**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM10-Q/A**

 

**Amendment No. 1**

 
| **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**

(Exact name of registrant as specified in its charter)

 
| **DELAWARE**                                                                | ** ** | **75-2560895**                       |
|-----------------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)              | ** ** | (I.R.S. Employer Identification 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** |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes o  No ý

 

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

 

As of April 30, 2004, 16,104,481 shares of the registrant’s CommonStock, $.01 par value per share, were outstanding.

 

 

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SOURCECORP, INCORPORATED AND SUBSIDIARIES

FORM 10-Q/A

QUARTERLY PERIOD ENDED MARCH 31, 2004

 

EXPLANATORY NOTE

 

This Amendment No. 1 on Form 10-Q/A is beingfiled to amend the Company’s quarterly report on Form 10-Q, which wasoriginally filed on May 10, 2004, to give effect to the restatement of theCompany’s condensed consolidated financial statements as discussed in Note 2 tothe condensed consolidated financial statements.

 

On October 27, 2004,the Company filed a Current Report on Form 8-K (as amended by Form 8-K/A filed October 27,2004) with the Securities and Exchange Commission (the “SEC”) disclosing thatthe Company’s previously issued financial statements and related independentregistered public accountants’ report for the year ended December 31,2003, as well as its previously issued financial statements for the 2004quarterly periods ended March 31, 2004 and June 30, 2004, should nolonger be relied upon, and that the Company, under the guidance of the AuditCommittee of the Board of Directors of the Company, had initiated aninvestigation into the financial results of one of the Company’s OperatingSubsidiaries in the Information Management Division.  Additionally, on January 21,2005, the Company issued a press release and subsequently filed a relatedCurrent Report on Form 8-K, disclosing that its previously issued financialstatements and related independent registered public accountants’ reports forthe years ended December 31, 2001 and 2002 should also no longer be reliedupon.

 

OnMarch 7, 2005, the Company filed a Current Report on Form 8-K with the SECand issued a press release, which was filed as an Exhibit to such Form 8-K,disclosing that the Company’s internal investigation has been concluded.

 

Based on the results of suchinvestigation, it was determined that the operatingsubsidiary had incorrectlyrecognized revenue for certain customer arrangements and omitted certainoperating expenses from its reported financial results which in turn resultedin overpayments and overaccruals of amounts of contingent consideration dueunder the earn-out provisions of the acquisition agreement for the OperatingSubsidiary which had been recognized as additional goodwill of the acquiredbusiness.  In connection with therestatement, the Company has expensed such contingent considerationoverpayments and adjusted goodwill and the related accrued liability (See Note2 to the condensed consolidated financial statements).  As a result, the condensed consolidatedfinancial statements for the three months ended March 31, 2003 and 2004are being restated from the amounts previously reported.  In addition, Item 2, “Management’s Discussionand Analysis of Financial Condition and Results of Operations” includes certainrestated financial statement information for periods ended December 31,2001, 2002, and 2003 and for the quarterly period ended June 30, 2004.  The Company intends to restate the financialstatements for the years ended December 31, 2001, 2002 and 2003 in its 2004Annual Report on Form 10-K.

 

In addition, this Amendment No.1 on Form 10-Q/A also reports theresults of the divestitures discussed in Note 4 to the condensed consolidatedfinancial statements as discontinued operations for the periods presented inItem 1, “Financial Statements” and in Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”.

 

Except for changes relating to or resultingfrom the investigation discussed in Note 2 to the condensed consolidatedfinancial statements and the divestitures discussed in Note 4 to the condensedconsolidated financial statements, this quarterly report does not reflecttransactions or events after the date of the initial filing of this Form 10-Qunless specifically indicated otherwise.

