockholders' equity........ $ 239,523 $ 202,691
========= =========
See notes to consolidated financial statements.
F-3
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue..................................................... $372,718 $352,791 $335,169
Operating expenses:
Cost of services.......................................... 248,372 232,661 217,895
Selling, general and administrative....................... 83,226 85,351 79,936
Other expenses............................................ 1,018 5,845 830
-------- -------- --------
Operating income............................................ 40,102 28,934 36,508
Interest expense............................................ 6,088 6,825 14,646
Interest income............................................. (1,655) (525) (297)
Loss on extinguishment of debt.............................. -- 5,896 6,255
-------- -------- --------
Income before income taxes................................ 35,669 16,738 15,904
Income tax (benefit) expense................................ (1,286) (28,101) 27
-------- -------- --------
Income from continuing operations......................... 36,955 44,839 15,877
-------- -------- --------
Discontinued operations (see Note 4)
Loss from discontinued operations, net of
tax -- Patient1........................................ -- (18) (1,316)
Gain on sale of Patient1, net of tax...................... 434 3,784 10,417
Loss from discontinued operations, net of
tax -- Business1....................................... -- (303) (3,589)
Loss on sale of Business1, net of tax..................... -- (130) (8,528)
Loss from discontinued operations, net of tax -- Other.... (20) (14) (872)
-------- -------- --------
414 3,319 (3,888)
-------- -------- --------
Net income........................................ $ 37,369 $ 48,158 $ 11,989
======== ======== ========
Net income per common share-basic:
Income from continuing operations......................... $ 1.23 $ 1.45 $ 0.52
Loss from discontinued operations, net of
tax -- Patient1........................................ -- -- (0.04)
Gain on sale of Patient1, net of tax...................... 0.01 0.12 0.34
Loss from discontinued operations, net of
tax -- Business1....................................... -- (0.01) (0.12)
Loss on sale of Business1, net of tax..................... -- -- (0.28)
Loss from discontinued operations, net of tax -- Other.... -- -- (0.03)
-------- -------- --------
Net income per common share-basic................. $ 1.24 $ 1.56 $ 0.39
======== ======== ========
Weighted average shares used in computing basic income per
common share.............................................. 30,084 30,843 30,594
======== ======== ========
Net income per common share-diluted:
Income from continuing operations......................... $ 1.11 $ 1.36 $ 0.49
Loss from discontinued operations, net of
tax -- Patient1........................................ -- -- (0.04)
Gain on sale of Patient1, net of tax...................... 0.01 0.11 0.32
Loss from discontinued operations, net of
tax -- Business1....................................... -- (0.01) (0.11)
Loss on sale of Business1, net of tax..................... -- -- (0.26)
Loss from discontinued operations, net of tax -- Other.... -- -- (0.03)
-------- -------- --------
Net income per common share-diluted............... $ 1.12 $ 1.46 $ 0.37
======== ======== ========
Weighted average shares used in computing diluted income per
common share.............................................. 33,386 33,082 32,661
======== ======== ========
See notes to consolidated financial statements.
F-4
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2005 2004 2003
-------- --------- ---------
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net income............................................... $ 37,369 $ 48,158 $ 11,989
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 14,959 15,456 16,509
Loss from discontinued operations..................... 20 465 14,305
Gain on sale of Patient1.............................. (434) (3,784) (10,417)
Amortization of deferred financing costs.............. 1,336 1,275 1,269
Loss on extinguishment of debt........................ -- 5,896 6,255
Changes in assets and liabilities, excluding effects
of acquisitions and divestitures:
Restricted cash..................................... -- -- 4,162
Accounts receivable, billed......................... (3,344) (1,303) (4,370)
Accounts receivable, unbilled....................... 40 275 129
Accounts payable.................................... 506 (1,315) 3,062
Accrued compensation................................ 783 (3,502) (1,639)
Accrued expenses.................................... (1,854) (1,158) (7,177)
Deferred tax asset.................................. (2,179) (28,115) --
Deferred revenue.................................... 1,694 3,793 1,962
Other, net.......................................... (123) 12,783 (7,568)
-------- --------- ---------
Net cash provided by continuing operations.......... 48,773 48,924 28,471
Net cash used for discontinued operations........... -- (434) (10,419)
-------- --------- ---------
Net cash provided by operating activities........ 48,773 48,490 18,052
-------- --------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment...................... (8,108) (6,337) (6,367)
Software development costs............................... (6,121) (6,681) (3,976)
Net proceeds from sale of Patient1 and Business1, net of
tax................................................... -- 3,654 27,925
Acquisition, net of cash acquired........................ (5,405) (1,141) --
Capitalized acquisition costs............................ (3,763) -- --
Other.................................................... (260) (76) (55)
-------- --------- ---------
Net cash (used for) provided by continuing
operations..................................... (23,657) (10,581) 17,527
Net cash used for discontinued operations........ -- -- (2,288)
-------- --------- ---------
Net cash (used for) provided by investing
activities..................................... (23,657) (10,581) 15,239
-------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from borrowings................................. -- 125,000 125,000
Treasury stock purchase.................................. (15,404) (24,999) --
Proceeds from the exercise of stock options.............. 9,219 7,398 7,969
Debt issuance costs...................................... -- (6,378) (9,797)
Payments of debt......................................... (76) (121,875) (178,145)
Other.................................................... (116) 96 205
-------- --------- ---------
Net cash used for financing activities........... (6,377) (20,758) (54,768)
-------- --------- ---------
Cash and Cash Equivalents:
Net change............................................... 18,739 17,151 (21,477)
Balance at beginning of period........................... 42,422 25,271 46,748
-------- --------- ---------
Balance at end of period................................. $ 61,161 $ 42,422 $ 25,271
======== ========= =========
See notes to consolidated financial statements.
F-5
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFERRED ACCUMULATED
STOCK OTHER
COMMON COMMON PAID-IN ACCUMULATED TREASURY UNIT PLAN COMPREHENSIVE
SHARES STOCK CAPITAL WARRANTS DEFICIT STOCK OBLIGATION (LOSS)/INCOME
------ ------ -------- -------- ----------- -------- ---------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
2002.................. 30,163 $302 $778,021 $ 1,495 $(817,275) $ (1,045) $1,045 $(515)
Net income.............. -- -- -- -- 11,989 -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- -- 84
TOTAL COMPREHENSIVE
INCOME................
Exercise of stock
options............... 1,159 11 7,958 -- -- -- -- --
Tax effect of exercise
of stock options...... -- -- 318 -- -- -- -- --
Deferred stock unit plan
activity.............. -- -- -- -- -- (258) 258 --
------ ---- -------- ------- --------- -------- ------ -----
BALANCE AT DECEMBER 31,
2003.................. 31,322 313 786,297 1,495 (805,286) (1,303) 1,303 (431)
Net income.............. -- -- -- -- 48,158 -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- -- (53)
TOTAL COMPREHENSIVE
INCOME................
Exercise of stock
options............... 1,002 10 7,388 -- -- -- -- --
Tax effect of exercise
of stock options...... -- -- 68 -- -- -- -- --
Treasury stock
purchase.............. -- -- -- -- -- (24,999) -- --
Expiration of
warrants.............. -- -- 1,495 (1,495) -- -- -- --
Other................... -- -- 15 -- -- -- -- --
Deferred stock unit plan
activity.............. -- -- -- -- -- (208) 208 --
------ ---- -------- ------- --------- -------- ------ -----
BALANCE AT DECEMBER 31,
2004.................. 32,324 323 795,263 -- (757,128) (26,510) 1,511 (484)
Net income.............. -- -- -- -- 37,369 -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- -- (63)
TOTAL COMPREHENSIVE
INCOME................
Exercise of stock
options............... 1,187 12 9,207 -- -- -- -- --
Tax effect of exercise
of stock options...... -- -- 405 -- -- -- -- --
Treasury stock
purchase.............. -- -- -- -- -- (15,404) -- --
Other................... -- -- -- -- 15 -- --
Deferred stock unit plan
activity.............. -- -- -- -- -- 82 (82) --
------ ---- -------- ------- --------- -------- ------ -----
BALANCE AT DECEMBER 31,
2005.................. 33,511 $335 $804,875 $ -- $(719,759) $(41,817) $1,429 $(547)
====== ==== ======== ======= ========= ======== ====== =====
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
2002.................. $(37,972)
Net income.............. 11,989
Foreign currency
translation
adjustment............ 84
--------
TOTAL COMPREHENSIVE
INCOME................ 12,073
Exercise of stock
options............... 7,969
Tax effect of exercise
of stock options...... 318
Deferred stock unit plan
activity.............. --
--------
BALANCE AT DECEMBER 31,
2003.................. (17,612)
Net income.............. 48,158
Foreign currency
translation
adjustment............ (53)
--------
TOTAL COMPREHENSIVE
INCOME................ 48,105
Exercise of stock
options............... 7,398
Tax effect of exercise
of stock options...... 68
Treasury stock
purchase.............. (24,999)
Expiration of
warrants.............. --
Other................... 15
Deferred stock unit plan
activity.............. --
--------
BALANCE AT DECEMBER 31,
2004.................. 12,975
Net income.............. 37,369
Foreign currency
translation
adjustment............ (63)
--------
TOTAL COMPREHENSIVE
INCOME................ 37,306
Exercise of stock
options............... 9,219
Tax effect of exercise
of stock options...... 405
Treasury stock
purchase.............. (15,404)
Other................... 15
Deferred stock unit plan
activity.............. --
--------
BALANCE AT DECEMBER 31,
2005.................. $ 44,516
========
See notes to consolidated financial statements.
