**UNITEDSTATES****SECURITIES ANDEXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

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**FORM10-Q**

 
| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**                                                                                                                                                                                            |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                        |
|       |   | **For the  quarterly period ended March 31, 2004**                                                                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                        |
|       |   | **OR**                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                        |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF  1934**                                                                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                                                                        |
|       |   | **For the  transition period from                        to                      ** |

 

**Commission file number 0-27444**

 

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**SOURCECORP, INCORPORATED**

(Exactname of registrant as specified in its charter)

 
| **DELAWARE**                                                                  |   | **75-2560895**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other jurisdictionof  incorporation or organization)               |   | (I.R.S.  EmployerIdentification  No.) |
|                                                                          |   |                                  |
| **3232 MCKINNEY AVENUE, SUITE 1000  DALLAS, TEXAS**                           |   | **75204**                             |
| (Address  of principal executive offices)                                     |   | (Zip  code)                           |
|                                                                          |   |                                  |
| REGISTRANT’S  TELEPHONE NUMBER, INCLUDING AREA CODE: **(214)  740-6500** |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý  No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes  ý  No  o

 

Asof April 30, 2004, 16,104,481 shares of the registrant’s Common Stock, $.01 parvalue per share, were outstanding.

 

 

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**SOURCECORP, INCORPORATED ANDSUBSIDIARIES**

**FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2004**

 

**INDEX**

 
| **PART  I.     FINANCIAL INFORMATION** |                                                                                                            |
|-----------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                                                            |                                                                                                            |   |
| Item 1                                                          | Condensed Financial  Statements                                                                                 |   |
|                                                            |                                                                                                            |   |
|                                                            | Condensed  Consolidated Balance Sheets — December 31, 2003 and March 31, 2004  (unaudited)                 |   |
|                                                            |                                                                                                            |   |
|                                                            | Condensed  Consolidated Statements of Operations — Three months ended March 31, 2003 and  2004 (unaudited) |   |
|                                                            |                                                                                                            |   |
|                                                            | Condensed  Consolidated Statements of Cash Flows — Three months ended March 31, 2003 and  2004 (unaudited) |   |
|                                                            |                                                                                                            |   |
|                                                            | Notes  to Condensed Consolidated Financial Statements (unaudited)                                               |   |
|                                                            |                                                                                                            |   |
| Item  2                                                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                     |   |
|                                                            |                                                                                                            |   |
| Item  3                                                         | Quantitative  and Qualitative Disclosures about Market Risk                                                     |   |
|                                                            |                                                                                                            |   |
| Item 4                                                          | Controls and Procedures                                                                                         |   |
|                                                            |                                                                                                            |   |
| **PART  II.     OTHER INFORMATION**    |                                                                                                            |
|                                                            |                                                                                                            |   |
| Item  1                                                         | Legal  Proceedings                                                                                              |   |
|                                                            |                                                                                                            |   |
| Item 6                                                          | Exhibits and  Reports on Form 8-K                                                                               |   |
|                                                            |                                                                                                            |   |
|                                                            | **SIGNATURES**                                                                                                  |   |
|                                                            |                                                                                                            |   |
|                                                            | **Index to  Exhibits**                                                                                          |   |
|                                                                 |                                                                                                                 |  |  |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.**                   **Financial Statements**

 

**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(IN THOUSANDS, EXCEPT SHARE DATA)**

 
|                                                                                                                                                                                                  |   | **December  31,  2003** |    | **March 31,  2004** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
|                                                                                                                                                                                                  |   | **(Unaudited)**         |    |
| **ASSETS**                                                                                                                                                                                            |   |                    |    |                |   |
| **CURRENT ASSETS:**                                                                                                                                                                                   |   |                    |    |                |   |
| Cash and cash equivalents                                                                                                                                                                             |   | $                       | 2,097   |                | $      | 4,155 |   |
| Accounts and notes receivable, less allowance for doubtful accounts  of $7,349 and $7,391, respectively                                                                                               |   | 73,566                  |    | 80,226              |   |
| Inventories                                                                                                                                                                                           |   | 2,063                   |    | 2,060               |   |
| Deferred income taxes                                                                                                                                                                                 |   | 6,072                   |    | 6,097               |   |
| Prepaid expenses and other current assets                                                                                                                                                             |   | 5,048                   |    | 5,518               |   |
| Total current assets                                                                                                                                                                                  |   | 88,846                  |    | 98,056              |   |
| **PROPERTY, PLANT AND EQUIPMENT,** net of accumulated depreciation of $63,150  and $65,768, respectively                                                                                              |   | 42,825                  |    | 42,768              |   |
| **GOODWILL,** net of amortization of $22,356                                                                                                                                                          |   | 324,305                 |    | 333,692             |   |
| **INTANGIBLES,** net of amortization of $709 and $798,  respectively                                                                                                                                  |   | 3,731                   |    | 3,642               |   |
| **OTHER NONCURRENT ASSETS**                                                                                                                                                                           |   | 10,566                  |    | 10,388              |   |
| Total assets                                                                                                                                                                                          |   | $                       | 470,273 |                | $      | 488,546 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                        |   |                    |    |                |   |
| **CURRENT LIABILITIES:**                                                                                                                                                                              |   |                    |    |                |   |
| Accounts payable and accrued liabilities                                                                                                                                                              |   | $                       | 57,477  |                | $      | 61,042 |   |
| Current maturities of long-term obligations                                                                                                                                                           |   | 209                     |    | 249                 |   |
| Income tax payable                                                                                                                                                                                    |   | 2,186                   |    | 4,003               |   |
| Total current liabilities                                                                                                                                                                             |   | 59,872                  |    | 65,294              |   |
| **LONG-TERM OBLIGATIONS,** net of current maturities                                                                                                                                                  |   | 73,390                  |    | 78,554              |   |
| **DEFERRED INCOME TAXES**                                                                                                                                                                             |   | 18,084                  |    | 19,533              |   |
| **OTHER LONG-TERM OBLIGATIONS**                                                                                                                                                                       |   | 7,839                   |    | 8,163               |   |
| Total liabilities                                                                                                                                                                                     |   | 159,185                 |    | 171,544             |   |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                                     |   |                    |    |                |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                                        |   |                    |    |                |   |
| Preferred stock, $.01 par value, 1,000,000 shares authorized, no  shares issued and outstanding                                                                                                       |   | —                  |    | —              |   |
| Common stock, $.01 par value, 26,000,000 shares authorized,  16,150,184 and 16,154,109 shares issued and 16,094,156 and 16,098,081  outstanding at December 31, 2003 and March 31, 2004, respectively |   | 162                     |    | 162                 |   |
| Additional paid-in-capital                                                                                                                                                                            |   | 194,999                 |    | 198,813             |   |
| Retained earnings                                                                                                                                                                                     |   | 119,236                 |    | 124,236             |   |
|                                                                                                                                                                                                  |   | 314,397                 |    | 323,211             |   |
| Less—Treasury stock, at cost, 56,028 shares                                                                                                                                                      |   | (982                    | )       | (982                | )      |
| Less—Deferred compensation                                                                                                                                                                       |   | (2,327                  | )       | (5,227              | )      |
| Total stockholders’ equity                                                                                                                                                                       |   | 311,088                 |    | 317,002             |   |
| Total liabilities and stockholders’ equity                                                                                                                                                       |   | $                       | 470,273 |                | $      | 488,546 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

3

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**SOURCECORP, INCORPORATED ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS(IN THOUSANDS, EXCEPT PER SHARE DATA)**

 
|                                             |   | **Three  Months Ended  March 31,** |    |
|--------------------------------------------------|--------|------------------------------------|---------|
|                                             |   | **2003**                           |    | **2004** |   |
|                                             |   | **(Unaudited)**                    |    |
| **REVENUE**                                      |   | $                                  | 109,525 |   | $ | 110,348 |   |
| **COST OF SERVICES**                             |   | 64,512                             |    | 63,541 |   |
| **DEPRECIATION**                                 |   | 3,536                              |    | 3,622 |   |
| Gross profit                                     |   | 41,477                             |    | 43,185 |   |
| **SELLING, GENERAL AND ADMINISTRATIVE EXPENSES** |   | 26,433                             |    | 33,999 |   |
| **AMORTIZATION**                                 |   | 89                                 |    | 89 |   |
| Operating income                                 |   | 14,955                             |    | 9,097 |   |
| **OTHER (INCOME) EXPENSE:**                      |   |                               |    |   |   |
| Interest expense                                 |   | 1,410                              |    | 659 |   |
| Interest income                                  |   | (261                               | )       | (15 | ) |
| Other (income) expense, net                      |   | 175                                |    | 120 |   |
| Income before income taxes                       |   | 13,631                             |    | 8,333 |   |
| **PROVISION FOR INCOME TAXES**                   |   | 5,452                              |    | 3,333 |   |
| **NET INCOME**                                   |   | $                                  | 8,179   |   | $ | 5,000 |   |
| **NET INCOME PER COMMON SHARE**                  |   |                               |    |   |   |
| **BASIC**                                        |   | $                                  | 0.48    |   | $ | 0.31 |   |
| **DILUTED**                                      |   | $                                  | 0.47    |   | $ | 0.30 |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING**   |   |                               |    |   |   |
| **BASIC**                                        |   | 17,205                             |    | 16,096 |   |
| **DILUTED**                                      |   | 17,226                             |    | 16,448 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