 

2

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

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

 

**INDEX**

 
| **PART  I.    FINANCIAL INFORMATION** |                                                                                                                              |
|-----------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                                                      |                                                                                                                              |   |
| Item 1                                                    | Financial Statements                                                                                                              |   |
|                                                      |                                                                                                                              |   |
|                                                      | Condensed  Consolidated Balance Sheets — December 31, 2003 and March 31, 2004  (unaudited), as restated            |   |
|                                                      |                                                                                                                              |   |
|                                                      | Condensed  Consolidated Statements of Operations — Three months ended March 31,  2003 and 2004 (unaudited), as restated |   |
|                                                      |                                                                                                                              |   |
|                                                      | Condensed  Consolidated Statements of Cash Flows — Three months ended March 31,  2003 and 2004 (unaudited), as restated |   |
|                                                      |                                                                                                                              |   |
|                                                      | 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**                                                                                                             |   |

 

3

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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** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                                                                              | ** ** | **(As restated, see Note 2)  (Unaudited)** | ** ** |
| **ASSETS**                                                                                                                                                                                                              |       |                                       |       |                     |       |
| **CURRENT  ASSETS:**                                                                                                                                                                                                    |       |                                       |       |                     |       |
| Cash and cash equivalents                                                                                                                                                                                               |       | $                                          | 2,097      |                     | $          | 4,155 |   |
| Accounts and notes receivable, less  allowance for doubtful accounts of $6,843 and $6,813, respectively                                                                                                                 |       | 63,522                                     |       | 65,669                   |       |
| Inventories                                                                                                                                                                                                             |       | 933                                        |       | 866                      |       |
| Deferred income taxes                                                                                                                                                                                                   |       | 6,072                                      |       | 6,097                    |       |
| Income tax receivable                                                                                                                                                                                                   |       | 3,000                                      |       | 3,139                    |       |
| Prepaid expenses and other current assets                                                                                                                                                                               |       | 4,318                                      |       | 5,061                    |       |
| Assets of discontinued operations                                                                                                                                                                                       |       | 14,658                                     |       | 14,033                   |       |
| Total current assets                                                                                                                                                                                                    |       | 94,600                                     |       | 99,020                   |       |
| **PROPERTY, PLANT AND  EQUIPMENT,** net of accumulated depreciation of  $53,393 and $55,611, respectively                                                                                                               |       | 35,902                                     |       | 36,147                   |       |
| **GOODWILL**                                                                                                                                                                                                            |       | 307,913                                    |       | 308,767                  |       |
| **INTANGIBLES,**  net of amortization of $709 and $798, respectively                                                                                                                                                    |       | 3,731                                      |       | 3,642                    |       |
| **OTHER  NONCURRENT ASSETS**                                                                                                                                                                                            |       | 10,384                                     |       | 10,225                   |       |
| Total assets                                                                                                                                                                                                            |       | $                                          | 452,530    |                     | $          | 457,801 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                           |       |                                       |       |                     |       |
| **CURRENT  LIABILITIES:**                                                                                                                                                                                               |       |                                       |       |                     |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                |       | $                                          | 52,375     |                     | $          | 46,494 |   |
| Current maturities of long-term obligations                                                                                                                                                                             |       | 209                                        |       | 249                      |       |
| Liabilities of discontinued operations                                                                                                                                                                                  |       | 5,423                                      |       | 6,346                    |       |
| Total current liabilities                                                                                                                                                                                               |       | 58,007                                     |       | 53,089                   |       |
| **LONG-TERM  OBLIGATIONS,** net of current maturities                                                                                                                                                                   |       | 73,390                                     |       | 78,554                   |       |
| **DEFERRED  INCOME TAXES**                                                                                                                                                                                              |       | 11,753                                     |       | 13,202                   |       |
| **LONG-TERM  CUSTOMER LIABILITY**                                                                                                                                                                                       |       | 1,862                                      |       | 1,878                    |       |
| **DEFERRED  REVENUE**                                                                                                                                                                                                   |       | 5,135                                      |       | 5,392                    |       |
| **OTHER  LONG-TERM OBLIGATIONS**                                                                                                                                                                                        |       | 9,306                                      |       | 9,632                    |       |
| Total liabilities                                                                                                                                                                                                       |       | 159,453                                    |       | 161,747                  |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                                                                                                      |       |                                       |       |                     |       |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                                                                                         |       |                                       |       |                     |       |
| Preferred stock, $.01 par value, 1,000,000  shares authorized, no shares issued or 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 shares outstanding at December 31, 2003 and March 31,  2004, respectively |       | 162                                        |       | 162                      |       |
| Additional paid-in-capital                                                                                                                                                                                              |       | 194,999                                    |       | 198,813                  |       |
| Retained earnings                                                                                                                                                                                                       |       | 101,225                                    |       | 103,288                  |       |
|                                                                                                                                                                                                                    |       | 296,386                                    |       | 302,263                  |       |
| Less—Treasury stock, at cost, 56,028 shares                                                                                                                                                                        |       | (982                                       | )          | (982                     | )          |
| Less—Deferred compensation                                                                                                                                                                                         |       | (2,327                                     | )          | (5,227                   | )          |
| Total stockholders’ equity                                                                                                                                                                                         |       | 293,077                                    |       | 296,054                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                         |       | $                                          | 452,530    |                     | $          | 457,801 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