F-6
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements include the
accounts of Per-Se Technologies, Inc. and its subsidiaries ("Per-Se" or the
"Company"). All intersegment accounts have been eliminated. The Hospital
Solutions division's revenue includes intersegment revenue for services provided
to the Physician Solutions division, which has been eliminated in total
consolidated revenue. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
The consolidated financial statements of the Company have been presented to
reflect the operations of the Hospital Solutions division's Patient1 clinical
product line ("Patient1") and Business1-PFM patient accounting product line
("Business1") as discontinued operations. Patient1 was sold on July 28, 2003,
and Business1 was sold effective January 31, 2004. Additionally, the activity
related to the Medaphis Services Corporation ("MSC") and Impact Innovations
Group ("Impact") businesses, which were sold in 1998 and 1999, respectively, are
also reflected as discontinued operations for all periods presented. For more
information about the Company's discontinued operations, refer to "Note
4 -- Discontinued Operations and Divestitures" in the Company's Notes to
Consolidated Financial Statements.
Recent Accounting Pronouncements. In May 2005, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 154, Accounting Changes and Error Correction, ("SFAS No. 154").
SFAS No. 154 supersedes Accounting Principles Board ("APB") Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 requires the retroactive application of
changes in accounting principles to prior periods' financial statements, unless
it is impracticable to determine either the period specific effects or the
cumulative effect of the change. SFAS No. 154 does not change the guidance for
reporting the correction of an error in previously issued financial statements
or the change in an accounting estimate. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 31, 2005. The Company does not believe SFAS No. 154 will have a
significant impact on the Company.
On December 16, 2004, the FASB issued 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 APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25"), and amends SFAS No. 95, Statement of Cash Flows. Statement 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 adopted SFAS No. 123(R) on
January 1, 2006, and elected the modified prospective method.
For the years ended December 31, 2005, 2004, and 2003, the Company
accounted 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 could have a significant impact on the Company's results of
operations, although it will have no impact on the Company's overall cash flow.
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 of that
standard would have approximated the impact of SFAS No. 123 as described on page
F-12.
F-7
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 2004, the Emerging Issues Task Force ("EITF") reached a
tentative conclusion on Issue Number 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share ("EITF No. 04-8"). The EITF
concluded that contingently convertible debt instruments should be included in
diluted earnings per share computations regardless of whether the market price
trigger has been met. The effective date of this consensus is for periods ending
after December 15, 2004. In November 2004, the Company exercised its irrevocable
option to pay the principal of its Convertible Subordinated Debentures in cash
and therefore, EITF No. 04-8 did not have any effect on the Company's
Consolidated Statements of Income.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Bad debt estimates. The Company relies on estimates to determine the
bad debt expense and the adequacy of the reserve for doubtful accounts
receivable. These estimates are based on the historical experience of the
Company and the industry in which it operates. If the financial condition
of the Company's customers deteriorated, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
Company actively reviews its accounts receivable and does not believe
actual results will vary materially from the Company's estimates.
Accrued expenses. The Company relies on estimates to determine the
amounts that are recorded in accrued expenses. Estimates of requirements
for legal services and settlements expected to be incurred in connection
with a loss contingency and to meet regulatory demands within the Company's
business and industry are used to accrue legal expenses. Income tax
accruals are estimated based on historical experience of the Company,
prevailing tax rates and the current business environment. Restructuring
and severance cost accruals are made using estimates of the costs required
to effect the desired change within the Company.
Revenue Recognition. The Company derives revenue from services and
products delivered to the healthcare industry through its two operating
divisions:
Physician Solutions provides Connective Healthcare solutions that
manage the revenue cycle for physician groups. The division provides
outsourced revenue cycle management services that are targeted at
hospital-affiliated and academic physician practices. Fees for these
services are primarily based on a percentage of net collections on the
Company's clients' accounts receivable. The division recognizes revenue and
bills its customers when the customers receive payment on those accounts
receivable. Contracts are typically multi-year in length and require no
payment from the customer upon contract signing. Since this is an
outsourced service delivered on the Company's proprietary technology, there
are no license or maintenance fees to be paid by the physician group
customers. The division also recognized approximately 3%, 4% and 5% of its
revenue, (or 2%, 3% and 3% of total company revenue), on a monthly service
fee and per-transaction basis from the MedAxxis product line, an
application service provider ("ASP") physician practice management system,
for the years ended December 31, 2005, 2004 and 2003, respectively. The
Physician Solutions division does not rely, to any material extent, on
estimates in the recognition of this revenue. Revenue is recognized in
accordance with Staff Accounting Bulletin ("SAB") No. 104, Revenue
Recognition ("SAB No. 104").
Hospital Solutions provides Connective Healthcare solutions that
improve revenue cycle and resource management for hospitals.
F-8
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue cycle management solutions primarily include services that
allow a hospital's central billing office to more effectively manage its
cash flow. These services include electronic and paper transactions, such
as claims processing, which can be delivered via the Web or through
dedicated electronic data interfaces and high-speed print and mail
services. Revenue related to these transaction services are billed and
recognized when the services are performed on a per transaction basis.
Contracts are typically multi-year in length. The division also recognizes
revenue related to direct and indirect payments it receives from payers for
the electronic transmission of transactions to the payers. The division
recognizes revenue on these transactions at the time the electronic
transactions are sent. Revenue is recognized in accordance with SAB No.
104.
Resource management solutions include staff and patient scheduling
software that enable hospitals to efficiently manage resources, such as
personnel and the operating room, to reduce costs and improve their bottom
line. The resource management software is sold as a one-time license fee
plus implementation services and an annual maintenance fee. Contracts are
typically structured to require a portion of the license fee and
implementation services to be paid periodically throughout the installation
process, including a portion due upon signing. For software contracts that
require the division to make significant production, modification or
customization changes, the division recognizes revenue for the license fee
and implementation services using the percentage-of-completion method over
the implementation period. The Hospital Solutions division relies on
estimates of work to be completed to determine the amount of revenue to be
recognized related to each contract using the percentage of completion
method. Because estimates of the extent of completion that differ from
actual results could affect revenue, the division periodically reviews the
estimated hours to complete major projects and compares these estimates to
budgeted hours or days to support the revenue recognized on that project.
Approximately 7%, 8% and 9% of the division's revenue (or 2%, 2% and 2% of
total Company revenue) was determined using the percentage-of-completion
method of accounting for the years ended December 31, 2005, 2004, and 2003,
respectively.
When the division receives payment prior to shipment or fulfillment of
its significant obligations, the Company records such payments as deferred
revenue and recognizes them as revenue upon shipment or fulfillment of
significant obligations. An unbilled receivable is recorded when the
division recognizes revenue on the percentage-of-completion basis prior to
achieving a contracted billing milestone. Additionally, an unbilled
receivable is recorded when revenue is earned, but the customer has not
been invoiced due to the terms of the contract. For minor add-on software
license sales where no significant customization remains outstanding, the
fee is fixed, an agreement exists and collectibility is probable, the
division recognizes revenue upon shipment. For software maintenance, the
division defers billed maintenance and recognizes revenue ratably over the
term of the maintenance agreement, which is typically one year. Revenue
recognized on the percentage-of-completion basis is done so in accordance
with AICPA Statement of Position ("SOP") 81-1, Accounting for Performance
of Construction Type and Certain Production Type Contracts. Revenue
recognized upon software shipment is done so in accordance with SOP 97-2,
Software Revenue Recognition ("SOP 97-2").
For arrangements that include one or more elements, or
multiple-element arrangements, to be delivered at a future date, revenue is
recognized in accordance with SOP 97-2 as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2, as amended, requires the Company to allocate
revenue to each element in a multiple-element arrangement based on the
element's respective vendor-specific objective evidence, or VSOE, of fair
value. Where VSOE does not exist for all delivered elements (typically
software license fees) revenue from multiple-element arrangements is
recognized using the residual method. Under the residual method, if VSOE of
the fair value of the undelivered elements exists, the Company defers
revenue recognition of the fair value of the undelivered elements. The
remaining portion of the arrangement fee is then recognized either by using
the percentage-of-completion method if significant
F-9
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
production, modification or customization is required or upon delivery,
assuming all other conditions for revenue recognition have been satisfied.
VSOE of fair value of maintenance services is based upon the amount charged
for maintenance when purchased separately, which is the renewal rate.
Maintenance services are typically stated separately in an arrangement.
VSOE of fair value of professional services (i.e., implementation,
consulting services and training classes not essential to the functionality
of the software) is based upon the price charged when professional services
are sold separately and is based on an hourly rate for professional
services or per training class fees.
Cash and Cash Equivalents. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than 90 days at the date
of purchase.
Restricted Cash. At December 31, 2005, and 2004, restricted cash primarily
represents amounts collected on behalf of certain Physician Solutions and
Hospital Solutions clients, a portion of which is held in trust until it is
remitted to such clients.