4

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
|                                                                                      |   | **Three  Months Ended**

**March 31,** |    |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                                      |   | **2003**                               |    | **2004** |   |
|                                                                                      |   | **(Unaudited)**                        |    |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 |   |                                   |    |   |   |
| Net income                                                                                |   | $                                      | 8,179   |   | $ | 5,000 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:        |   |                                   |    |   |   |
| Depreciation and amortization                                                             |   | 3,625                                  |    | 3,711 |   |
| Deferred tax provision                                                                    |   | 1,581                                  |    | 1,424 |   |
| Compensation expense on restricted stock grants                                           |   | —                                 |    | 554 |   |
| Change in operating assets and liabilities:                                               |   |                                   |    |   |   |
| Accounts and notes receivable                                                             |   | (5,240                                 | )  | (6,660 | )  |
| Inventories, prepaid expenses and other assets                                            |   | (537                                   | )  | (241 | ) |
| Accounts payable and accrued liabilities                                                  |   | 3,274                                  |    | (3,078 | )  |
| Net cash provided by operating activities                                                 |   | 10,882                                 |    | 710 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 |   |                                   |    |   |   |
| Purchase of property, plant and equipment                                                 |   | (2,939                                 | )  | (3,407 | )  |
| Proceeds from disposition of property, plant and equipment                                |   | —                                 |    | 9 |   |
| Cash paid for acquisitions, net of cash acquired                                          |   | (445                                   | )       | (400 | ) |
| Net cash used for investing activities                                                    |   | (3,384                                 | )       | (3,798 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |   |                                   |    |   |   |
| Proceeds from exercise of common stock options                                            |   | —                                 |    | 94 |   |
| Cash paid for common stock repurchased                                                    |   | (12,750                                | )  | — |   |
| Proceeds from long-term obligations                                                       |   | 73,335                                 |    | 92,745 |   |
| Principal payments on long-term obligations                                               |   | (68,683                                | )       | (87,693 | ) |
| Cash paid for debt issuance costs                                                         |   | (75                                    | )       | — |   |
| Net cash (used for) provided by financing activities                                      |   | (8,173                                 | )       | 5,146 |   |
| **NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**                                  |   | (675                                   | )       | 2,058 |   |
| **CASH AND CASH EQUIVALENTS,**beginning of period                                         |   | 3,217                                  |    | 2,097 |   |
| **CASH AND CASH EQUIVALENTS,** end of period                                              |   | $                                      | 2,542   |   | $ | 4,155 |   |
| **SUPPLEMENTAL DATA:**                                                                    |   |                                   |    |   |   |
| Cash paid for:                                                                            |   |                                   |    |   |   |
| Income taxes, net of income tax refunds                                                   |   | $                                      | (2,148  | )  | $ | 53 |   |
| Interest                                                                                  |   | $                                      | 1,369   |   | $ | 629 |   |
| **NONCASH FINANCING TRANSACTIONS:**                                                       |   |                                   |    |   |   |
| Assets acquired through financing and capital lease arrangements                          |   | $                                      | 41      |   | $ | 151 |   |
| Restricted stock grant (0 and 132,000 shares, respectively)                               |   | $                                      | —  |   | $ | 3,454 |   |
| Common stock issued related to business acquisitions (20,268 and 0  shares, respectively) |   | $                                      | (94     | ) | $ | — |   |
| Common stock accrued related to business acquisitions (0 and 9,623  shares, respectively) |   | $                                      | —  |   | $ | 261 |   |
|                                                                                           |        |                                        |         |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1. Basis ofPresentation**

 

Theaccompanying condensed consolidated financial statements and related notes tothe condensed consolidated financial statements include the accounts ofSOURCECORP, Incorporated and subsidiaries (collectively, the “Company”).

 

Inthe opinion of management, the accompanying condensed consolidated financialstatements include all accounts and the adjustments necessary to present fairlythe Company’s financial position at March 31, 2004, results of operations forthe three months ended March 31, 2003 and 2004, and cash flows for the threemonths ended March 31, 2003 and 2004. All significant intercompany transactionshave been eliminated. Although management believes that the disclosures areadequate to make the information presented not misleading, certain informationand footnote disclosures normally included in annual financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to the rules and regulations of the Securitiesand Exchange Commission (the “Commission”). These condensed consolidatedfinancial statements should be read in conjunction with the Company’sconsolidated financial statements and the related notes thereto in the AnnualReport on Form 10-K filed with the Commission on March 12, 2004. The results ofoperations for the three months ended March 31, 2003 and 2004 may not beindicative of the results for the full year.

 

TheCompany uses estimates and assumptions required for preparation of thefinancial statements. The estimates are primarily based on historicalexperience and business knowledge and are revised as circumstances change.However, actual results could differ from the estimates.

 

**2.Stockholders’ Equity and Stock-Based Compensation**

 

*Stock-BasedCompensation*

 

In2002, the Board of Directors and Shareholders of the Company approved theSOURCECORP, Incorporated 2002 Long-Term Incentive Plan (the “2002 Plan”), whichreplaced the 1995 Stock Option Plan, as amended (the “1995 Plan”). The 2002Plan provides for awards of options to purchase common stock and may includeincentive stock options (“ISOs”) and/or non-qualified stock options (“NQSOs”),stock appreciation rights, restricted stock, deferred stock, bonus stock andawards in lieu of cash obligations, dividend equivalents and other stock basedawards.

 

TheBoard of Directors has appointed a committee (the “Committee”) to administerthe 2002 Plan. Persons eligible to receive awards under the plan includedirectors, officers, employees of the Company and its subsidiaries, and personswho provide consulting services to the Company deemed by the Committee to be ofsubstantial value to the Company, persons who have been offered employment bythe Company or its subsidiaries, and persons employed by an entity that theCommittee reasonably expects to become a subsidiary of the Company. Awardsgranted under the 2002 Plan may, at the discretion of the Committee, be grantedeither alone or in addition to, in tandem with or in substitution for any otheraward granted under the 2002 Plan or any other plan of the Company, anysubsidiary or any business entity to be acquired by the Company or one of itssubsidiaries. The Committee determines vesting in awards granted under the 2002Plan.

 

6

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TheCompany applies Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*and related interpretations in accounting for stock-based compensation andawards. Stock option and warrant awards are granted at the market price of thecommon stock on the date of grant. Accordingly, no compensation expense hasbeen recognized for stock options and warrants. Had compensation expense beendetermined based upon the fair value at grant dates for stock options andwarrants consistent with the method of Statement of Financial AccountingStandards (“SFAS”) No. 123, *Accounting forStock-Based Compensation,* the Company’s net income and earnings pershare would have been as follows (in thousands, except per share data):

 
|                                                                                                                                |   | **Three  Months  Ended March 31,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                                                |   | **2003**                           |   | **2004** |   |
| Net income as reported                                                                                                              |   | $                                  | 8,179  |   | $ | 5,000 |   |
| Add: Deferred compensation expense included in reported net income,  net of related tax effect                                      |   | —                             |   | 332 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards, net of tax effect |   | (829                               | )      | (908 | ) |
| Proforma net income                                                                                                                 |   | $                                  | 7,350  |   | $ | 4,424 |   |
|                                                                                                                                |   |                               |   |   |   |
| Earnings per share:                                                                                                                 |   |                               |   |   |   |
| Reported basic earnings per share                                                                                                   |   | $                                  | 0.48   |   | $ | 0.31 |   |
| Proforma basic earnings per share                                                                                                   |   | $                                  | 0.43   |   | $ | 0.27 |   |
|                                                                                                                                |   |                               |   |   |   |   |   |
| Reported diluted earnings per share                                                                                                 |   | $                                  | 0.47   |   | $ | 0.30 |   |
| Proforma diluted earnings per share                                                                                                 |   | $                                  | 0.43   |   | $ | 0.27 |   |
|                                                                                                                                     |        |                                    |        |  |  |  |  |  |

 

Thefair value of stock options and warrants was estimated on the date of grantusing the Black-Scholes option pricing model using the following assumptions:

 
|                                     |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------|--------|------------------------------------|--------|
|                                     |   | **2003**                           |   | **2004** |   |
| Weighted-average risk-free interest rate |   | 2.6                                | %      | 3.1 | % |
| Weighted-average dividend yield          |   | 0.0                                | %      | 0.0 | % |
| Weighted-average volatility              |   | 44.5                               | %      | 41.4 | % |
| Weighted-average expected life           |   | 3.0  years                         |   | 4.0 years |   |

 

Duringthe three months ended June 30, 2003, the Company awarded 164,300 shares ofrestricted stock under the 2002 Plan. The restricted shares were issued at nocost to the recipients; therefore, the Company recorded deferred compensationof approximately $2.9 million based on the market value of the stock at thedate of issuance. The deferred compensation charge is being amortized toexpense over the vesting period of the restricted stock. The restricted sharesvest over a three-year period ending July 1, 2006, with acceleration of thevesting period occurring if a certain stock price or performance target isachieved. For the three months ended March 31, 2003 and 2004, approximately$0.0 and $0.3 million, respectively, of deferred compensation was amortized toexpense related to this grant.