4

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**SOURCECORP,INCORPORATED AND SUBSIDIARIESCONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                  | ** ** | **Three Months Ended  March 31,**     | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2003**                                   | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(As restated, see Note 2)  (Unaudited)** | ** ** |
| **REVENUE**                                                 |       | $                                          | 97,357     |   | $ | 96,876 |   |
| **COST OF  SERVICES**                                       |       | 56,839                                     |       | 57,141 |   |
| **DEPRECIATION**                                            |       | 3,088                                      |       | 3,221 |   |
| Gross profit                                                |       | 37,430                                     |       | 36,514 |   |
| **SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES**           |       | 23,831                                     |       | 31,397 |   |
| **AMORTIZATION**                                            |       | 89                                         |       | 89 |   |
| Operating income                                            |       | 13,510                                     |       | 5,028 |   |
| **OTHER  (INCOME) EXPENSE:**                                |       |                                       |       |   |   |
| Interest expense                                            |       | 1,410                                      |       | 660 |   |
| Interest income                                             |       | (252                                       | )          | (4 | ) |
| Other (income) expense, net                                 |       | 173                                        |       | 119 |   |
| Income from continuing operations before  income taxes      |       | 12,179                                     |       | 4,253 |   |
| **PROVISION  FOR INCOME TAXES**                             |       | 4,873                                      |       | 1,701 |   |
| **INCOME  FROM CONTINUING OPERATIONS**                      |       | 7,306                                      |       | 2,552 |   |
| **INCOME  (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX** |       | 184                                        |       | (487 | ) |
| **NET  INCOME**                                             |       | $                                          | 7,490      |   | $ | 2,065 |   |
| **NET  INCOME PER COMMON SHARE**                            |       |                                       |       |   |   |
| **BASIC**                                                   |       |                                       |       |   |   |
| **Continuing  Operations**                                  |       | $                                          | 0.43       |   | $ | 0.16 |   |
| **Discontinued  Operations**                                |       | 0.01                                       |       | (0.03 | ) |
| **Total**                                                   |       | $                                          | 0.44       |   | $ | 0.13 |   |
| **DILUTED**                                                 |       |                                       |       |   |   |
| **Continuing  Operations**                                  |       | $                                          | 0.42       |   | $ | 0.16 |   |
| **Discontinued  Operations**                                |       | 0.01                                       |       | (0.03 | ) |
| **Total**                                                   |       | $                                          | 0.43       |   | $ | 0.13 |   |
| **WEIGHTED  AVERAGE COMMON SHARES OUTSTANDING**             |       |                                       |       |   |   |
| **BASIC**                                                   |       | 17,205                                     |       | 16,096 |   |
| **DILUTED**                                                 |       | 17,226                                     |       | 16,448 |   |

 

The accompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

5

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,**       | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                | ** ** | **2003**                                     | ** ** | **2004** | ** ** |
| ** **                                                                                | ** ** | **(As restated, see Note 2)****(Unaudited)** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                |       |                                         |       |   |   |
| Income from continuing operations                                                         |       | $                                            | 7,306      |   | $ | 2,552 |   |
| Adjustments to reconcile income to net cash  provided by operating activities:            |       |                                         |       |   |   |
| Depreciation and amortization                                                             |       | 3,177                                        |       | 3,310 |   |
| Deferred income taxes                                                                     |       | 1,581                                        |       | 1,424 |   |
| Compensation expense on restricted stock  grants                                          |       | —                                       |       | 528 |   |
| Change in operating assets and liabilities:                                               |       |                                         |       |   |   |
| Accounts and notes receivable                                                             |       | (5,632                                       | )          | (2,271 | ) |
| Inventories, prepaid expenses and other  assets                                           |       | (468                                         | )          | (460 | ) |
| Accounts payable and accrued liabilities                                                  |       | 3,485                                        |       | (4,693 | ) |
| Net cash provided by operating activities  from continuing operations                     |       | 9,449                                        |       | 390 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                |       |                                         |       |   |   |
| Purchase of property, plant and equipment                                                 |       | (2,912                                       | )          | (3,310 | ) |
| Proceeds from disposition of property,  plant and equipment                               |       | —                                       |       | 9 |   |
| Cash paid for acquisitions, net of cash  acquired                                         |       | (445                                         | )          | (400 | ) |
| Net cash used in investing activities from  continuing operations                         |       | (3,357                                       | )          | (3,701 | ) |
| **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 in) provided by financing  activities from continuing operations           |       | (8,173                                       | )          | 5,146 |   |
|                                                                                      |       |                                         |       |   |   |
| **Net cash  provided by operating activities from discontinued operations**               |       | 1,406                                        |       | 223 |   |
|                                                                                      |       |                                         |       |   |   |
| **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 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

6

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1. Basis of Presentation**

 

The accompanying condensed consolidatedfinancial statements and related notes to the condensed consolidated financialstatements include the accounts of SOURCECORP, Incorporated and subsidiaries(collectively, the “Company”).  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation. These condensed consolidated financial statements have beenprepared by the Company, without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations. However,the Company believes that all disclosures are adequate to make the informationpresented not misleading.

 

In the opinion of management, all adjustments (which include normalrecurring adjustments, except as disclosed in Note 2) necessary to fairly presentthe Company’s financial position as of March 31, 2004, and results ofoperations and cash flows for the three months ended March 31, 2004 and March 31,2003 have been included. The results of operations for the three months ended March 31,2004 are not necessarily indicative of the results to be expected for the fullfiscal year or for any future periods.

 

The Company uses estimates and assumptions required for preparation ofthe financial statements. The estimates are primarily based on historical experienceand business knowledge and are revised as circumstances change. However, actualresults could differ from the estimates.

 

**2. Restatement**

 

Subsequent to the issuance of its condensed consolidated financial statements for the three months ended March 31, 2004, the Company, with the oversight and approval of the Audit Committee of the Board of Directors, initiated an investigation of the financial results of one of the Company’s operating subsidiaries in the Information Management and Distribution reportable segment (the “Operating Subsidiary”).  The findings of the investigation concluded that the Operating Subsidiary had incorrectly recognized revenue for certain customer arrangements and omitted certain operating expenses from its reported financial results which in turn resulted in overpayments and overaccruals of amounts of contingent consideration due under the earn-out provisions of the acquisition agreement for the Operating Subsidiary which had been recognized as additional goodwill of the acquired business.  As a result, the condensed consolidated financial statements for the three months ended March 31, 2003 and 2004, and the condensed consolidated balance sheet at December 31, 2003, have been restated from the amounts previously reported.  

 

As described in the Company’s summary of significant accounting policies, revenue is recognizable when each of the following conditions is met:  persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred or services have been rendered and collection is reasonably assured.  The investigation identified certain instances where one or more of the aforementioned revenue recognition conditions as applied to certain customer contracts were not met by the Operating Subsidiary.  As a result, the revenue previously recognized that did not meet all the revenue recognition conditions mentioned above has been reversed, resulting in a downward adjustment to certain asset accounts or the recognition of a customer liability or deferred revenue, if the customer has paid the invoices related to the reversed revenue.   Notwithstanding the reversal of revenue, the direct costs associated with the reversed revenue continue to be reported in the period incurred.  In addition, the Company has evaluated the direct costs related to deferred revenue and has determined to continue to include the costs in the period incurred due to the uncertainty regarding the future recoverability of the associated costs.  The following table identifies the revenue adjustments by issue that are reflected in the restated financial statements for the three months ended March 31, 2003 and 2004:

 
| **(In  Thousands)**          | ** ** | **Three Months  Ended  March 31, 2003** | ** ** | **Three Months  Ended  March 31, 2004** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Asset accounts               |       | $                                            | (135       | )                                            | $          | (2,771 | ) |
| Customer liability, net      |       | (372                                         | )          | (1,474                                       | )          |
| Deferred revenue, net        |       | (600                                         | )          | (638                                         | )          |
| Total Net Revenue Adjustment |       | $                                            | (1,107     | )                                            | $          | (4,883 | ) |