Fair Value of Financial Instruments. The carrying amount of all of the
Company's financial instruments approximates fair value. Additionally, the
Company had unused letters of credit in the amount of $2.9 million and $2.8
million at December 31, 2005, and 2004, respectively.
Property and Equipment. Property and equipment, including equipment under
capital leases, are stated at cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally ten years for furniture and fixtures, three to ten years
for equipment and twenty years for buildings. Leasehold improvements are
recorded at cost and amortized over the remaining term of the lease or the
useful life of the asset, whichever period is shorter. The Company recorded
depreciation expense of approximately $6.8 million, $7.8 million and $9.4
million in 2005, 2004 and 2003, respectively.
Goodwill. Goodwill represents the excess of the cost of businesses
acquired and the value of their workforce in the Physician Solutions division in
1995 and the Hospital Solutions division from 1995 to 2005 over the fair market
value of their identifiable net assets. The Company performs a periodic review
of its goodwill and other indefinite lived intangible assets for impairment as
of December 31 each year or sooner if indicators of impairment exist. The
Company's initial impairment and periodic review of its goodwill and other
indefinite lived intangible assets were based upon a discounted future cash flow
analysis that included revenue and cost estimates, market growth rates and
appropriate discount rates. As of December 31, 2005, and 2004, the Company did
not record an impairment of goodwill or indefinite-lived intangible assets as a
result of the review.
Trademarks. Trademarks represent the value of the trademarks acquired in
the Hospital Solutions division from 2000 to 2005. The Company expects the
trademarks to contribute to cash flows indefinitely and therefore deems the
trademarks to have indefinite useful lives.
Client Lists. Client lists represent the value of clients acquired in the
Physician Solutions division from 1992 to 1996 and the Hospital Solutions
division from 1995 to 2005. The Company amortizes client lists over their
estimated useful lives, which range from five to ten years.
Developed Technology. Developed technology represents the value of the
systems acquired in the Hospital Solutions division from 2000 to 2005. The
Company amortizes these intangible assets over their estimated useful lives of
five years.
Software Development Costs. Software development includes costs incurred
in the development or the enhancement of software in the Physician Solutions and
Hospital Solutions divisions for resale or internal use.
F-10
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software development costs, related to external use software, are
capitalized upon the establishment of technological feasibility for each product
and capitalization ceases when the product or process is available for general
release to customers. Technological feasibility is established when all
planning, designing, coding and testing activities required to meet a product's
design specifications are complete. Technological feasibility for relatively
minor enhancements to an existing product may also be established using a
working model provided that there are no major changes to the functions of the
product and there are no high-risk development issues. The Company amortizes
external use software development costs over the greater of the ratio that
current revenues bear to total and anticipated future revenues for the
applicable product or the straight-line method over the estimated economic lives
of the assets, which are generally three to five years. The Company monitors the
net realizable value of all capitalized external use software development costs
to ensure that it can recover its investment through future sales.
Software development costs, related to internal use software, are
capitalized after the preliminary project stage is complete, when management
with the relevant authority authorizes and commits to the funding of the
software project and it is probable that the project will be completed and the
software will be used to perform the function intended. Capitalization of
development costs related to upgrades and enhancements of existing internal use
software are capitalized only when such expenditures result in additional
functionality. Capitalization ceases no later than the point at which the
project is substantially complete and ready for its intended use. The Company
expenses software development costs, related to internal use software, as
incurred during the planning and post implementation phases of development. The
Company amortizes internal-use software on a straight-line basis over its
estimated useful life, generally five years.
Research and Development Costs. The Company expenses research and
development costs as incurred. The Company recorded research and development
costs of approximately $11.2 million, $8.3 million and $8.0 million in 2005,
2004 and 2003, respectively. These amounts are included in Selling, General and
Administrative expenses in the Company's Consolidated Statements of Income.
Advertising Costs. The Company expenses advertising costs as incurred. The
Company recorded advertising costs of approximately $0.5 million, $0.7 million
and $0.7 million in 2005, 2004, and 2003, respectively.
Shipping and Postage Costs. The Company expenses shipping and postage
costs as incurred. These costs are primarily incurred related to providing print
and mail services to customers, which are billed to the customer and included in
revenue. The Company recorded shipping and postage costs of approximately $26.3
million, $23.8 million and $19.3 million in 2005, 2004, and 2003, respectively.
These amounts are included in Cost of Services in the Company's Consolidated
Statements of Income.
Stock-Based Compensation Plans. In December 2002, the FASB issued SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS
No. 148"). SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. SFAS No. 148 is effective
for financial statements for fiscal years ending after December 15, 2002 and for
interim periods beginning after December 15, 2002. The annual disclosure
requirements of SFAS No. 148 were adopted by the Company on January 1, 2003. As
previously discussed, SFAS No. 123(R) was issued on December 16, 2004, with a
revised effective date no later than January 1, 2006. The Company adopted SFAS
123(R) on January 1, 2006.
F-11
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2005, the Company has four stock-based compensation plans
described more fully in Note 13. The Company accounts for its stock-based
compensation plans under APB Opinion No. 25. No stock-based compensation cost is
reflected in the Company's Consolidated Statements of Income, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. 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 stock-based compensation.
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net income as reported.................................. $37,369 $48,158 $11,989
Deduct: total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects.................... (4,661) (4,334) (4,210)
------- ------- -------
Pro forma net income.................................... $32,708 $43,824 $ 7,779
======= ======= =======
Net income per common share:
Basic -- as reported.................................. $ 1.24 $ 1.56 $ 0.39
======= ======= =======
Basic -- pro forma.................................... $ 1.09 $ 1.42 $ 0.25
======= ======= =======
Diluted -- as reported................................ $ 1.12 $ 1.46 $ 0.37
======= ======= =======
Diluted -- pro forma.................................. $ 0.98 $ 1.32 $ 0.24
======= ======= =======
Legal Costs. The Company expenses ordinary legal and administrative fees,
costs and expenses as incurred. Legal and administrative fees, costs, expenses,
damages or settlement losses for specific legal matters that the Company
determines to be probable are accrued at such time when they are reasonably
estimable.
Income Taxes. The Company recognizes deferred income taxes for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The Company
determines deferred tax assets and liabilities by reference to the tax laws and
changes to such laws. Management includes the consideration of future events in
assessing the likelihood that the Company will realize tax benefits. See Note 15
where the Company discusses the realizability of the deferred tax assets.
F-12
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share. Net income per common share-basic is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Net income per common share-diluted reflects the
potential dilution that could occur from common shares issuable through stock
options and warrants. The following sets forth the computation of basic and
diluted net income per common share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
Net income.............................................. $37,369 $48,158 $11,989
======= ======= =======
Common shares outstanding:
Shares used in computing net income per common
share-basic........................................ 30,084 30,843 30,594
Effect of potentially dilutive stock options and
warrants........................................... 3,302 2,239 2,067
------- ------- -------
Shares used in computing net income per common share--
diluted............................................ 33,386 33,082 32,661
======= ======= =======
Net income per common share:
Basic................................................. $ 1.24 $ 1.56 $ 0.39
======= ======= =======
Diluted............................................... $ 1.12 $ 1.46 $ 0.37
======= ======= =======
Options to purchase 0.4 million and 1.6 million shares of common stock
outstanding during 2005 and 2004, respectively, were excluded from the
computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares, and therefore, the
effect would have been antidilutive.
During the year ended December 31, 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 0.6 million shares, related to the convertible debt instrument
(see Note 9 for additional information).
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) income.
For the years ended December 31, 2005, 2004, and 2003, the only component of
other comprehensive loss is the net foreign currency translation, which was
$(0.1) million, ($0.1) million and $0.1 million, respectively.
Guarantees. In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by issuing the
guarantee. FIN No. 45 also requires additional disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees it has issued. Certain of the Company's sales
agreements contain infringement indemnity provisions that are covered by FIN No.
45. Under these sales agreements, the Company agrees to defend and indemnify a
customer in connection with infringement claims made by third parties with
respect to the customer's authorized use of the Company's products and services.
The indemnity obligations contained in sales agreements generally have no
specified expiration date and generally limit the award to the amount of fees
paid. The Company has not previously incurred costs to settle claims or pay
awards under these indemnification obligations. Also, the Company maintains
F-13
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
membership in a group captive insurance company for its workers compensation
insurance. The member companies agree to jointly insure the group's liability
risks up to a certain threshold. As a member, the Company guarantees to pay an
assessment, if an assessment becomes due, as a result of insured losses by its
members. This guarantee will never exceed a percentage of the Company's loss
funds (an amount that is based on the Company's insured five-year loss history).
The Company issues a letter of credit to the group captive insurance company as
security for potential assessments and to meet any surplus needs. At December
31, 2005 and 2004, the Company had outstanding letters of credit to the group
captive insurance company amounting to approximately $1.8 million and $1.5
million, respectively. As a result, the Company's estimated fair value of the
infringement indemnity provision obligations and the captive insurance guarantee
is nominal.