 

Duringthe three months ended March 31, 2004, the Company awarded 132,000 shares ofrestricted stock under the 2002 Plan. The restricted shares were issued at no cost to the recipients;therefore, the Company recorded deferred compensation of approximately $3.5million based on the market value of the stock at the date of issuance.  The deferred compensation charge is beingamortized to expense over the vesting period of the restricted stock.  The restricted shares vest over a three-yearperiod ending January 10, 2007, with acceleration of the vesting periodoccurring if certain performance targets are achieved.  For the three months ended March 31, 2004,approximately $0.3 million of deferred compensation was amortized to expenserelated to this grant.

 

Totaldeferred compensation amortized to expense related to the restricted stockgrants was approximately $0.6 million during the three months ended March 31,2004.

 

*Common Stock Repurchase Program*

 

During 2003, the Company activated the $30.0 million stock repurchaseprogram authorized by the Board of Directors in April 2001 and purchased1,306,979 shares of its common stock at a cost of approximately $20.7 million(including 894,133 shares repurchased during the three months ended March 31,2003 at an average price of $14.26 per share). The repurchased shares were recorded in the accompanying balance sheetas a reduction to common stock, additional paid-in-capital, and retainedearnings.  These shares have beenretired and returned to the status of authorized but unissued shares of theCompany.  The Company did not repurchaseany additional shares during the three months ended March 31, 2004.

 

7

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*Net IncomePer Share:*

 

Basicand diluted net income per common share were computed in accordance with SFASNo. 128, *Earnings Per Share*. Thedifferences between basic weighted average common shares and diluted weightedaverage common shares and common stock equivalents are as follows (inthousands):

 
|                                                     |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|
|                                                     |   | **2003**                           |   | **2004** |   |
| Basic weighted average common shares outstanding         |   | 17,205                             |   | 16,096 |   |
| Weighted average options, warrants, and restricted stock |   | 1                                  |   | 328 |   |
| Other contingent consideration                           |   | 20                                 |   | 24 |   |
| Diluted weighted average common shares                   |   | 17,226                             |   | 16,448 |   |

 

AtMarch 31, 2003 and 2004, approximately 3.6 million and 1.8 million,respectively, of common stock equivalents were not included in the dilutedearnings per share calculation because they were anti-dilutive. These commonstock equivalents may be dilutive to future earnings per share calculations.

 

**3. BusinessCombinations**

 

*Goodwilland Intangibles*

 

Thechanges in the carrying value of goodwill and the components of intangibles areas follows (in thousands):

 

Goodwill:

 
|                              |   | **Information  Management and  Distribution** |    | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Total** |   |
|-----------------------------------|--------|-----------------------------------------------|---------|----------------------------------------------------|--------|-----------|--------|
| Net balance as of January 1, 2004 |   | $                                             | 192,337 |                                               | $      | 131,968   |   | $ | 324,305 |   |
| Additional accrued consideration  |   | 8,881                                         |    | 506                                                |   | 9,387     |   |
| Net balance as of March 31, 2004  |   | $                                             | 201,218 |                                               | $      | 132,474   |   | $ | 333,692 |   |

 

Intangibles:

 
|                   |   | **March 31,  2004**       |   |
|------------------------|--------|---------------------------|--------|
|                   |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   | **Net  Intangibles** |   |
| Customer Relationships |   | $                         | 4,000  |   | $ | (600 | ) | $ | 3,400 |   |
| Non Compete Agreements |   | 440                       |   | (198 | ) | 242 |   |
| Total                  |   | $                         | 4,440  |   | $ | (798 | ) | $ | 3,642 |   |

 

Aggregateamortization expense related to intangibles for the three months ended March31, 2004 was $0.1 million. Estimated amortization expense for the periodsending December 31, 2004 through December 31, 2006 is $0.4 million annually.Thereafter, annual amortization expense is estimated to be $0.3 million throughDecember 31, 2016.

 

*ContingentConsideration*

 

Certain of the Company’s acquisitions are subject to adjustments inoverall consideration and recorded goodwill based upon the achievement ofspecified revenue and/or earnings targets generally over one to three yearperiods. In certain agreements, the Company reserves the right to change thepayment mix to use common stock versus cash in satisfying contingentconsideration liabilities. In transactions where the Company acquired asubsidiary through a tax-free stock merger, the Company is required to pay aminimum amount of total consideration in common stock rather than cash,including any contingent consideration payments.

 

Management’s evaluation of the cumulative earnings of acquiredcompanies through March 31, 2004 indicated that certain acquired companieshave met specified earnings targets beyond a reasonable doubt; therefore theCompany accrued aggregate additional consideration of approximately$9.0 million during the three months ended March 31, 2004. As ofMarch 31, 2004, approximately $12.9 million of additionalconsideration remains accrued of which $12.1 million is classified asother current liabilities and is expected to be settled in cash and$0.8 million is classified as additional paid-in-capital and is expectedto be settled in common stock with final valuation determined at date ofissuance.

 

8

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Not all of theperiods applicable for earnout targets are completed and additional amounts maybe payable in future periods under the terms of the agreements.  If all earnout targets under the currentagreements were achieved, the maximum contingent consideration to be paid wouldbe $20.1 million, including the $12.9 million accrued at March 31, 2004,with approximately $14.8 million to be paid in 2004 and approximately$5.3 million to be paid in 2005. In accordance with the agreements, the Company would be required tosatisfy approximately $0.8 million of the $20.1 million potentialliability in common stock related to a past tax-free stock merger and has theoption to satisfy $11.5 million of the $20.1 million potentialliability in common stock with final valuation for the number of shares to bedetermined at date of issuance.  Theremaining potential liability would be paid in cash, as specified in theagreements.

 

# *Other AccruedConsideration*

# * *

During the three months ended March 31, 2004, the Company accruedadditional purchase proceeds of approximately $0.4 million pursuant to thepurchase agreement of a past acquisition. This amount is classified as other current liabilities and is expectedto be paid in cash during 2004.

 

## *Acquisition RelatedPayments*

##  

During the three months ended March 31, 2004, the Company paid netconsideration of $0.4 million in cash.

 

**4. SegmentReporting**

 

The Company aggregates its service offerings and operations into tworeportable segments: (i) Information Management and Distribution, and(ii) Healthcare, Regulatory, and Legal Compliance. The Company’sreportable segments are organized around customer types and service offeringspossessing similar economic characteristics. Management evaluates segmentperformance based on revenue, operating income, and income before income taxes.All centrally incurred corporate costs are allocated to the segments basedprincipally on operating income. The reporting segments follow the sameaccounting policies used for the Company’s consolidated financial statements asdescribed in the summary of critical accounting policies.

 

The identified segments are as follows:

 

**Information Management and Distribution.**  This segment offers Business ProcessOutsourcing (“BPO”) solutions that help its customers manage the *Document In-flow*, *Workflow Processing* and *Statement Out-flow* of their missioncritical business document processes. This segment’s BPO solutions enablecustomers to automate their complex workflow processes by digitizing extremelylarge volumes of documents, capturing information from the documents, hostingelectronic documents on the Company’s Web-based repository, and preparingstatements that customers mail or present electronically to their end users. Inconjunction with statement out-flow, this segment provides full-serviceprinting and direct mail services.

 

**Healthcare, Regulatory and Legal Compliance.**  This segment offers specializedknowledge-based processing and consulting services that include medical recordsrelease, record management services for healthcare institutions, temporarystaffing for healthcare institutions, managed care compliance reviews, classaction claims administration, and professional economic research and litigationservices.