 

7

 

**Asset accounts:**

Represents the reversal of previously recognized revenue through the downward adjustment of certain asset accounts where one or more of the aforementioned revenue recognition conditions as applied to certain customer contracts were not met by the Operating Subsidiary.  To the extent that the write-down relates to performed services that exceeded the contractual funding limitation, a portion of the revenue may be recognized in future periods upon customer authorization.

 

**Customer liability, net:**

The Operating Subsidiary in certain instances recognized revenue for services that were never performed. The customers were invoiced for the non-performed services and collection of the invoices has occurred.  A portion of the customer liability may be recognized as revenue in future periods upon successful completion of services or negotiations with the Operating Subsidiary’s customer(s).  Remaining customer liability balances will be extinguished through either customer refund or applying such remaining customer liability against future provided services.

 

**Deferred revenue, net:**

The Operating Subsidiary recognized revenue for performed services although the related contractually required services designed to meet customer-specific acceptance provisions (i.e. quality standards) were not performed.  The customers were invoiced for the performed services and collection of the invoices has occurred.  However, by not complying with the contract, the Operating Subsidiary is unable to reasonably demonstrate that the performed services met the required quality standard(s).  This has resulted in the deferral of revenue for performed services for which acceptance is contingent upon meeting the required quality standard(s).  The Operating Subsidiary will recognize the revenue for performed services upon obtaining explicit acceptance from the customer(s).  In the event customer acceptance is not obtained, the deferred revenue will be reclassified to a customer liability.  The customer liability will be extinguished through either customer refund or applying such remaining customer liability against future provided services.

 

The investigation identified certain expenses of the Operating Subsidiary that were not properly recorded in the Operating Subsidiary’s consolidated statement of operations.  Certain former members of the Operating Subsidiary’s management allegedly diverted expenses to entities they controlled, but that are unrelated to the Company, resulting in the omission of the related expenses from the Operating Subsidiary’s and, as a result, the Company’s previously reported financial results.  The Company has identified the unrecorded expenses and has recorded them in the period the expenses were incurred as an adjustment to selling, general and administrative expense.  A liability for such an amount has been recorded in other long-term obligations in the restated financial statements.  The liability will be eliminated at such time the Company recovers any contingent consideration overpayments paid to the former owners of the Operating Subsidiary, as discussed below.

 

The revenue recognition and expense omission issues affected previously paid contingent consideration related to the acquisition of the Operating Subsidiary.  As a result of the structure of the acquisition agreement, the former owners of the Operating Subsidiary had the opportunity to earn additional purchase consideration for the twelve-month periods ended February 28, 2002, February 28, 2003 and February 29, 2004 (the “Earn-out Period(s)”) based on earnings before interest and taxes of the Operating Subsidiary, in excess of designated thresholds, calculated in accordance with accounting principles generally accepted in the United States of America for each respective period (the “Earn-out Agreement”).  Based on the findings of the Company’s investigation, earnings before interest and taxes attributable to the Operating Subsidiary were overstated during the Earn-out Period(s) resulting in overpayments and overaccruals made by the Company under the provisions of the Earn-out Agreement that otherwise would not have been made.  The Company has expensed the contingent consideration overpayments in the financial statements in the periods in which they were paid.  These amounts had previously been accrued as contingent consideration and an addition to goodwill.  The Company has reversed these accruals and related goodwill in the periods originally recorded.  The Company will record a gain in future periods to the extent such contingent consideration overpayments are recovered.

 

Restating the financial statements for the revenue recognition, expense omission and contingent consideration overpayment issues results in an adjustment to the provision for income taxes and to certain other balance sheet tax accounts for the periods restated.