Related Party Transactions. In November 2000, pursuant to the employment
agreement between the Company and Philip M. Pead, the Company's Chairman of the
Board, Chief Executive Officer, and President, the Company entered into a
promissory note agreement with Mr. Pead for $250,000. This amount is included in
other long-term assets in the accompanying consolidated balance sheets at
December 31, 2005 and 2004. The loan is secured by an aggregate of 74,000 shares
of Common Stock, which Mr. Pead purchased in the open market with the proceeds
of the note, and is payable in full upon the earlier to occur of the termination
of Mr. Pead's employment or the sale of all or any part of those shares. Any
overdue payment on the loan bears interest at a rate equal to the rate of
interest then imputed by the Internal Revenue Service plus 4% per annum, or the
maximum rate permitted by law, whichever is lower. Because the shares were
purchased in the open market by Mr. Pead, and the note only bears interest in
the event of an overdue payment, the Company did not record any compensation
expense associated with this arrangement at inception, and has not recorded any
compensation expense in any subsequent period.
2. OTHER EXPENSES
BINDING ARBITRATION
On March 10, 2006, the Company concluded binding arbitration for a claim of
breach of contract arising from an acquisition completed in 2000. The binding
arbitration resulted in an award to be paid by Per-Se of approximately $1.3
million, including interest of $0.3 million. The Company included the award in
Other Expenses and the interest in Interest Expense in the Company's 2005
Consolidated Statement of Income. In Note 18, the costs associated with the
award are classified in the Corporate segment.
NDCHEALTH TRANSITION
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
by Per-Se. The transaction was completed on January 6, 2006 (for more
information about the Company's acquisition of NDCHealth, refer to "Note
19 -- Subsequent Events"). The Company recorded integration costs related to the
NDCHealth acquisition totaling approximately $74,000 during the year ended
December 31, 2005, and included these costs in other expenses in the Company's
Consolidated Statements of Income. In Note 18, these expenses are classified in
the Corporate segment.
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
F-14
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
became effective for periods beginning on or after December 15, 2002. Due to the
volume and, in some cases, vague nature of many of the allegations, the scope of
the additional procedures was broad and extensive. The additional procedures
included the review of certain of the Company's revenues, expenses, assets and
liabilities accounts for the years 2001 through 2003.
The Company recorded costs related to the additional procedures totaling
approximately $6.3 million during the year ended December 31, 2004, and included
these costs in other expenses in the Company's Consolidated Statements of
Income. In Note 18, these expenses are classified in the Corporate segment.
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 for the year ended December 31,
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 July 2014.
While the new landlord will assume the payments for the lease of the Company's
former corporate office space, the Company recorded a non-cash expense related
to the lease expense 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.
OTHER
In 2003, the Company recorded net expenses of $0.8 million for severance
costs and restructuring expenses related to the realignment of the Company into
the Physician Solutions and Hospital Solutions divisions.
3. ACQUISITIONS
On December 1, 2005, the Company acquired privately held Integra Solutions
("Integra"), a hospital revenue cycle management outsourcing firm located in
Norcross, Georgia, for a purchase price of approximately $10.8 million. The
Company paid approximately $5.4 million of the purchase price at closing and
will pay the remaining purchase price of approximately $5.4 million at the
one-year anniversary. In addition, if Integra achieves certain revenue
objectives over the first two years, the Company will pay an additional purchase
price amount of approximately $3.8 million. Since the amount is contingent, the
additional purchase price is not included in the Company's December 31, 2005,
Consolidated Balance Sheet. Integra Solutions offers a comprehensive suite of
services designed to help healthcare providers improve their bottom line
results. This includes a full range of outsourcing options, from health
information and patient accounting management consulting to auditing and
accounts receivable services. The Company currently provides outsourcing
services to more than 80 hospitals, and Integra will be a key component of its
outsourcing growth strategy in the hospital market.
The Company recorded the acquisition using the purchase method of
accounting and, accordingly, has preliminarily allocated the purchase price to
the assets acquired and liabilities assumed based on their estimated fair market
value at the date of acquisition. Approximately $2.0 million of the purchase
price was allocated to client lists and other with a four to seven-year life,
approximately $0.9 million was
F-15
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocated to a developed technology with a five-year life and approximately $5.9
million of the purchase price was allocated to indefinite lived intangible
assets. The remaining $1.7 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 Solutions division.
The pro-forma impact of this acquisition was immaterial to the financial
statements of the Company and therefore has not been presented.
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, 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 Solutions
division.
The pro forma impact of this acquisition was immaterial to the financial
statements of the Company and therefore has not been presented.
4. DISCONTINUED OPERATIONS AND DIVESTITURES
In June 2003, the Company announced that it agreed to sell Patient1 to
Misys Healthcare Systems, a division of Misys plc ("Misys") for $30 million in
cash. Patient1 was the Company's only clinical product line, and its sale
allowed the Company to better focus on optimizing reimbursement and improving
administrative efficiencies for physician practices and hospitals. The sale was
completed on July 28, 2003, and the Company recognized a gain on the sale of
Patient1 of approximately $10.4 million, net of taxes of approximately $0.5
million, subject to closing adjustments. Net proceeds on the sale of Patient1
were approximately $27.9 million, subject to closing adjustments. The Company
and Misys entered into binding arbitration regarding the final closing
adjustments, and on May 21, 2004, the arbitrator awarded the Company
approximately $4.3 million. On June 1, 2004, the Company received payment of
approximately $4.5 million, which included interest of approximately $0.2
million. The Company recognized an additional gain on sale of approximately $3.8
million, net of taxes of approximately $0.2 million, in 2004. In December 2005,
the Company determined that payment was not required on a Patient1 tax liability
that was not included in the sale to Misys. Therefore, the approximately $0.4
million liability was reversed and recognized as income in the Company's
Consolidated Statement of Income.
In September 2003, the Company initiated a process to sell Business1. As
with the sale of Patient1, the discontinuance of Business1 allowed the Company
to focus resources on solutions that provide meaningful, strategic returns for
the Company, its customers and its shareholders. Pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"),
the Company wrote down the net assets of Business1 to fair market value, less
costs to sell, and incurred an $8.5 million expense. The Company completed the
sale of Business1 effective January 31, 2004, to a privately held company for
$0.6 million. No cash consideration was received at closing and the Company has
not recognized proceeds on the sale. The Company does not anticipate receiving
payment for the sale of Business1, however, the sale improved the Company's
profitability and cash flow.
F-16
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Summarized operating results for the
discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2004 2003
---------------------------- ------------------------------
PATIENT1 BUSINESS1 TOTAL PATIENT1 BUSINESS1 TOTAL
-------- --------- ----- -------- --------- -------
(IN THOUSANDS)
Revenue...................... $ -- $ 106 $ 106 $15,247 $ 474 $15,721
==== ===== ===== ======= ======= =======
Loss from discontinued
operations before income
taxes...................... $(18) $(303) $(321) $(1,270) $(3,589) $(4,859)
Income tax expense........... -- -- -- 46 -- 46
---- ----- ----- ------- ------- -------
Loss from discontinued
operations, net of tax..... $(18) $(303) $(321) $(1,316) $(3,589) $(4,905)
==== ===== ===== ======= ======= =======
There were no assets and liabilities for the discontinued operations at
December 31, 2005, and 2004.
In October of 2001, the Company received $1.0 million in cash from the
buyer of the government division of Impact when the term of the purchase
agreement escrow expired. This amount was recorded as a component of
discontinued operations. In May of 2001, the Company received an insurance
settlement related to a matter filed against the commercial division of Impact
of approximately $3.0 million, which was recorded as a component of discontinued
operations. The Company continues to pursue claims against a former vendor of
this division for damages incurred in this matter.
During the years ended December 31, 2005, 2004, and 2003, the Company also
incurred expenses of approximately $20,000, $14,000 and $0.9 million,
respectively, which were primarily legal costs, associated with MSC and Impact.
Pursuant to SFAS No. 144, the consolidated financial statements of the Company
have been presented to reflect the activity associated with MSC and Impact as
discontinued operations for all periods presented.
The net operating results of these segments have been reported in the
Consolidated Statements of Income as "Loss from discontinued operations, net of
tax -- Other" and the net cash flows have been reported in the Consolidated
Statements of Cash Flows as "Net cash used for discontinued operations."
5. RESTRUCTURING EXPENSES
In early 1995, the Company initiated a reengineering program focused upon
its billing and accounts receivable management operations (the "Reengineering
Project"). As part of the Physician Solutions Restructuring Plan, the Company
recorded restructuring reserves in 1995 through 1996. In 1996, the Company
abandoned its Reengineering Project. The Company periodically reevaluates the
adequacy of the reserves established for the Physician Solutions Restructuring
Plan. In 1997 and 1999 the Company recorded an additional expense of $1.7
million and $0.3 million, respectively, for lease termination costs.
A description of the type and amount of restructuring costs, recorded at
the commitment date and subsequently incurred for the restructurings discussed
above, is as follows:
RESERVE COSTS RESERVE COSTS RESERVE COSTS RESERVE
BALANCE PAID OR BALANCE PAID OR BALANCE PAID OR BALANCE
JANUARY 1, OTHERWISE DECEMBER 31, OTHERWISE DECEMBER 31, OTHERWISE DECEMBER 31,
2003 SETTLED 2003 SETTLED 2004 SETTLED 2005
---------- --------- --------------- --------- --------------- --------- ---------------
(IN THOUSANDS)
Lease termination $1,980 $(550) $1,430 $(326) $1,104 $(297) $807
costs..............