 

TheCompany measures segment profit as income before income taxes. Information onthe segments follows (in thousands):

 
|                       |   | **THREE  MONTHS ENDED MARCH 31, 2004**          |   |
|----------------------------|--------|-------------------------------------------------|--------|
|                       |   | **Information  Management   and  Distribution** |   | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                               | 64,748 |   | $ | 45,600 |   | $ | 110,348 |   |
| Income before income taxes |   | 2,019                                           |   | 6,314 |   | 8,333 |   |
|                            |        |                                                 |        |  |  |  |  |  |  |  |

 
|                       |   | **THREE  MONTHS ENDED MARCH 31, 2003**         |   |
|----------------------------|--------|------------------------------------------------|--------|
|                       |   | **Information  Management  and  Distribution** |   | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                              | 64,810 |   | $ | 44,715 |   | $ | 109,525 |   |
| Income before income taxes |   | 7,548                                          |   | 6,083 |   | 13,631 |   |
|                            |        |                                                |        |  |  |  |  |  |  |  |

 

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**5.****              Litigation**

 

The Company is, from time to time, a party to litigation arising in thenormal course of business. The following is a brief description for some of thelegal matters that the Company is involved in. Management believes that none of these actions, will have a materialadverse effect on our business or financial condition.  However, in the event of an adverse outcomein one or more of the legal proceedings, operating results for a given quartermay be negatively impacted.

 

*Healthcare Marketing Associates, Inc.vs. Managed Care Professionals, Inc.*

 

On February 9, 1995, prior to the acquisition by the Company,Managed Care Professionals, Inc. (one of the Company’s wholly-ownedsubsidiaries) (“MCP”) entered into an “Exclusive Marketing Agreement” withHealthcare Marketing Associates, Inc. (“HMA”) whereby MCP granted to HMAthe exclusive right to market, and HMA agreed to market exclusively for MCP,the MCP products and services to health care providers in the United States forwhich MCP agreed to pay HMA a percentage (30%) of gross revenues paid to MCP bythe provider (customer). The duration of the Agreement was for a period of five(5) years and expired on February 9, 2000 (“Termination Date”). OnApril 27, 2001, HMA filed a lawsuit against MCP in the Circuit Court ofthe County of St. Louis, State of Missouri, alleging entitlement to commissionson revenues generated from providers after the Termination Date who wereinitially brought to MCP prior to the Termination Date. In March 2003,this lawsuit was tried before a judge and at the conclusion of the trial, thejudge ruled in the plaintiff’s favor in the amount of $1.782 million plusprejudgment and post judgment interest, which equated to approximately$2.4 million in total as of December 31, 2003. The judgment amountplus prejudgment interest costs were included in the Company’s 2002 results.Post judgment interest accrues at a statutory 9% rate.  The Company has appealed this ruling andoral arguments for our appeal were heard on February 24, 2004.  On May 4, 2004, the Court of Appealsaffirmed the Circuit Court’s judgment. The Company is currently evaluating additional appellate options.

 

*Various ROI Copy Charge Matters*

 

From time to time, various subsidiaries of the Company that performrelease of information (“ROI”) services become defendants to putative classaction lawsuits generally alleging that the charge for reproducing certainmedical records is not in conformity with such plaintiffs’ reading of theapplicable regulated charge. Such suits typically include multiple ROIcompanies and hospitals as defendants and demand reimbursement for priorcharges as well as for prospective pricing adjustments. The Company iscurrently a party to several such suits in various stages of development. TheCompany believes it has meritorious defenses and intends to continue tovigorously defend any claims made against it in these matters.

 

*Mattel v. SOURCECORP*

 

On February 18, 2003, Mattel, Inc. filed suit against theCompany in the Los Angeles County California Superior Court. In the suit, theplaintiff alleged that one of the Company’s subsidiaries is liable for the lossof various products, prototypes and paper documents allegedly stored at one ofthe subsidiary’s box storage facilities under theories of breach of contract,breach of fiduciary duty, negligence, breach of implied covenants of good faithand fair dealing and/or conversion. The plaintiff at various times allegeddamages ranging from “in excess of $2.5 million,” to approximately$20 million.  This matter wassettled prior to trial, the terms of which settlement are confidential. Thesettlement and related legal costs impacted the Company's first quarter 2004pre-tax earnings by approximately $3.9 million with no future earnings impactexpected.  Furthermore, the impact ofthe settlement and related legal costs on the Company's 2004 operating cashflow will be approximately $5.7 million, before consideration of taxes.

 

*Spohr. et. al. v. F.Y.I. Incorporated, et.al.*

 

In June 2000, the Company filed an action styled *F.Y.I. Incorporated v. Spohr, et. al.* inDallas, Texas, in which it asserted claims for breach of contract, fraud, andnegligent misrepresentation against the sellers of two related companies theCompany acquired in December 1998 (the “Texas Action”). The Texas Actionwas later removed to federal court and ultimately dismissed on jurisdictionalgrounds. The Company reasserted these claims in two actions that were laterconsolidated; one styled *F.Y.I. Incorporatedv. Spohr, et. al.* in Superior Court of the State of California inthe County of Sacramento, Case No. 01-AS-00721 (the “Sacramento Action”)and one styled *Spohr, et. al. v. F.Y.I.Incorporated, et. al.* in the Superior Court of the State ofCalifornia in the County of San Francisco, Case No. 318703 (the “SanFrancisco Action”). In the consolidated action, the Company additionally filedclaims against the sellers’ accountants and the two sellers filed claimsagainst the Company; however, in February 2004, the judge in theSacramento Action dismissed the Company’s claims against the sellers’ accountants.The sellers allege that the Company’s former subsidiary wrongfully failed andrefused to execute and deliver a requested estoppel certificate, and that thefailure to provide such estoppel certificate harmed the landlord in that theywere allegedly denied favorable terms on a refinancing of the property and wereallegedly prevented from completing a timely sale of the property. Sellers’allege damages of approximately $1.5 million. The Company has asserteddamages in excess of $8 million. The Company believes it has meritoriousdefenses to sellers’ claims and intends to vigorously defend any claims madeagainst it in this matter.

 

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**6.  Subsequent Events**

 

*Acquisition*

 

On May 4,2004, the Company announced the acquisition of KeyPoint Consulting, LLC(“KeyPoint”).  KeyPoint, located inEmeryville and Los Angeles, California, provides economic, financial, andforensic accounting services to law firms, corporations and governmentagencies.  KeyPoint will merge with theCompany’s legal consulting service offering and will be reported in theHealthcare, Regulatory and Legal Compliance segment.  The estimated purchase price is $15 million, subject to certainpost-close purchase price adjustments, and includes approximately $14 million of goodwill and intangibleassets.  The Company financed theacquisition through its revolving credit facility, thus reducing the March 31,2004 availability from $54.3 million to approximately $39.3 million.  Furthermore, once integrated into theCompany’s current legal consulting service offering, Keypoint is expected tocontribute to earnings after related intangible amortization and acquisitionfinancing costs during 2005.

 

*Discontinued Operations*

 

During thefirst quarter of 2004, the Company completed a strategic evaluation of itsoperations based on certain criteria, such as strategic and financial fit, andfuture growth prospects.  As a result,on May 6, 2004, the Company formally committed to a plan of divestiture for certainnon-strategic asset groups.  The assetgroups to be divested include the Direct Mail operations, currently reported inthe Company’s Information Management and Distribution segment, and two medicalrecords management operations that are reported in the Company’s Healthcare,Regulatory and Legal Compliance segment. Collectively, these asset groups  incurred losses, net of tax, of $0.8 millionand $0.5 million for the full year ended December 31, 2003 and the quarterended March 31, 2004, respectively.  TheCompany will reclassify related operating assets as available for sale duringthe quarter ended June 30, 2004 and up to the time of disposition.  The Company will also record any estimatedimpairment losses during the same period. Any gain or loss on disposition will be recorded during the period ofsale, but the Company expects all disposition activities to conclude within 12months of formalizing the plan.  Theexpected impairment losses, net of any expected gain or loss on dispositionrelated to these activities, which have yet to be finalized, are estimated tobe between $1.5 million and $2.5 million, net of taxes.  The asset groups’ operating results and anyimpairment losses will be classified as discontinued operations beginningduring the second quarter of 2004.

 

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**Item 2.**      **Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Thefollowing discussion should be read in conjunction with our financialstatements and the related notes thereto appearing elsewhere in this Report onForm 10-Q.

 

**Overview**

 

We werefounded in September 1994, to create a national, single source provider ofdocument and information outsourcing solutions to document and informationintensive industries, including healthcare insurance, financial services,healthcare provider, transportation/logistics, federal and state government,and legal industries. We acquired the seven Founding Companies (the “FoundingCompanies”) simultaneously with the closing of our initial public offering (the“IPO”) on January 26, 1996, and effectively began operations at that time.The consideration for the Founding Companies consisted of a combination of cashand common stock of our Company.