 

8

 

A summary of the significant effects of the restatement is as follows (in thousands, except per share data):

 

**BALANCE SHEET INFORMATION**

**(All Periods Presented Unaudited)**

 
| ** **                               | ** ** | **At December 31, 2003** | ** ** | **At March 31, 2004** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | **As Previously   Reported**  | ** ** | **As  Restated**           | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** |
| ** **                               | ** ** | **(Item 1)**                  | ** ** | ** **                 | ** ** | **(Item 1)** | ** ** | ** ** | ** ** |
| Accounts and Notes Receivable, Net       |       | $                             | 67,873     |                       | $          | 63,522 |   | $ | 74,628 |   | $ | 65,669 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Income Tax Receivable                    |       | $                             | —     |                       | $          | 3,000 |   | $ | — |   | $ | 3,139 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Goodwill                                 |       | $                             | 324,305    |                       | $          | 307,913 |   | $ | 333,692 |   | $ | 308,767 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Total Assets                             |       | $                             | 470,273    |                       | $          | 452,530 |   | $ | 488,546 |   | $ | 457,801 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Accounts Payable and Accrued Liabilities |       | $                             | 52,054     |                       | $          | 52,375 |   | $ | 54,696 |   | $ | 46,494 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Income Tax Payable                       |       | $                             | 2,186      |                       | $          | — |   | $ | 4,003 |   | $ | — |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Deferred Income Taxes                    |       | $                             | 18,084     |                       | $          | 11,753 |   | $ | 19,533 |   | $ | 13,202 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Long-term Customer Liability             |       | $                             | —     |                       | $          | 1,862 |   | $ | — |   | $ | 1,878 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Deferred Revenue                         |       | $                             | —     |                       | $          | 5,135 |   | $ | — |   | $ | 5,392 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Other Long-term Obligations              |       | $                             | 7,839      |                       | $          | 9,306 |   | $ | 8,163 |   | $ | 9,632 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Retained Earnings                        |       | $                             | 119,236    |                       | $          | 101,225 |   | $ | 124,236 |   | $ | 103,288 |   |
|                                     |       |                          |       |                       |       |   |   |   |   |
| Total Stockholders’ Equity          |       | $                             | 311,088    |                       | $          | 293,077 |   | $ | 317,002 |   | $ | 296,054 |   |

 

----

**Item 1:****  **Amounts as previously reported after givingeffect to adjustments required to reflect the Company’s discontinued operationsdiscussed in Note 4 to the consolidated financial statements.

 

9

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**STATEMENT OF OPERATIONS INFORMATION**

**(All Periods Presented Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended  March 31, 2003** | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously   Reported**                | ** ** | **As  Restated**                            | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                             | ** ** | **(Item 1)**                                | ** ** | ** **                                  | ** ** | **(Item 1)** | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                           | 98,464     |                                        | $          | 97,357 |   | $ | 101,759 |   | $ | 96,876 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Gross Profit                                           |       | $                                           | 38,537     |                                        | $          | 37,430 |   | $ | 41,397 |   | $ | 36,514 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Selling, General & Administrative  Expenses        |       | $                                           | 23,793     |                                        | $          | 23,831 |   | $ | 31,388 |   | $ | 31,397 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Income From Continuing Operations Before  Income Taxes |       | $                                           | 13,324     |                                        | $          | 12,179 |   | $ | 9,145 |   | $ | 4,253 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Provision for Income Taxes                             |       | $                                           | 5,329      |                                        | $          | 4,873 |   | $ | 3,658 |   | $ | 1,701 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Income from Continuing Operations                      |       | $                                           | 7,995      |                                        | $          | 7,306 |   | $ | 5,487 |   | $ | 2,552 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Net Income                                             |       | $                                           | 8,179      |                                        | $          | 7,490 |   | $ | 5,000 |   | $ | 2,065 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| **Net  Income Per Common Share**                       | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                  |       |                                        |       |                                        |       |   |   |   |   |
| Continuing Operations                                  |       | $                                           | 0.47       |                                        | $          | 0.43 |   | $ | 0.34 |   | $ | 0.16 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                           | 0.48       |                                        | $          | 0.44 |   | $ | 0.31 |   | $ | 0.13 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Diluted                                                |       |                                        |       |                                        |       |   |   |   |   |
| Continuing Operations                                  |       | $                                           | 0.46       |                                        | $          | 0.42 |   | $ | 0.33 |   | $ | 0.16 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Total                                                  |       | $                                           | 0.47       |                                        | $          | 0.43 |   | $ | 0.30 |   | $ | 0.13 |   |