F-17
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The terminated leases have various expiration dates through 2011. The
estimated lease termination costs to be incurred within the next 12 months are
classified in accrued expenses in the Company's Consolidated Balance Sheets. The
estimated lease termination costs to be incurred beyond the next 12 months are
classified in other obligations in the Company's Consolidated Balance Sheets.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
AS OF DECEMBER 31,
---------------------
2005 2004
--------- ---------
(IN THOUSANDS)
Land........................................................ $ 406 $ 590
Buildings................................................... 2,751 2,751
Furniture and fixtures...................................... 14,936 14,876
Equipment................................................... 105,212 106,539
Equipment under capital leases.............................. 711 625
Leasehold improvements...................................... 6,797 6,250
--------- ---------
130,813 131,631
Less accumulated depreciation............................... (113,970) (116,119)
--------- ---------
$ 16,843 $ 15,512
========= =========
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
AS OF AS OF
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------- -----------------------
ESTIMATED GROSS ACCUMULATED GROSS ACCUMULATED
USEFUL LIFE AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- -------- ------------ -------- ------------
Goodwill.................... Indefinite $ 44,707 $ (6,508) $ 39,057 $ (6,508)
Client lists................ 5-10 years 48,052 (42,795) 46,181 (39,305)
Developed technology........ 5 years 5,486 (4,319) 4,616 (3,229)
Trademarks.................. Indefinite 1,586 -- 1,316 --
Software development
costs..................... 5 years 31,914 (18,121) 25,794 (14,589)
Other....................... 1 year 150 (7) -- --
-------- -------- -------- --------
$131,895 $(71,750) $116,964 $(63,631)
======== ======== ======== ========
On December 1, 2005, the Company acquired Integra for a purchase price of
approximately $10.8 million. The Company paid approximately $5.4 million of the
purchase price at closing and will pay the remaining purchase price of
approximately $5.4 million at the one-year anniversary. In addition, if Integra
achieves certain revenue objectives over the first two years, the Company will
pay an additional purchase price amount of approximately $3.8 million. Since the
amount is contingent, the additional purchase price is not included in the
Company's December 31, 2005, Consolidated Balance Sheet. The Company recorded
the acquisition using the purchase method of accounting and, accordingly, has
preliminarily allocated the purchase price to the assets acquired and
liabilities assumed based on their estimated fair market value at the date of
acquisition. Approximately $2.0 million of the purchase price was allocated to
client lists and other with a four to seven-year life, approximately $0.9
million was allocated to a developed technology with a five-year life and
approximately $5.9 million of the purchase
F-18
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price was allocated to indefinite lived intangible assets. The remaining $1.7
million of the purchase price was allocated to tangible assets acquired.
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. The Company recorded the acquisition using the purchase method of
accounting and, accordingly, 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.
Expenditures on capitalized software development costs were approximately
$6.1 million, $6.7 million and $4.0 million in 2005, 2004 and 2003,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $3.5 million, $2.6 million and $2.1 million in 2005, 2004 and
2003, respectively. The unamortized balance of software development costs at
December 31, 2005, and 2004 was $13.8 million and $11.2 million, respectively.
The Company amortizes software development costs using the straight-line method
over the estimated useful lives of the assets, which are generally three to five
years.
The acquisition related intangible asset amortization expense estimated as
of December 31, 2005, for the five years following 2005 and thereafter is as
follows (in thousands):
2006........................................................ $1,823
2007........................................................ 1,326
2008........................................................ 1,273
2009........................................................ 1,055
2010........................................................ 835
Thereafter.................................................. 255
------
$6,567
======
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
AS OF DECEMBER 31,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Accrued restructuring and severance costs, current.......... $ 232 $ 262
Accrued legal and accounting costs.......................... 1,653 3,494
Accrued legal settlements................................... 944 400
Accrued taxes............................................... 887 1,301
Accrued interest............................................ 312 4
Funds due clients........................................... 3,117 3,107
Accrued costs -- businesses acquired........................ 5,485 502
Other....................................................... 4,372 5,558
------- -------
$17,002 $14,628
======= =======
F-19
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consists of the following:
AS OF DECEMBER 31,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
3.25% Convertible Subordinated Debentures due 2024.......... $125,000 $125,000
Capital lease obligations, weighted average effective
interest rate of 1.6% and 3.1% in 2005 and 2004,
respectively.............................................. 625 625
-------- --------
125,625 125,625
Less current portion........................................ (135) (98)
-------- --------
$125,490 $125,527
======== ========
On February 20, 1998, the Company issued $175 million of 9 1/2 Senior Notes
due 2005 (the "Notes"). On March 17, 2003, the Company repurchased $15.0 million
of the Notes at par plus accrued interest of approximately $0.1 million. The
Company wrote off approximately $0.2 million of deferred debt issuance costs
associated with the original issuance of the Notes related to this repurchase,
which is included in loss on extinguishment of debt in the Company's
Consolidated Statement of Income for the year ended December 31, 2003.
On August 12, 2003, the Company commenced a cash tender offer for its then
outstanding $160 million of Notes (the "Tender Offer"). On September 11, 2003,
the Company repurchased $143.6 million of the Notes that were tendered at the
redemption price of 102.625% of the principal amount, as required under the
Indenture governing the Notes, and accrued interest of approximately $1.0
million. The remaining $16.4 million of the Notes were retired on September 18,
2003, through a call initiated by the Company on August 12, 2003, at the
redemption price of 102.375% of the principal amount plus accrued interest of
approximately $10,000 (the "Call"). The Company wrote-off approximately $1.4
million of deferred issuance costs associated with the original issuance of the
Notes related to their retirement through the Tender Offer and the Call, which
are included in loss on extinguishment of debt in the Company's Consolidated
Statements of Income. In addition, the Company incurred expenses associated with
the retirement of the Notes of approximately $4.7 million, including the Tender
Offer premium and the Call premium which are also included in loss on
extinguishment of debt in the Company's Consolidated Statement of Operations.
On September 11, 2003, the Company entered into a $175 million Credit
Agreement (the "Credit Agreement"), consisting of a $125 million Term Loan B
(the "Term Loan B") and a $50 million revolving credit facility (the "Revolving
Credit Facility"). The Company had approximately $118.8 million outstanding
under the Term Loan B as of June 30, 2004, under a LIBOR-based interest contract
bearing interest at 5.36%. The Company has had no borrowings outstanding under
the Revolving Credit Facility since its inception.
On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A of the Securities Act of
1933, as amended. As originally issued, the Debentures were convertible into
shares of the Company's Common Stock at an initial conversion rate of 56.0243
shares per $1,000 principal amount (a conversion price of approximately $17.85)
once the Company's Common Stock share price reaches 130% of the conversion
price, or a share price of approximately $23.20. In November 2004, the Company
exercised its irrevocable option to pay, when due, the principal of Debentures
submitted for conversion in cash rather than shares of the Company's Common
Stock. The Company will satisfy any amount above the conversion trigger price of
$17.85 through the issuance of
F-20
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the $118.8 million
outstanding under the Term Loan B, as well as to repurchase, for approximately
$25 million, an aggregate of approximately 2.0 million shares of the Company's
outstanding common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. In addition, the Company
incurred expenses associated with the retirement of the Term Loan B of
approximately $5.9 million, which included the write-off of approximately $3.5
million of deferred debt issuance costs, and which is classified as loss on
extinguishment of debt in the Company's Consolidated Statements of Income.
On June 30, 2004, the Company also amended the Revolving 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%. The Company is
required to pay an annual commitment fee of 0.5% of the unused capacity related
to the Revolving Credit Facility. The Company did not incur any borrowings under
the Revolving Credit Facility in connection with the retirement of the Term Loan
B or the share repurchase. 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 December 31, 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 December 31, 2005.
The Company's policy is to amortize debt issuance costs using the
straight-line method over the life of the debt agreement. Amortization expense
related to debt issuance costs on the Notes, the Revolving Credit Facility,
Credit Agreement and the Debentures for the years ended 2005, 2004, and 2003
were $1.3 million, $1.3 million and $1.5 million, respectively.
F-21
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt, including capital leases, are
as follows at December 31, 2005 (in thousands):
2006........................................................ $ 135
2007........................................................ 138
2008........................................................ 143
2009........................................................ 147
2010........................................................ 62
Thereafter.................................................. 125,000
--------
$125,625
========
The Company's capital leases consist principally of leases for equipment.
As of December 31, 2005, the net book value of equipment subject to capital
leases totaled $0.6 million.
10. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, which expire at various dates through 2016. The Company's operating
leases generally have one to three year terms with renewal options and may
contain customary rent holidays, rent concessions or leasehold improvement
incentives. Rent expense is recognized on a straight-line basis over the term of
the lease, including, when applicable, rent holidays, rent concessions and
leasehold improvement incentives. Rent expense was $14.2 million, $14.1 million
and $14.4 million for the years ended December 31, 2005, 2004, and 2003,
respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
2006........................................................ $12,028
2007........................................................ 9,726
2008........................................................ 8,038
2009........................................................ 7,197
2010........................................................ 5,805
Thereafter.................................................. 16,422
-------
$59,216
=======
11. LEGAL MATTERS
PENDING LEGAL MATTERS
The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not 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.