 

Since the IPO,we have acquired 65 companies and divested 17 operating units by sales orclosures. We evaluate candidates for acquisition and periodically fordivestiture as a part of our strategic plan of providing customers a singlesolution for business process outsourcing and knowledge-based processingand consulting services. The criteria for evaluation include geographic need,additional technology, market growth potential, industry expertise, serviceexpansion to broaden service offerings, expansion of our customer base, revenueand earnings growth potential, and expected sources and uses of capital.

 

On May 4,2004, we announced the acquisition of KeyPoint Consulting, LLC(“KeyPoint”).  KeyPoint, located inEmeryville and Los Angeles, California, provides economic, financial, andforensic accounting services to law firms, corporations and governmentagencies.  KeyPoint will merge with ourlegal consulting service offering and will be reported in the Healthcare,Regulatory and Legal Compliance segment. Once integrated into the Company’s current legal consulting serviceoffering, Keypoint is expected to contribute to earnings after relatedintangible amortization and acquisition financing costs during 2005.

 

During thefirst quarter of 2004, we completed a strategic evaluation of our operationsbased on certain criteria, such as strategic and financial fit, and futuregrowth prospects.  As a result, on May6, 2004, we formally committed to a plan of divestiture for certainnon-strategic asset groups.  The assetgroups to be divested include the Direct Mail operations, currently reported inour Information Management and Distribution segment, and two medical recordsmanagement operations that are reported in our Healthcare, Regulatory and LegalCompliance segment. Collectively, these assets groups incurred losses, net oftax, of $0.8 million and $0.5 million for the full year ended December 31, 2003and the quarter ended March 31, 2004, respectively.  We will reclassify related operating assets as available for saleduring the quarter ended June 30, 2004 up to the time of disposition.  We will also record any estimated impairmentlosses during the same period.  Any gainor loss on disposition will be recorded during the period of sale, but weexpect all disposition activities to conclude within 12 months of formalizingthe plan.  The expected impairmentlosses, net of any excepted gain or loss on disposition related to theseactivities, which have yet to be finalized, are estimated to be between $1.5million and $2.5 million, net of taxes. The asset groups’ operating results and any impairment losses will beclassified as discontinued operations beginning during the second quarter of2004.

 

**Basis forManagement Discussion and Analysis**

 

Ourrevenue possesses both project and recurring characteristics.  Project revenue includes one-time projectsin which the customer relationship is not expected to continue after projectcompletion. Project revenue margins are usually higher than our average marginsand the workload can be highly volatile. Project revenue is typically based on time and material arrangements andpredominately occurs within the Healthcare, Regulatory and Legal Compliancesegment.  Recurring revenue ischaracterized by customer relationships that are generally for one year and maycontinue for longer.  Recurring revenueis typically based on transaction volumes sent to us by our customers at anagreed upon fixed rate per unit.  Ourcustomers’ volumes are generally not contractually or otherwiseguaranteed.  Recurring revenue typicallypossesses lower margins than project revenue but is usually more predictable.

 

Costof services consists primarily of compensation and benefits to employeesproviding goods and services to our clients; occupancy and facility costs;equipment costs and supplies. Our cost of services also includes the cost ofproducts sold for micrographics supplies and equipment; computer hardware andsoftware; and business imaging supplies and equipment.

 

Selling,general and administrative expenses (“SG&A”) consist primarily ofcompensation and related benefits to sales and marketing, executive management,accounting, human resources and other administrative employees; other sales andmarketing costs; communications costs; general business insurance costs; andlegal and accounting professional fees and expenses.

 

12

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**BusinessSegments**

 

We aggregateour service offerings and operations into two reportable segments:(i) Information Management and Distribution, and (ii) Healthcare,Regulatory, and Legal Compliance. Service offerings are aggregated when theyare similar in the following areas: economic characteristics, products andservices, production processes, methods for distributing or delivering products,and type or class of customers. We evaluate segment performance based onrevenue, operating income, and income before income taxes. All centrallyincurred corporate costs are allocated to the segments based principally onoperating income. The reporting segments follow the same accounting policiesused for our consolidated financial statements as described in the summary ofcritical accounting policies.  Theidentified segments are as follows:

 

**Information Management and Distribution.**  We offer Business Process Outsourcing(“BPO”) solutions that help our customers manage the *Document In-flow*, *WorkflowProcessing* and *Statement Out-flow*of their mission critical business document processes. Our BPO solutions enablecustomers to automate their complex workflow processes by digitizing extremelylarge volumes of documents, capturing information from the documents, hostingelectronic documents on our Web-based repository, and preparing statements thatcustomers mail or present electronically to their end users. In conjunctionwith statement out-flow, we provide full-service printing and direct mailservices. We offer our BPO solutions to businesses in document intensiveindustries, such as healthcare insurance, financial services, healthcareprovider, transportation/logistics, and federal and state government.  For the three months ended March 31, 2003and 2004, revenue in the Information Management and Distribution segmentconsisted of approximately $57.2 million and $57.4 million of recurringrevenue, respectively, and $7.6 million and $7.3 million of project revenue,respectively.

 

**Healthcare, Regulatory and Legal Compliance.**  We offer specialized knowledge-basedprocessing and consulting services that include medical records release, recordmanagement services for healthcare institutions, temporary staffing forhealthcare institutions, managed care compliance reviews, class action claimsadministration, and professional economic research and litigation services. Forthe three months ended March 31, 2003 and 2004, revenue in the HealthcareRegulatory and Legal Compliance segment consisted of approximately $15.7million and $14.9 million of recurring revenue, respectively, and $29.0 millionand $30.7 million of project revenue, respectively.

 

 

**THREEMONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004**

 
|                   |   | **Three  Months Ended March 31,** |    |
|------------------------|--------|-----------------------------------|---------|
|                   |   | **2003**                          |    | **2004** |   |
|                   |   | **($000’s)**                 |    | **% of  Revenue** |   | **($000’s)** |   | **% of  Revenue** |   |
| **Revenue**            |   | $                                 | 109,525 |   | 100.0 | % | $ | 110,348 |   | 100.0 | % |
| **Gross  Profit**      |   | 41,477                            |    | 37.9 | % | 43,185 |   | 39.1 | % |
| **SG&A**           |   | 26,433                            |    | 24.1 | % | 33,999 |   | 30.8 | % |
| **Operating  income**  |   | 14,955                            |    | 13.7 | % | 9,097 |   | 8.2 | % |
| **Income  before tax** |   | 13,631                            |    | 12.4 | % | 8,333 |   | 7.6 | % |
| **Net  income**        |   | 8,179                             |    | 7.5 | % | 5,000 |   | 4.5 | % |
|                        |        |                                   |         |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Ouroperations generated revenues of $110.3 million for the three months endedMarch 31, 2004, an increase of 0.8% compared to the same period in 2003.Project revenue accounted for $38.0 million or 34.5% of revenue in the currentquarter compared to $36.6 million or 33.4% of revenue in the prior yearquarter. (See “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Basis for Management Discussion and Analysis.”)

 

Revenuewithin our Information Management and Distribution segment decreased 0.1% from$64.8 million for the three months ended March 31, 2003 to $64.7 million forthe three months ended March 31, 2004. Project revenue accounted for 11.4% of segment revenue in the firstquarter of 2004 compared to 11.7% for the same period in 2003.  Seasonal statement processing volumes, whichincreased $1.1 million, or 11.3%, compared to the prior year, and highervolumes in our Information Management service offering of $1.2 million, weremore than offset by a 23.0% decline in Direct Mail compared to the prior year.  We have since committed to a plan ofdivestiture for certain non-strategic asset groups, including our Direct Mailoperations.  See Note 6, SubsequentEvents, of Notes to Condensed Consolidated Financial Statements.

 

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Revenuewithin our Healthcare, Regulatory and Legal Compliance segment increased 2.0%from $44.7 million for the three months ended March 31, 2003 to $45.6 millionfor the three months ended March 31, 2004. Project revenue accounted for 67.3%of segment revenue in the first quarter of 2004 and 64.9% for the same periodin 2003.  The increase in revenue wasprimarily a result of higher project revenue within our Class Action ClaimsAdministration service offering, which increased 39%, or $2.4 million, comparedto the prior year, partially offset by lower volumes in our Medical Coding andRelease of Medical Information service offerings due to increased competition.

 

**Grossprofit**

 

Grossprofit increased 4.1% from $41.4 million for the three months ended March 31,2003 to $43.2 million for the three months ended March 31, 2004. Gross profitas a percentage of revenue increased from 37.9% for the three months endedMarch 31, 2003 to 39.1% for the three months ended March 31, 2004. Personnelrelated costs, as a percentage of revenue, decreased from 43.6% in the prioryear quarter to 40.1% in the current quarter. The improvement is primarilyrelated to our productivity and technology initiatives, such as high-speedscanners, offshore production and pay for performance compensation plans.  Partially offsetting the lower personnelrelated costs were higher facilities costs of approximately $0.9 millionrelated to the opening of new production facilities, mainly to support growthinitiatives within our Information Management and Distribution segment, andhigher bad debt expense of approximately $0.6 million.

