| PER SE TECHNOLOGIES INC ITEM 1A RISK FACTORS |
| 7 ITEM 1A RISK FACTORS FORWARD-LOOKING STATEMENTS Certain statements included in Managementapstas Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report, including certain statements set forth under the captions "e Recent Developments, "e "e Description of Business by Industry Segment, "e "e Healthcare Industry, "e "e Regulation, "e "e Employees, "e "e Legal Proceedings, "e "e Market for the Registrantapstas Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, "e "e Recent Accounting Pronouncements, "e "e Overview of Critical Accounting Policies, "e "e Other, "e "e Results of Operations, "e "e Liquidity and Capital Resources, "e "e Interest Rate Sensitivity, "e "e Exchange Rate Sensitivity, "e "e Controls and Procedures, "e "e Summary of Significant Accounting Policies, "e "e Discontinued Operations, "e "e Long-term Debt, "e and "e Legal Matters, "e are "e forward-looking statements "e 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 "e Reform Act "e ) |
| Forward-looking statements include the Companyapstas 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 Companyapstas 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 "e Factors That May Affect Future Results of Operations, Financial Condition or Business "e in "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e 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 &apos 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 Companyapstas 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 Companyapstas 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 &apos and potential customers &apos 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 Companyapstas 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 &apos 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 Companyapstas services and solutions are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions |
| The Companyapstas ability to keep pace with changes in the healthcare industry may be dependent on a variety of factors, including the Companyapstas 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 Companyapstas operating results |
| It is possible that the Company will be unsuccessful in refining, enhancing and developing the Companyapstas 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 &apos S SERVICES In general, consolidation initiatives in the healthcare marketplace may result in fewer potential customers for the Companyapstas services |
| Some of these types of initiatives include employer initiatives such as creating group purchasing cooperatives ( "e GPOs "e ); 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 Companyapstas business management outsourcing services for particular physician practices |
| In addition, consolidation among the Companyapstas customers may result in such customers having greater leverage, which could adversely affect the price the Company is able to charge for the Companyapstas products |
| THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE THE COMPANY &apos S COSTS OF OPERATION OR HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY &apos 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 US 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 Companyapstas businesses |
| Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in the Companyapstas 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 Companyapstas 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 Companyapstas 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 Companyapstas 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 Companyapstas 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 Companyapstas customers seeking monetary damages |
| Under the Health Insurance Portability and Accountability Act of 1996 ( "e HIPAA "e ), 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 Companyapstas 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 Companyapstas 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 HIPAAapstas 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 Companyapstas 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 HIPAAapstas 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 Companyapstas 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 Companyapstas provider clients and consequently, decrease revenue derived by the Company and increase the cost of services |
| THE TRADING PRICE OF THE COMPANY &apos 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 Companyapstas 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 Companyapstas common stock, regardless of actual operating performance |
| 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 Companyapstas future operating performance, which may be affected by conditions beyond the Companyapstas control |
| 10 THE AGREEMENTS GOVERNING PER-SE &apos S DEBT LIMIT THE COMPANY &apos S FINANCIAL AND OPERATING FLEXIBILITY Per-Seapstas 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 &apos 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-Seapstas 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 companyapstas 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 NDCHealthapstas 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 managementapstas attention and any 11 delays or difficulties encountered in connection with the integration of the two companies &apos 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 companyapstas 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 &apos 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 NDCHealthapstas 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 NDCHealthapstas 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 Companyapstas 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 Companyapstas 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 Companyapstas 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 |
| 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 NDCHealthapstas physician business unit; (ii) the failure to timely write-down NDCHealthapstas 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, NDCHealthapstas previously issued financial statements were materially false and misleading, thereby causing the price of NDCHealthapstas 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 "e Exchange Act "e ), and Rule 10b-5 thereunder, and seeks unspecified monetary damages and 12 other relief |
| A US federal district court judge granted NDCHealthapstas 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 Companyapstas 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 Companyapstas 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-Seapstas 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 |
| 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 &apos S INTERNAL CONTROL OVER FINANCIAL REPORTING NDCHealthapstas former management and its independent registered public accounting firm identified three "e material weaknesses "e in its internal controls over financial reporting |
| As of May 27, 2005, NDCHealthapstas management concluded that NDCHealthapstas documentation and procedures relating to (1) the revenue recognition and billing processes, (2) the financial statement close process and (3) NDCHealthapstas 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 companyapstas financial reports filed pursuant to the Exchange Act |
| As a result, current and potential stockholders could lose confidence in the combined companyapstas financial reporting, which could harm the trading price of the Companyapstas common stock |