F-22
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SETTLED LEGAL MATTERS
On March 10, 2006, the Company concluded binding arbitration for a claim of
breach of contract arising from an acquisition completed in 2000. The binding
arbitration resulted in an award to be paid by Per-Se of approximately $1.3
million, including interest of $0.3 million. The Company included the award in
Other Expenses and the interest in Interest Expense in the Company's 2005
Consolidated Statement of Income. In Note 18, the costs associated with the
award are classified in the Corporate segment.
On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Lloyd's. In the settlement, Lloyd's agreed to pay the Company
$20 million in cash by July 9, 2004. Lloyd's also agreed to defend, settle or
otherwise resolve, at their expense, the two remaining pending claims covered
under the errors and omissions ("E&O") policies issued to the Company by
Lloyd's. In exchange, the Company provided Lloyd's with a full release of all
E&O and directors and officers and company reimbursement ("D&O") policies. The
California Superior Court retained jurisdiction to enforce any aspect of the
settlement agreement.
As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O settlements covered by Lloyd's. Effective
on May 12, 2004, as a result of negotiations among the Company, Lloyd's, and a
party to a prior E&O settlement with the Company, the Lloyd's settlement was
amended to reduce by $3.8 million the additional amounts to be paid by the
Company under the prior E&O settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
receivable from Lloyd's by $3.8 million. 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 year ended December 31, 2004.
12. STOCKHOLDERS' RIGHTS PLAN
On January 21, 1999, the Board approved a stockholders' rights agreement
(the "Rights Agreement"). Pursuant to the Rights Agreement, the Company declared
a dividend of one right for each outstanding share of Common Stock to
stockholders of record at the close of business on February 16, 1999. Each right
entitles the registered holder to purchase from the Company a unit (a "Unit")
consisting of one one-hundredth of a share of Series A Junior Participating
Preferred Stock, without par value, at a purchase price of $75 per Unit.
Initially, the rights are deemed to be attached to certificates
representing all outstanding shares of Common Stock, and they are not
represented by separate rights certificates. Subject to certain exceptions
specified in the Rights Agreement, the rights will separate from the Common
Stock and become exercisable upon the earlier to occur of (i) 10 business days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding Common Stock or (ii) 10 business days following
the commencement of a tender offer for the Common Stock.
In the event that a person becomes an Acquiring Person, except pursuant to
an offer for all outstanding shares of Common Stock that the independent
directors of the Company determine to be fair and otherwise in the best
interests of the Company and its stockholders (after receiving advice from one
or more investment banking firms), each holder of a right will thereafter have
the right to receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value equal to two
times the exercise price of the right (i.e., $150 per Unit).
F-23
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the rights become
exercisable for Common Stock (or other consideration) of the Company, or for
common stock of the acquiring company, or in the event of the redemption of the
rights as set forth above. As of December 31, 2005, and 2004, no rights have
become exercisable under this agreement.
On May 4, 2000, the Company amended the Rights Agreement to provide that
the meaning of the term "Acquiring Person" shall not include Basil P. Regan and
Regan Partners, L.P. (collectively, "Regan Fund Management"), so long as Regan
Fund Management does not become the beneficial owner of 20% or more of the
outstanding shares of Common Stock. Effective March 6, 2002, the Company amended
the Rights Agreement to rescind the May 4, 2000, amendment, thereby making Regan
Fund Management subject to the 15% beneficial ownership threshold described
above. On March 10, 2003, the Company amended the Rights Agreement to provide
that the term "Acquiring Person" shall not include ValueAct Capital Partners,
L.P. ("ValueAct Partners"), ValueAct Capital Partners II, L.P. ("ValueAct
Partners II"), ValueAct Capital International, Ltd. ("ValueAct International"),
VA Partners, L.L.C. ("VA Partners"), Jeffrey W. Ubben, George F. Hamel, Jr., and
Peter H. Kamin (ValueAct Partners, ValueAct Partners II, ValueAct International,
VA Partners and Messrs. Ubben, Hamel and Kamin, and their affiliates,
collectively, ("ValueAct"), so long as ValueAct does not become the Beneficial
Owner of 20% or more of the then outstanding shares of Common Stock. As of
December 31, 2005, and 2004, ValueAct was the beneficial owner of approximately
17.6% and 17.7%, respectively, of the outstanding shares of Common Stock.
On February 18, 2005, the Company amended the Rights Agreement to remove
Section 23(c) thereof (the "slow hand" provision) in its entirety. Section 23(c)
previously provided that if, within 180 days of a public announcement by a third
party of an intent or proposal to engage in an acquisition of or business
combination with the Company or otherwise to become an Acquiring Person there
was an election of directors resulting in a majority of the Board being
comprised of persons who were not nominated by the Board in office immediately
prior to such election, then following the effectiveness of such election, the
rights could not be redeemed for a period of 180 days unless (1) the rights were
otherwise then redeemable absent the provisions of paragraph 23(c) and (2) the
Board fulfilled certain specified procedural obligations.
This amendment also amended and restated Section 29 of the Rights Agreement
to create a three-year independent director evaluation ("TIDE") Committee,
consisting of independent members of the Board, that will review and evaluate
the Rights Agreement at least once every three years to consider whether the
maintenance of the Rights Agreement continues to be in the best interest of the
Company, its stockholders and other relevant constituencies of the Company. The
TIDE Committee may also review and evaluate the Rights Agreement if (1) any
person has made an acquisition proposal to the Company or its stockholders, or
taken any other action that could cause such person to become an Acquiring
Person, and (2) a majority of the members of the TIDE Committee deems such
review and evaluation appropriate after giving due regard to all relevant
circumstances.
On August 26, 2005, the Company and NDCHealth Corporation entered into an
Agreement and Plan of Merger (the "Merger Agreement") providing for the
Company's acquisition of NDCHealth Corporation. Effective immediately prior to
the execution of the Merger Agreement, the Company amended the Rights Agreement
with the purpose and intent of rendering the Rights Agreement inapplicable to
the transaction.
F-24
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies and a Non-Qualified Stock Option Plan for Non-Executive Employees.
Options expire ten to eleven years after the date of grant and generally vest
over a three-to-five year period. The total number of options available for
future grant under these stock option plans was approximately 0.8 million at
December 31, 2005.
The Company also has a Non-Qualified Non-Employee Director Stock Option
Plan (the "Director Plan") for non-employees who serve on the Company's Board of
Directors. The Director Plan provides for an initial grant of 10,000 options at
a strike price equal to the average of the fair market values for the five
trading days prior to the date of the grant. Additionally, each non-employee
director receives an annual grant of 10,000 options at each subsequent annual
meeting in which the non-employee director is a member of the Board of
Directors. All options granted under the Director Plan originally vested over a
five-year period and expired eleven years from the date of grant. On April 1,
1999, the Director Plan was amended so that all future options granted under the
Director Plan fully vest as of the date of grant but are not exercisable until
one year after the date of grant. As of December 31, 2005, the Company had
108,539 options available for future grant under this plan.
In June of 1999, in connection with the settlement with the former
shareholders of Medical Management Sciences, Inc., the Company issued warrants
to purchase 166,667 shares of Common Stock. These warrants expired unexercised
on June 25, 2004.
Activity related to all stock option plans is summarized as follows (shares
in thousands):
2005 2004 2003
-------------------------- -------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
Options outstanding as
of January 1........ 6,584 $10.19 6,635 $ 8.94 7,319 $ 8.36
Granted............... 220 $17.39 1,532 $14.15 685 $11.66
Exercised............. (1,187) $ 7.77 (1,003) $ 7.38 (1,159) $ 6.87
Canceled.............. (231) $13.76 (580) $11.16 (210) $ 8.84
------- ------- -------
Options outstanding as
of December 31...... 5,386 $10.86 6,584 $10.19 6,635 $ 8.94
======= ======= =======
Options exercisable as
of December 31...... 3,590 $ 9.82 3,731 $ 9.16 3,838 $ 9.31
======= ======= =======
Weighted-average fair
value of options
granted during the
year................ $ 6.92 $ 5.50 $ 5.25
======= ======= =======
F-25
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2005 (shares in thousands):
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2005 LIFE (YEARS) PRICE 2005 PRICE
------------------------ -------------- ------------ --------- -------------- ---------
$3.75 to $6.25............. 879 6.10 $ 5.90 758 $ 5.88
$6.64 to $7.53............. 1,354 6.20 $ 7.10 1,113 $ 7.10
$7.63 to $12.70............ 1,060 7.25 $10.54 752 $ 9.75
$12.92 to $14.02........... 816 8.96 $13.75 301 $13.62
$14.61 to $16.13........... 937 6.65 $15.54 486 $15.88
$16.14 to $29.34........... 339 7.05 $19.87 178 $20.77
$30.00..................... 1 1.49 $30.00 1 $30.00
----- -----
$3.75 to $30.00............ 5,386 6.95 $10.86 3,589 $ 9.82
===== =====
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted to employees with an exercise price equal to the quoted market
price of the Common Stock on the date of grant and that vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the Company estimates the fair value of each option grant as of the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
2005 2004 2003
----- ----- -----
Expected life (years)....................................... 3.4 4.5 5.0
Risk-free interest rate..................................... 3.90% 3.60% 3.00%
Dividend rate............................................... 0.00% 0.00% 0.00%
Expected volatility......................................... 47.31% 54.31% 53.05%
Per-Se has never paid cash dividends on its Common Stock. The Credit
Agreement entered into on September 11, 2003, as amended, contains restrictions
on the Company's ability to declare or pay cash dividends on its Common Stock.