 

**Selling,general and administrative expenses**

 

SG&A increased 28.6% from $26.4 million, or 24.1% of revenue, forthe three months ended March 31, 2003 to $34.0 million, or 30.8% of revenue,for the three months ended March 31, 2004. The increase in SG&A expense islargely attributable to the costs associated with the settlement of asignificant legal matter in the Information Management and Distribution segmentduring the quarter of approximately $3.9 million, higher personnel relatedcosts of approximately $1.7 million associated with our investments in salesand technology resources that began in 2003 and other professional fees ofapproximately $0.6 million.

 

**Income before income taxes**

 

Incomebefore income taxes decreased 38.9% from $13.6 million, or 12.4% of revenue,for the three months ended March 31, 2003 to $8.3 million, or 7.6% of revenue,for the three months ended March 31, 2004. The decline in income before income taxes was largely attributable tothe increased SG&A expenses discussed above, partially offset by theimprovements in gross profit and lower interest expense.  Interest expense decreased $0.8 millioncompared to the prior year due to lower balances on long-term obligations, alower interest rate environment, and the expiration of our interest rate hedgeon March 31, 2003.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

AtMarch 31, 2004, we had $32.8 million of working capital, including $4.2 millionof cash. Working capital at December 31, 2003 was $29.0 million, including $2.1million of cash. For the first three months of 2004, cash provided by operatingactivities was $0.7 million compared to $10.9 million for the same period in2003.  Factors contributing to thedecline in operating cash flow consisted of slower cash collections during thecurrent year quarter, higher annual incentive compensation payments compared tothe prior year quarter and the receipt of income tax refunds of $2.3 million inthe prior year quarter.  The firstquarter typically produces the lowest operating cash flow during the year dueto the timing of incentive compensation payments and the predominance ofgovernment project work completed and billed during the last and first fiscalquarters, which typically has a longer order-to-cash conversion cycle.  Days sales outstanding increased fourbusiness days during the quarter to 46 business days at March 31, 2004 comparedto 42 business days at December 31, 2003.

 

Asa result of the settlement of the significant legal matter and the timing ofexpected cash collections, our full year operating cash flow is expected to bein the range of $40 million to $45 million. The impact of the settlement and related legal costs on our 2004operating cash flow will be approximately $5.7 million, before consideration oftaxes.

 

Forthe three months ended March 31, 2004, investing activities consisted ofacquisitions of property, plant and equipment of $3.4 million and netacquisition related payments of $0.4 million representing the settlement ofcontingent consideration on a past acquisition. Not all of the periodsapplicable for contingent consideration targets have been completed andadditional amounts may be payable in future periods under the terms of theagreements.  If all contingentconsideration targets under the current agreements were achieved, the maximumamount of consideration to be paid would be $20.1 million, withapproximately $14.8 million to be paid in 2004 and approximately$5.3 million to be paid in 2005. In accordance with the agreements, theCompany would be required to satisfy approximately $0.8 million of the$20.1 million potential liability in common stock related to a pasttax-free stock merger and has the option to satisfy $11.5 million of the$20.1 million potential liability in common stock with final valuationdetermined at date of issuance.  Theremaining potential liability would be paid in cash, as specified in theagreements.

 

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Net cash used provided byfinancing activities was $5.1 million for the three months ended March 31,2004.  Payments of $87.7 million on ourline of credit were more than offset by net proceeds borrowed from our line ofcredit of $92.7 million and net proceeds from common stock issuances of $0.1million.  We utilize our line of creditto fund general operating requirements of the Company as well as fundsignificant investments such as acquisitions or capital expenditures.

 

InApril 2001, we entered into a line of credit agreement with Bank ofAmerica, SunTrust Bank and Wells Fargo Bank, as co-agents (the “2001 CreditAgreement”). Under this agreement, we can from time to time borrow up to$297.5 million through April 2, 2004, subject to certain financialcovenants and ratios. Meeting these requirements is highly dependent uponmaintaining a minimum level of operating results and the continued demand forour services, among other factors.

 

EffectiveApril 3, 2002, we extended $220.0 million of the $297.5 millioncommitment for an additional year to April 2, 2005. InSeptember 2002, additional extensions were granted by member banks,bringing the total commitment extended to April 2, 2005 to$290.0 million. Total fees paid in 2002 related to the extensions andamendments to the 2001 Credit Agreement were $0.3 million.

 

EffectiveApril 3, 2003, we extended $230.0 million of the $297.5 millioncommitment to April 1, 2006. During the fourth quarter of 2003, aparticipating bank in the 2001 Credit Agreement assigned $7.5 million ofits commitment to another bank who, effective December 4, 2003, extendedthis commitment to April 1, 2006. Total fees paid in 2003 related to theextensions and amendments to the 2001 Credit Agreement were $0.3 million.

 

Managementfully expects to replace or refinance the 2001 Credit Agreement upon itsmaturity scheduled for April 1, 2006. As a result of the extensionagreements discussed in the previous two paragraphs, the $297.5 millioncommitment under the 2001 Credit Agreement is scheduled to mature as follows(in millions):

 
| **Maturity Date**  |   | **Commitment** |   | **Remaining  Commitment** |   |
|--------------------|--------|----------------|--------|---------------------------|--------|
| April 3, 2004 |   | $              | 7.5    |                      | $      | 290.0 |   |
| April 2, 2005 |   | 52.5           |   | $                         | 237.5  |   |
| April 1, 2006 |   | 237.5          |   |                      |   |
| Total              |   | $              | 297.5  |                      |   |   |

 

Our ability toborrow is contingent on certain leverage and fixed cost coverage ratios. Theseratios were scheduled to become more restrictive beginning in the quarter endedDecember 31, 2002 with the leverage ratio declining from 3.0 times to 2.5times and the fixed charge coverage ratio increasing from 1.25 times to 1.50times. However, in September 2002, an amendment was approved that extendedthe fixed cost coverage ratio requirement of 1.25 until January 1, 2004and will increase to 1.35 at all times thereafter. In addition to the leverageand fixed cost coverage ratios, we are subject to minimum net worthrequirements. Effective March 26, 2003, an amendment was approved thatallows for the reduction to the minimum net worth requirement for up to$30 million of share repurchases. After application of such ratios and ourtotal commercial commitments of $12.3 million for standby letters ofcredit, we

have $54.3 million available to borrow under the 2001 CreditAgreement as of March 31, 2004.  On May4, 2004, we announced the acquisition of KeyPoint Consulting, LLC (“KeyPoint”).  KeyPoint, located in Emeryville and LosAngeles, California, provides economic, financial, and forensic accountingservices to law firms, corporations and government agencies.  The estimated purchase price is $15 million,subject to certain post-close purchase price adjustments.  We financed the acquisition through ourrevolving credit facility, thus reducing the March 31, 2004 availability from$54.3 million to approximately $39.3 million. Management believes that it has sufficient liquidity from its cash flowand its revolving credit facility to meet ongoing business needs.  Additionally, depending on the mix of stockand cash used in our strategic acquisition program, if any, we may need to seekfurther financing through the public or private sale of equity or debtsecurities.  However, there can be noassurance we could secure such financing if and when it is needed or with termswe deem acceptable.

 

InJanuary 2000, we registered on Form S-4 (RegistrationNo. 333-92981) 3,012,217 shares of common stock for issuance in connectionwith our acquisition program (the “Acquisition Shelf”), of which 1,390,176shares were available as of March 31, 2004.

 

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**CriticalAccounting Policies**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations are based on therelated consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of the financial statements requires the use ofestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses.

 

We haveidentified the following critical accounting policies that, as a result of thejudgments, uncertainties, uniqueness and complexities of the underlyingaccounting standards and operations involved, could result in material changesto our financial condition or results of operations under different conditionsor using different assumptions. We apply a consistent methodology at the end ofeach quarter to determine our account balances that require judgmentalanalysis.

 

**Revenue Recognition.**  We recognize our revenue as it becomesrealized or realizable and earned according to the criteria provided by StaffAccounting Bulletin 101, *RevenueRecognition in Financial Statements*. Revenue recognition occurs oncepersuasive evidence of an arrangement exists, delivery has occurred or serviceshave been rendered, the sales price is fixed or otherwise determinable, andcollection is reasonably assured. Our revenue-earnings activities possessboth project and recurring customer relationships.

 

Projectrevenue includes one-time projects in which the customer relationship is notexpected to continue after project completion. Project revenue is typicallybased on time and material arrangements. Revenue recognition occurs at thecontractual rates as the labor hours and direct expenses are incurred. Projectrevenue represented approximately 34% of total 2003 revenues and typicallyoccurs within our Healthcare, Regulatory, and Legal Compliance segment.