 

----

**Item1:****  **Amounts aspreviously reported after giving effect to adjustments required to reflect theCompany’s discontinued operations discussed in Note 4 to the consolidatedfinancial statements.

 

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

 

*Stock-Based Compensation*

 

In 2002, the Board of Directors and Shareholders of the Companyapproved the SOURCECORP, Incorporated 2002 Long-Term Incentive Plan (the “2002Plan”), which replaced the 1995 Stock Option Plan, as amended (the “1995 Plan”).The 2002 Plan provides for awards of options to purchase common stock and mayinclude incentive 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.

 

The Board of Directors has appointed a committee (the “Committee”) toadminister the 2002 Plan. Persons eligible to receive awards under the planinclude directors, officers, employees of the Company and its subsidiaries, andpersons who provide consulting services to the Company deemed by the Committeeto be of substantial value to the Company, persons who have been offeredemployment by the Company or its subsidiaries, and persons employed by anentity that the Committee reasonably expects to become a subsidiary of the Company.Awards granted under the 2002 Plan may, at the discretion of the Committee, begranted either alone or in addition to, in tandem with or in substitution forany other award granted under the 2002 Plan or any other plan of the Company,any subsidiary or any business entity to be acquired by the Company or one ofits subsidiaries. The Committee determines vesting in awards granted under the2002 Plan.

 

10

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The Company 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):

 

11

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| ** **                                                                                                                           | ** ** | **Three Months  Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2003**                               | ** ** | **2004** | ** ** |
| Net income as reported                                                                                                               |       | $                                      | 7,490      |   | $ | 2,065 |   |
| 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                                                                                                                  |       | $                                      | 6,661      |   | $ | 1,489 |   |
|                                                                                                                                 |       |                                   |       |   |   |
| Earnings per share:                                                                                                                  |       |                                   |       |   |   |
| Reported basic earnings per share                                                                                                    |       | $                                      | 0.44       |   | $ | 0.13 |   |
| Proforma basic earnings per share                                                                                                    |       | $                                      | 0.39       |   | $ | 0.09 |   |
|                                                                                                                                 |       |                                   |       |   |   |
| Reported diluted earnings per share                                                                                                  |       | $                                      | 0.43       |   | $ | 0.13 |   |
| Proforma diluted earnings per share                                                                                                  |       | $                                      | 0.39       |   | $ | 0.09 |   |

 

The fair value of stock options and warrants was estimated on the dateof grant using the Black-Scholes option pricing model using the followingassumptions:

 
| ** **                               | ** ** | **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 |   |

 

During the three months ended June 30, 2003, the Company awarded164,300 shares of restricted stock under the 2002 Plan. The restricted shareswere issued at no cost to the recipients; therefore, the Company recordeddeferred compensation of approximately $2.9 million based on the market valueof the stock at the date of issuance. The deferred compensation charge is beingamortized to expense over the vesting period of the restricted stock. Therestricted shares vest over a three-year period ending July 1, 2006, withacceleration of the vesting period occurring if a certain stock price orperformance target is achieved. For the three months ended March 31, 2003and 2004, approximately $0.0 and $0.3 million, respectively, of deferredcompensation was amortized to expense related to this grant.

 

During the three months ended March 31, 2004, the Company awarded132,000 shares of restricted stock under the 2002 Plan.  The restricted shares were issued at no costto the recipients; therefore, the Company recorded deferred compensation ofapproximately $3.5 million based on the market value of the stock at the dateof issuance.  The deferred compensationcharge is being amortized to expense over the vesting period of the restrictedstock.  The restricted shares vest over athree-year period ending January 10, 2007, with acceleration of thevesting period occurring if certain performance targets are achieved.  For the three months ended March 31,2004, approximately $0.3 million of deferred compensation was amortized toexpense related to this grant.