14. DEFERRED STOCK UNIT PLAN
Effective October 1, 2001, and approved by the stockholders at the annual
meeting held on May 2, 2002, the Board of Directors adopted the Per-Se
Technologies, Inc. Deferred Stock Unit Plan (the "Plan"). The purpose of the
Plan is to further align the interests of the Company's non-employee directors
and a select group of key employees of the Company (and its affiliates) with the
interests of stockholders by encouraging additional ownership of the Common
Stock. The Plan also provides the participants with an opportunity to defer
taxation of income in consideration of the valuable services that they provide
to the Company. Non-employee directors of the Company are automatically eligible
to participate in the Plan. The Compensation Committee of the Board of Directors
may select key employees of the Company from time to time as eligible
participants. Currently, seven non-employee directors and six executives
(including two employee directors) are eligible to participate in the Plan.
Pursuant to the Plan, a non-employee director may elect to defer up to 100%
of his Board and committee meeting fees and his annual retainer each year.
Eligible employees may elect each year to defer
F-26
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
up to 50% of their annual incentive bonus and receive an enhancement bonus equal
to $0.25 for each dollar of compensation deferred. The Compensation Committee
may also from time to time in its sole discretion designate such other
enhancement bonus contributions as it deems appropriate. The cash amount of such
deferrals and, in the case of employee participants, the enhancement bonuses
will be converted to stock units, by dividing the amount to be deferred, plus
any enhancement bonus, by the fair market value of the Common Stock on the date
the amounts are credited to the participant's account.
Participants are always fully vested in the stock units converted from
deferrals of compensation. However, stock units that are converted from an
enhancement bonus credited to an employee participant, and any related dividend
equivalent stock units, will vest at the rate of 20% each year over a period of
five years from the date of deferral of the related compensation. If a
participant's employment is terminated for "cause" (as defined in the Plan) or
if he or she resigns without "good reason" (as defined in the Plan) before the
enhancement bonus stock units are vested, he or she will forfeit any such
unvested stock units.
For the years ended December 31, 2005, and 2004, the Plan purchased a total
of 11,193 shares and 19,925 shares, respectively, of the Company's Common Stock
at a total cost of approximately $0.4 million and $0.3 million, respectively.
For the years ended December 31, 2005, and 2004, the Plan distributed a total of
40,023 shares and 7,672 shares, respectively. In accordance with EITF Issue No.
97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested, the shares purchased and the Company's
obligation are reflected as treasury stock and deferred compensation obligation,
respectively, in the financial statements.
15. INCOME TAXES
Income tax (benefit) expense attributable to continuing operations
comprises the following:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal............................................ $ 569 $ 83 $ (701)
State.............................................. 316 (82) 728
Foreign............................................ 8 13 --
-------- -------- --------
893 14 27
======== ======== ========
Deferred:
Federal............................................ 13,183 1,485 6,624
State.............................................. 2,178 879 10,869
Valuation benefit.................................... (17,540) (30,479) (17,493)
-------- -------- --------
(2,179) (28,115) --
-------- -------- --------
Income tax (benefit) expense attributable to
continuing operations.............................. $ (1,286) $(28,101) $ 27
======== ======== ========
F-27
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to income before income taxes and income tax (benefit) expense is
as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
(IN THOUSANDS)
Income tax expense at federal statutory rate......... $ 12,484 $ 5,858 $ 5,566
State taxes, net of federal benefit.................. 1,936 825 480
Change in tax rates.................................. 552 (4,428) 10,869
Valuation allowance.................................. (17,540) (30,479) (17,493)
Expiration of net operating losses and credits....... 1,219 -- --
Other................................................ 63 123 605
-------- -------- --------
$ (1,286) $(28,101) $ 27
======== ======== ========
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes at December 31, 2005, and 2004,
are as follows:
AS OF DECEMBER 31,
---------------------
2005 2004
--------- ---------
(IN THOUSANDS)
CURRENT:
Accounts receivable, unbilled............................... $ (100) $ (91)
Accrued expenses............................................ 4,627 5,336
Net operating loss carryforwards............................ 14,616 12,799
Valuation allowance......................................... (16,781) (15,955)
Other....................................................... 1,694 1,175
--------- ---------
$ 4,056 $ 3,264
========= =========
NONCURRENT:
Net operating loss carryforwards............................ $ 129,278 $ 138,512
Valuation allowance......................................... (108,537) (121,473)
Depreciation and amortization............................... 3,033 7,316
Credits..................................................... 861 485
Other....................................................... 1,603 11
--------- ---------
$ 26,238 $ 24,851
========= =========
The 2004 current and non-current deferred tax asset balances have been
reclassified to conform to the 2005 presentation. This reclassification resulted
in a $9.5 million reduction of the previously reported 2004 current deferred tax
asset and a corresponding $9.5 million increase to the non-current deferred tax
asset. This reclassification resulted from a reallocation of the valuation
allowance between current and non-current deferred tax assets.
At December 31, 2005, the Company had alternative minimum tax ("AMT")
credits of approximately $0.9 million that may be carried forward indefinitely
as a credit against regular tax liability. In addition, the Company had federal
net operating loss carryforwards ("NOLs") for income tax purposes of
approximately $375.4 million, which consist of $346.8 million of consolidated
NOLs and $28.6 million of separate return limitation year NOLs. Of the $375.4
million of NOLs available, $105.1 million relate to
F-28
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-qualified stock option deductions. When realized, the resulting benefits of
those deductions will be credited to stockholder's equity. The NOLs will expire
at various dates from 2006 through 2024 as follows:
AMOUNTS
EXPIRING
-------------
(IN MILLIONS)
2006 to 2007................................................ $ 20.6
2008 to 2010................................................ 69.1
2011 to 2014................................................ 136.1
2015 to 2024................................................ 149.6
------
$375.4
======
In addition to the NOL's above, the Company's state net operating loss
carryforwards at December 31, 2005, for income tax purposes was approximately
$298.5 million. These NOL's will expire at various dates from 2006 through 2024.
Prior to 2004, the Company 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 NOLs. 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. As a result, the Company released a portion of the allowance
resulting in an income tax benefit of $28.1 million for 2004. The valuation
allowance for deferred tax assets decreased by $12.1 million in 2005, primarily
due to the utilization of NOLs to offset current taxable income. Approximately
$2.2 million of the $12.1 million decrease relates to an additional release of
the valuation allowance in the fourth quarter of 2005 based upon the Company's
projection of taxable income for 2006 and 2007. 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. Approximately
$37.0 million of the total valuation allowance of $125.3 million at December 31,
2005, relates to non-qualified stock option deductions. The Company will
continue to release its valuation allowance as a benefit to continuing
operations until only the stock option benefit remains. Any release of valuation
allowance related to stock option benefit will be recorded to Stockholders'
Equity.
16. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans. The Company matches a percentage of the employee contributions. The
Company's contribution expense was $2.2 million, $2.1 million and $1.8 million
for the years ended December 31, 2005, 2004, and 2003, respectively.
17. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities are as follows:
2005 2004 2003
------ ------ -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Additions to capital lease obligations.................. $ -- $ 625 $ --
Liabilities assumed in acquisitions..................... 241 947 --
Cash paid for:
Interest................................................ 4,518 5,686 18,296
Extinguishment of debt.................................. -- 6,378 5,412
Income taxes............................................ 626 640 565
F-29
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SEGMENT REPORTING
The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its two
operating divisions: Physician Solutions and Hospital Solutions. Both operating
divisions generate approximately 100% of their revenue in the U.S.
The Physician Solutions division provides Connective Healthcare services
and 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. 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 Solutions 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 Solutions division provides Connective Healthcare solutions
designed to increase revenue and decrease expenses for hospitals, with a focus
on revenue cycle management and resource management. The division's revenue
cycle management solutions enable a hospital's central billing office to improve
its revenue cycle. The division has one of the largest clearinghouses in the
medical industry, which provides an important infrastructure to support its
revenue cycle offering. The division also provides resource management solutions
that enable hospitals efficiently to manage resources, such as personnel and the
operating room, to reduce costs and improve their bottom line. The division
primarily recognizes revenue on a per-transaction basis for its revenue cycle
management solutions and primarily recognizes revenue on a
percentage-of-completion basis or upon software shipment for sales of its
resource management software solutions. Approximately 90% of the division's
revenue is recurring due to its transaction-based business and the maintenance
revenue from its substantial installed base for the revenue cycle management and
resource management software solutions. The business of the Hospital Solutions
division is conducted by the following wholly owned subsidiaries of the Company:
Per-Se Transaction Services, Inc., an Ohio corporation; Patient Account
Management Services, Inc., an Ohio corporation; PST Products, LLC, a California
limited liability company; and Knowledgeable Healthcare Solutions, Inc., an
Alabama corporation. All of these subsidiaries do business under the name
"Per-Se Technologies."