 

Recurringrevenue is characterized by customer relationships that are generally for oneyear and may continue for longer. Recurring revenue is typically based on thetransaction volumes provided by our customer at an agreed upon fixed rate perunit. Our customer’s volumes are typically not contractual or otherwiseguaranteed. Revenue recognition occurs once work is completed and delivery hasoccurred or services have been rendered. Recurring revenue represented theremaining 66% of total 2003 revenues and typically occurs within ourInformation Management and Distribution segment.

 

As a part ofproviding services to our customers, we incur incidental expenses commonlyreferred to as “out-of-pocket” expenses. These expenses include items such asairfare, hotels, and mileage and are often reimbursable by our customers. Whenreimbursable, we record both revenue and direct cost of services in accordancewith the provisions of Emerging Issues Task Force (“EITF”) Issue 01-14, *Income Statement Characterization of ReimbursementsReceived for “Out-of-Pocket” Expenses Incurred.*

 

Unearnedincome, included in other current liabilities, represents payments from ourcustomers in advance of services being provided. Advanced payments are deferredas unearned income when received and recognized as revenue as services arerendered.

 

**Allowance for Doubtful Accounts.**  The allowance for doubtful accounts isestablished and maintained based on our estimate of accounts receivablecollectibility. Management estimates collectibility by specifically analyzingaccounts receivable aging and other historical factors that affect collections.Such factors include the historical trends of write-offs and recovery ofpreviously written-off accounts, the financial strength of the customer andprojected economic and market conditions. The evaluation of these factorsinvolves subjective judgments and changes in these factors may significantlyimpact our consolidated financial statements.

 

**Long-Lived Asset Impairment.**  As required by SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets,*management continually evaluates whether eventsand circumstances indicate that the carrying value of long-lived assets may notbe recoverable. When events require, management performs the valuation bycomparing the estimated undiscounted future cash flows over the remaining lifeof the long-lived assets to the carrying amount of the asset being evaluated.An impairment loss is recognized to the extent the carrying amount of assetsbeing evaluated exceeds the expected future undiscounted cash flow. AtMarch 31, 2004, no events were evident that required valuation forpotential impairment.

 

**Goodwill Impairment.**  On January 1, 2002, we adopted SFASNo. 142, *Goodwill and Other IntangibleAssets.* This statement states that goodwill and intangible assetsthat have indefinite useful lives will not be amortized but rather will betested at least annually for impairment. Our annual impairment test isperformed at October 31.  The impairmenttest is based on fair value rather than undiscounted cash flows. Additionally,goodwill and other intangible assets are tested at a reporting unit levelrather than the individual operating unit level. A reporting unit is either atthe operating segment level or one reporting level below and could consists ofseveral service offerings aggregated into a single reporting unit. Serviceofferings are aggregated when they are similar in the following areas: economiccharacteristics, products and services, production processes, methods fordistributing or delivering products, and type or class of customers. Valuationmethods used in determining fair value include an analysis of the cash flowsthat the reporting units can be expected to generate in the future (IncomeApproach) and the fair value of a reporting unit as compared to 

 

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similar publicly tradedcompanies (Market Approach). In preparing these valuations management utilizesestimates to determine fair value of the reporting units. These estimatesinclude future cash flows, growth rates, capital needs, and projected earningmargins among other factors. Estimates utilized in future calculations coulddiffer from estimates used in the current period. Future years’ estimates thatare unfavorable compared to current estimates could cause an impairment ofgoodwill and other intangible assets. Due to the fact that we are primarily aservices company, our business acquisitions typically result in significantamounts of goodwill and other intangible assets. Therefore, an impairmentcharge resulting from goodwill or other intangible assets could result in amaterial adverse impact on our financial statements during the period incurred.

 

**Self-Insurance Liabilities and Reserves.**  We are self-insured for workmen’scompensation liabilities and a significant portion of our employee medicalcosts. We account for our self-insurance programs based on actuarial estimatesof the amount of loss inherent in that period’s claims, including losses forwhich claims have not been reported. These loss estimates rely on actuarialobservations of ultimate loss experience for similar historical events. Welimit our risk by carrying stop-loss policies for significant claims incurredfor both workmen’s compensation liabilities and medical costs.

 

**Other Loss Contingencies.**  We record liabilities when it is probablethat a liability has been incurred and the amount of the loss is reasonablyestimable in accordance with SFAS No. 5, *Accountingfor Contingencies*. Disclosure is required when there is a reasonablepossibility that the ultimate loss will exceed the recorded provision.Contingent liabilities are often resolved over long periods of time. Estimatingprobable losses requires analysis of multiple forecasts that often depend onjudgments about potential actions by third parties such as regulators. Our losscontingencies consist primarily of estimates related to the probable outcome ofcurrent litigation.

 

**RISKSASSOCIATED WITH FORWARD-LOOKING STATEMENTS**

 

ThisReport contains certain forward-looking statements such as our intentions,hopes, beliefs, expectations, strategies, predictions or any other variationthereof or comparable phraseology of our future activities or other futureevents or conditions within the meaning of Section 27A of the Securities Act of1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of1934, as amended, which are intended to be covered by the safe harbors createdthereby. Investors are cautioned that all forward-looking statements involverisks and uncertainty, including, without limitation, the risk of integratingour operating companies, of managing our rapid growth, of the timing andmagnitude of technological advances, of the occurrences of future events thatcould diminish our customers’ needs for our services, of a change in the degreeto which companies continue to outsource business processes, of an adverse outcomein any given legal proceeding or claim, of the denial of insurance on aparticular claim or of a party obligated to provide indemnification beingfinancially unable to do so, as well as such other risks set forth under theheading Risk Factors included in our most recent annual report on Form 10-K.

 

Althoughwe believe that the assumptions underlying the forward-looking statementscontained herein are reasonable, any of the assumptions could be inaccurate,and, therefore, there can be no assurance that the forward-looking statementsincluded in this Report will prove to be accurate. In light of the significantuncertainties inherent in the forward-looking statements included herein, theinclusion of such information should not be regarded as a representation by usor any other person that our objectives and plans will be achieved. Further, wedisclaim any obligation to update any such forward-looking statements, exceptas required by law.

 

**Item 3.**      **Quantitative and QualitativeDisclosures about Market Risk**

 

Weare subject to interest rate risk on our term loans, revolving credit facilityand Industrial Revenue Bonds. A 100 basis point increase in short-term interestrates would result in approximately $0.6 million of additional expense in 2004based on our expected average balance outstanding under the credit facilityduring 2004. Interest rates are fixed on the capitalized lease obligations.

 

**Item 4.**      **Controls and Procedures**

 

*(a) Evaluation of disclosure controls andprocedures.*

 

The Companymaintains disclosure controls and procedures, which it has designed to ensurethat material information related to the Company, including its consolidatedsubsidiaries, is made known to a group comprised of designated members of theCompany’s senior management, designated members of functional divisions of theCompany, and/or the certifying officers (i.e. Chief Executive Officer and ChiefFinancial Officer) (collectively, the “Disclosure Committee”), on a timelybasis. In response to recent legislation and proposed regulations, the Companyreviewed its internal control structure and its disclosure controls andprocedures. Although the Company believes its pre-existing disclosure controlsand procedures were adequate to enable the Company to comply with itsdisclosure obligations, as a result of such review, the Company implementedminor changes, primarily to formalize and document the procedures already inplace. As of March 31, 2004, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, 

 

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of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedurespursuant to Securities Exchange Act of 1934, as amended, Rule 13a-15 and15d-15. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the Company’s periodic SEC Filings.

 

*(b) Changes in internal controls.*

 

There were nosignificant changes in our internal controls or in other factors, including anycorrective actions with regard to significant deficiencies and materialweaknesses, that could significantly affect these controls subsequent to thedate of their evaluation.

 

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**PART II. OTHER INFORMATION**

 

**Item 1.**      **Legal Proceedings**

 

We are, fromtime to time, a party to litigation arising in the normal course of business.The following is a brief description for some of the legal matters that we areinvolved in. We do not believe these actions, nor any of the actions that weare a party to, will have a material adverse effect on our business orfinancial condition, however in the event of an adverse outcome in one or moreof our legal proceedings, operating results for a given quarter may benegatively impacted.

 

*Healthcare Marketing Associates, Inc.vs. Managed Care Professionals, Inc.*

 

OnFebruary 9, 1995, prior to the acquisition by the Company, Managed CareProfessionals, Inc. (one of our wholly-owned subsidiaries) (“MCP”)entered into an “Exclusive Marketing Agreement” with Healthcare MarketingAssociates, Inc. (“HMA”) whereby MCP granted to HMA the exclusive right tomarket, and HMA agreed to market exclusively for MCP, the MCP products andservices to health care providers in the United States for which MCP agreed topay HMA a percentage (30%) of gross revenues paid to MCP by the provider(customer). The duration of the Agreement was for a period of five(5) years and expired on February 9, 2000 (“Termination Date”). OnApril 27, 2001, HMA filed a lawsuit against MCP in the Circuit Court ofthe County of St. Louis, State of Missouri, alleging entitlement to commissionson revenues generated from providers after the Termination Date who wereinitially brought to MCP prior to the Termination Date. In March 2003,this lawsuit was tried before a judge and at the conclusion of the trial, thejudge ruled in the plaintiff’s favor in the amount of $1.782 million plusprejudgment and post judgment interest, which equates to approximately$2.4 million in total as of December 31, 2003. The judgment amountplus prejudgment interest costs were included in our 2002 results. Postjudgment interest accrues at a statutory 9% rate. We have appealed this rulingand oral arguments for our appeal were heard on February 24, 2004.  On May 4, 2004, the Court of Appealsaffirmed the Circuit Court’s judgment. We are currently evaluating additional appellate options.

 

*Various ROI Copy Charge Matters*

 

From time totime, various of our subsidiaries that perform release of information (“ROI”)services become defendants to putative class action lawsuits generally allegingthat the charge for reproducing certain medical records is not in conformitywith such plaintiffs’ reading of the applicable regulated charge. Such suitstypically include multiple ROI companies and hospitals as defendants and demandreimbursement for prior charges as well as for prospective pricing adjustments.We are currently a party to several such suits in various stages ofdevelopment. We believe we have meritorious defenses and intend to continue tovigorously defend any claims made against us in these matters.

 

*Mattel v. SOURCECORP*

 

OnFebruary 18, 2003, Mattel, Inc. filed suit against the Company in theLos Angeles County California Superior Court. In the suit, the plaintiffalleged that one of our subsidiaries is liable for the loss of variousproducts, prototypes and paper documents allegedly stored at one of oursubsidiary’s box storage facilities under theories of breach of contract,breach of fiduciary duty, negligence, breach of implied covenants of good faithand fair dealing and/or conversion. The plaintiff at various times allegeddamages ranging from “in excess of $2.5 million,” to approximately$20 million.  This matter wassettled prior to trial, the terms of which settlement are confidential.  The settlement and related legal costsimpacted our first quarter 2004 pre-tax earnings by approximately $3.9 millionwith no future earnings impact expected. Furthermore, the impact of the settlement and related legal costs on our2004 operating cash flow will be approximately $5.7 million, beforeconsideration of taxes.

 

*Spohr. et. al. v. F.Y.I. Incorporated, et.al.*

 

InJune 2000, the Company filed an action styled *F.Y.I. Incorporated v. Spohr, et. al.* in Dallas, Texas, inwhich we asserted claims for breach of contract, fraud, and negligentmisrepresentation against the sellers of two related companies that we acquiredin December 1998 (the “Texas Action”). The Texas Action was later removedto federal court and ultimately dismissed on jurisdictional grounds. Wereasserted these claims in two actions that were later consolidated; one styled*F.Y.I. Incorporated v. Spohr, et. al.*in Superior Court of the State of California in the County of Sacramento, CaseNo. 01-AS-00721 (the “Sacramento Action”) and one styled *Spohr, et. al. v. F.Y.I. Incorporated, et. al.*in the Superior Court of the State of California in the County of SanFrancisco, Case No. 318703 (the “San Francisco Action”). In theconsolidated action, we additionally filed claims against the sellers’accountants and the two sellers filed claims against us; however, inFebruary 2004, the judge in the Sacramento Action dismissed our claimsagainst the sellers’ accountants. The sellers allege that our former subsidiarywrongfully failed and refused to execute and deliver a requested estoppelcertificate, and that the failure to provide such estoppel certificate harmedthe landlord in that they were allegedly denied favorable terms on arefinancing of the property and were allegedly prevented from completing atimely sale of the property. Sellers’ allege damages of approximately$1.5 million. We have asserted damages in excess of $8 million. Webelieve we have meritorious defenses to sellers’ claims and intend tovigorously defend any claims made against us in this matter.

 

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**Item 6.**      **Exhibits and Reports on Form8-K**

 

(a) Exhibits

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                               |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1*                |   | Membership Interest  Purchase Agreement by and among SOURCECORP, Incorporated, Keypoint I  Acquisition Corp., Keypoint Consulting LLC and the Members of the Company  dated as of April 15, 2004                                              |
|                |   |                                                                                                                                                                                                                                          |
| 3.1                 |   | Restated Certificate of  Incorporation of SOURCECORP, Incorporated (Incorporated by reference to  Exhibit 99.3 to Amendment No.1 to the Company’s Registration Statement on  Form 8-A filed on February 15, 2002)                        |
|                |   |                                                                                                                                                                                                                                          |
| 3.2                 |   | Amended and Restated  By-Laws of SOURCECORP, Incorporated (Incorporated by reference to Exhibit 99.4  to Amendment No. 1 to the Company’s Registration Statement on Form 8-A filed  on February 15, 2002)                                |
|                |   |                                                                                                                                                                                                                                          |
| 4                   |   | Specimen certificate for  the Common Stock, par value $.01 per share, of the Registrant. (Incorporated  by reference to Exhibit 99.1 to Amendment No. 1 to the Company’s Registration  Statement on Form 8-A filed on February 15, 2002) |
|                |   |                                                                                                                                                                                                                                          |
| 31.1                |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                          |
| 31.2                |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                          |
| 32.1                |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                          |
| 32.2                |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                 |

 

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* Schedules and similarattachments are omitted in accordance with Item 601(b)(2) of Regulation SK anda brief description of such omitted schedules and similar attachments isincluded in the agreement.  The Companyundertakes to supplementally provide the Commission with a copy of any suchomitted schedule or similar attachment upon request.

 

(b) Reports on Form 8-K

 

On February 18, 2004, the Company filed a Current Report on Form 8-Kwith the Commission dated February 18, 2004, reporting, under Item 7 and Item12 thereto, the filing of a press release to announce its financial results forthe fourth quarter and fiscal year ended December 31, 2003.

 

OnFebruary 19, 2004, the Company filed a Current Report (Amendment No. 1) on Form8-K/A with the Commission dated February 18, 2004, reporting under Item 7 andItem 12 thereto, a correction to the earnings release issued on February 18,2004 related to the Company’s finance results for the fourth quarter and fiscalyear end December 31, 2003.  Theearnings release contained an error with respect to total new business wins in2003 for the Company, which were $125 million rather than the $133 millionreported in the earnings release.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report on Form 10-Q to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                | SOURCECORP, INCORPORATED |
|---------------------|--------------------------|
|                |                     |
| Date: May  10, 2004 | By:                      | /s/ ED H. BOWMAN, JR. |
|                |                     | Ed  H. Bowman, Jr. Chief Executive  Officer and President |
|                |                     |   |
| Date: May  10, 2004 | By:                      | /s/ BARRY L. EDWARDS |
|                |                     | Barry  L. EdwardsExecutive  Vice  President and Chief Financial Officer(Principal Financial and Accounting  Officer) |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                               |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1*                |   | Membership Interest  Purchase Agreement by and among SOURCECORP, Incorporated, Keypoint I  Acquisition Corp., Keypoint Consulting LLC and the Members of the Company  dated as of April 15, 2004                                              |
|                |   |                                                                                                                                                                                                                                          |
| 3.1                 |   | Restated Certificate of  Incorporation of SOURCECORP, Incorporated (Incorporated by reference to  Exhibit 99.3 to Amendment No.1 to the Company’s Registration Statement on  Form 8-A filed on February 15, 2002)                        |
|                |   |                                                                                                                                                                                                                                          |
| 3.2                 |   | Amended and Restated  By-Laws of SOURCECORP, Incorporated (Incorporated by reference to Exhibit  99.4 to Amendment No. 1 to the Company’s Registration Statement on Form 8-A  filed on February 15, 2002)                                |
|                |   |                                                                                                                                                                                                                                          |
| 4                   |   | Specimen certificate for  the Common Stock, par value $.01 per share, of the Registrant. (Incorporated  by reference to Exhibit 99.1 to Amendment No. 1 to the Company’s Registration  Statement on Form 8-A filed on February 15, 2002) |
|                |   |                                                                                                                                                                                                                                          |
| 31.1                |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                          |
| 31.2                |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                          |
| 32.1                |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                 |
|                |   |                                                                                                                                                                                                                                          |
| 32.2                |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                 |

 

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* Schedules and similarattachments are omitted in accordance with Item 601(b)(2) of Regulation SK anda brief description of such omitted schedules and similar attachments isincluded in the agreement.  The Companyundertakes to supplementally provide the Commission with a copy of any suchomitted schedule or similar attachment upon request.

 

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