The Company evaluates each segment's performance based on its segment
operating income. Segment operating income is revenue less cost of services,
selling, general and administrative expenses and other expenses.
The Hospital Solutions segment revenue includes intersegment revenue for
services provided to the Physician Solutions segment, which are shown as
Eliminations to reconcile to total consolidated revenue.
F-30
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's segment information from continuing operations is as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
(IN THOUSANDS)
Revenue:
Physician Solutions................................ $274,576 $260,473 $251,251
Hospital Solutions................................. 112,282 105,923 97,240
Eliminations....................................... (14,140) (13,605) (13,322)
-------- -------- --------
$372,718 $352,791 $335,169
======== ======== ========
Segment operating expenses:
Physician Solutions................................ $243,231 $232,907 $221,895
Hospital Solutions................................. 87,915 82,600 74,671
Corporate.......................................... 15,610 21,955 15,417
Eliminations....................................... (14,140) (13,605) (13,322)
-------- -------- --------
$332,616 $323,857 $298,661
======== ======== ========
Segment operating income:
Physician Solutions................................ $ 31,345 $ 27,566 $ 29,356
Hospital Solutions................................. 24,367 23,323 22,569
Corporate.......................................... (15,610) (21,955) (15,417)
-------- -------- --------
$ 40,102 $ 28,934 $ 36,508
======== ======== ========
Interest expense..................................... $ 6,088 $ 6,825 $ 14,646
======== ======== ========
Interest income...................................... $ (1,655) $ (525) $ (297)
======== ======== ========
Loss on extinguishment of debt....................... $ -- $ 5,896 $ 6,255
======== ======== ========
Income before income taxes........................... $ 35,669 $ 16,738 $ 15,904
======== ======== ========
Depreciation and amortization:
Physician Solutions................................ $ 8,092 $ 9,331 $ 10,475
Hospital Solutions................................. 6,492 5,661 5,270
Corporate.......................................... 369 464 764
-------- -------- --------
$ 14,953 $ 15,456 $ 16,509
======== ======== ========
Capital expenditures and capitalized software
development costs:
Physician Solutions................................ $ 7,224 $ 6,547 $ 5,467
Hospital Solutions................................. 6,073 5,667 4,655
Corporate.......................................... 932 804 221
-------- -------- --------
$ 14,229 $ 13,018 $ 10,343
======== ======== ========
F-31
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF DECEMBER 31,
-------------------
2005 2004
-------- --------
(IN THOUSANDS)
Identifiable Assets:
Physician Solutions(1).................................... $ 66,380 $ 63,611
Hospital Solutions(1)..................................... 71,482 59,964
Corporate................................................. 101,661 79,116
-------- --------
$239,523 $202,691
======== ========
---------------
(1) Identifiable assets in the Physician Solutions division include
approximately $8,936 of goodwill for all periods presented. Identifiable
assets in the Hospital Solutions division include approximately $29,263 and
$23,613 of goodwill as of December 31, 2005, and 2004, respectively.
19. SUBSEQUENT EVENTS (UNAUDITED)
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
by Per-Se. The transaction was completed on January 6, 2006. The acquisition
included the NDCHealth physician, hospital and retail pharmacy businesses for
total consideration of approximately $665 million. The transaction resulted in
consideration to NDCHealth's shareholders of $19.50 per share, with $14.05 paid
in cash and $5.45 paid in Per-Se stock. As part of the transaction, Wolters
Kluwer, based in Amsterdam, the Netherlands, purchased the pharmaceutical
information management business from NDCHealth for $382 million in cash.
In connection with the acquisition, the Company secured financing in the
form of a new senior credit facility consisting of a $435 million Term Loan B
and a $50 million revolving credit facility ("Senior Credit Facility"). The Term
Loan B bears interest at a rate of LIBOR plus 2.25% or Base Rate, as defined by
the Senior Credit Facility agreement, plus 1.25% and matures in seven years. The
revolving credit facility has an interest rate that varies between LIBOR plus
1.50% and LIBOR plus 2.50% or between Base Rate plus 0.5% and Base Rate plus
1.50%, based on performance, and matures in five years. The Company has incurred
no borrowings under the revolving credit facility. All outstanding debt of
NDCHealth was retired in connection with the closing of the transaction.
Also on January 6, 2006, the Company entered into a four-year interest rate
swap agreement, in order to hedge against potential interest rate fluctuations
resulting from the variable interest rate under the terms of the new senior
credit facility. Pursuant to the terms of the interest rate swap, the Company is
obligated to periodically pay an amount based on a fixed interest rate, and the
Company will receive an amount based on a variable rate. The variable rate is
based on the three-month LIBOR rate available at the time. By entering into the
interest rate swap, the Company has effectively fixed the maximum interest rate
that the Company will pay on a portion of the $435 million outstanding under the
Credit Facility at 4.76% per annum plus the applicable spread, which is 225
basis points. The amount of the Credit Facility that is covered by the swap is
$125 million in years one and two, decreasing to $100 million in year three and
$75 million in year four. The interest rate swap will terminate on December 31,
2009, unless sooner terminated pursuant to its terms.
As of December 31, 2005, the Company had incurred approximately $3.8
million of transaction costs related to the acquisition of NDCHealth that are
included in other long-term assets in the Company's Consolidated Balance Sheet.
The Company will record the acquisition using the purchase method of
accounting and, accordingly, will allocate the purchase price to the assets
acquired and liabilities assumed based on their estimated fair
F-32
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value at the date of acquisition. The Company has not yet obtained all
the information related to the fair value of acquired assets, contingent
liabilities, total expenses related to the acquisition and acquisition
liabilities required to finalize the purchase price allocation.
In the first quarter of 2006, the Company will reassess the valuation
allowance recorded against its deferred tax assets. This assessment will be
based upon projections of taxable income for the next two years including the
operations of the businesses acquired in the NCDHealth transaction. The Company
anticipates releasing an additional portion of its valuation allowance in the
first quarter of 2006 as a result of the assessment.
For additional information, refer to the Company's Form S-4/A-2 filed on
November 30, 2005.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005
Revenue.................................. $92,030 $93,300 $94,006 $93,382
Cost of services......................... 60,037 62,470 63,089 62,776
Income from continuing operations........ 9,431 7,546 9,823 10,155
Discontinued operations, net of tax...... -- -- -- 414
Net income............................... 9,431 7,546 9,823 10,569(1)
Net income per common share -- basic from
continuing operations.................. 0.31 0.25 0.33 0.34
Discontinued operations, net of tax,
per common share.................... -- -- -- 0.01
Net income per common share -- basic... 0.31 0.25 0.33 0.35
Shares used to compute net income per
common share -- basic............... 30,294 29,773 29,994 30,277
Net income per common share -- diluted
from continuing operations............. 0.29 0.23 0.29 0.29
Discontinued operations, net of tax,
per common share.................... -- -- -- 0.01
Net income per common
share -- diluted.................... 0.29 0.23 0.29 0.30
Shares used to compute net income per
common share -- diluted............. 32,552 32,410 33,792 34,792
F-33
PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
-----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ---------- --------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004
Revenue.................................. $84,601 $88,141 $90,641 $89,408
Cost of services......................... 55,398 56,939 60,486 59,838
Income (loss) from continuing
operations............................. 1,607 (1,387) 8,807 35,812
Discontinued operations, net of tax...... (580) 3,791 (107) 215
Net income............................... 1,027 2,404 8,700 36,027(1)
Net income (loss) per common
share -- basic from continuing
operations............................. 0.05 (0.04) 0.29 1.18
Discontinued operations, net of tax, per
common share........................... (0.02) 0.12 -- 0.01
Net income per common share -- basic..... 0.03 0.08 0.29 1.19
Shares used to compute net income per
common share -- basic.................. 31,531 31,530 30,088 30,238
Net income (loss) per common share --
diluted from continuing operations..... 0.05 (0.04) 0.27 1.10
Discontinued operations, net of tax, per
common share........................... (0.02) 0.12 -- 0.01
Net income per common share -- diluted... 0.03 0.08 0.27 1.11
Shares used to compute net income per
common share -- diluted................ 34,200 31,530 32,168 32,511
---------------
(1) Includes the release of $2.2 million and $28.1 million of the valuation
allowance against the Company's deferred tax asset resulting in an income
tax benefit that was recorded in the fourth quarter of 2005 and 2004,
respectively.
F-34
PER-SE TECHNOLOGIES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
----------- ---------- ---------- ---------- ---------- -----------
YEAR ENDED DECEMBER 31, 2005 Allowance
for doubtful accounts................ $3,600 $ 891 -- $(1,143) $3,348
YEAR ENDED DECEMBER 31, 2004 Allowance
for doubtful accounts................ $4,795 $ 603 -- $(1,798) $3,600
YEAR ENDED DECEMBER 31, 2003 Allowance
for doubtful accounts................ $4,288 $1,159 -- $ (652) $4,795
F-35