 

Total deferred compensation amortized to expense related to therestricted stock grants was approximately $0.6 million during the three monthsended March 31, 2004.

 

*Common Stock Repurchase Program*

 

During 2003, the Company activated the $30.0million stock repurchase program authorized by the Board of Directors in April 2001and purchased 1,306,979 shares of its common stock at a cost of approximately$20.7 million (including 894,133 shares repurchased during the three monthsended March 31, 2003 at an average price of $14.26 per share).  The repurchased shares were recorded in theaccompanying balance sheet as a reduction in common stock, additionalpaid-in-capital, and retained earnings. These shares have been retired and returned to the status of authorizedbut unissued shares of the Company.  TheCompany did not repurchase any additional shares during the three months ended March 31,2004.

 

12

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*Net Income Per Share:*

 

Basic and diluted net income per common share were computed inaccordance with SFAS No. 128, *Earnings PerShare*. The differences between basic weighted average common sharesand diluted weighted average common shares and potentially dilutive commonshares are as follows (in thousands):

 
| ** **                                                | ** ** | **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 |   |

 

At March 31, 2003 and 2004, approximately 3.6 million and 1.8million, respectively, of potentially dilutive common shares were not includedin the diluted earnings per share calculation because they were anti-dilutive.These potentially dilutive common shares may be dilutive to future earnings pershare calculations.

 

**4. Discontinued Operations**

 

During the first quarter of 2004, the Companycompleted a strategic evaluation of its operations based on certain criteria,such as strategic and financial fit, and future growth prospects.  As a result, on May 6, 2004, the Companyformally committed to a plan of divestiture for certain non-strategic assetgroups related to its Direct Mail operations reported in the InformationManagement and Distribution segment in prior periods, and two medical recordsmanagement operations reported in the Healthcare, Regulatory and LegalCompliance segment in prior periods.  TheDirect Mail operations and the two medical records management operations areaccounted for as discontinued operations. As such, the operating assets and liabilities of these operations arepresented in the condensed consolidated balance sheets as Assets and Liabilitiesof Discontinued Operations and the results associated with these operations arepresented in the condensed consolidated statement of operations as Income(Loss) from Discontinued Operations, net of tax.

 

During the second quarter of 2004, theCompany completed the sale of one of the medical records management operations,which resulted in approximately $0.8 million of cash proceeds and a pre-taxgain on disposal of approximately $0.5 million. Additionally, the Company recognized a pre-tax loss on disposal relatedto the Direct Mail operations of approximately $2.2 million.

 

During the third quarter of 2004, the Companycompleted the sale of the Direct Mail operations and the remaining medicalrecords management operation, resulting in the recognition of a net pretax gainof $0.4 million.  In connection withthese transactions, the Company received approximately $6.1 million of cashproceeds, net of transaction costs, approximately $1.5 million of 12 percentsecured subordinated notes, which the Company fully reserved, related to theDirect Mail operations and $0.6 million of contingent consideration related toa contract renewal at the medical records management operation.

 

During the fourth quarter of 2004, thecontingency surrounding the contract renewal at the medical records managementoperation was resolved.  As such, theCompany recognized additional consideration of $0.6 million offset byapproximately $0.1 million of incremental loss related to finalizing theconsideration related to the divestiture.

 

The collection of the reserved subordinated notes could result in afuture reduction of the total loss recognized related to the disposition of theDirect Mail operations.

 

13

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Summarized selected financial information for the discontinuedoperations is as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                      | ** ** | **2003**                               | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **(Unaudited)**                        | ** ** |
| **REVENUE**                                                     |       | $                                      | 11,061     |   | $ | 8,589 |   |
| **COST OF  SERVICES**                                           |       | 7,673                                  |       | 6,400 |   |
| **DEPRECIATION**                                                |       | 448                                    |       | 401 |   |
| Gross profit                                                    |       | 2,940                                  |       | 1,788 |   |
| **SELLING,  GENERAL AND ADMINISTRATIVE EXPENSES**               |       | 2,640                                  |       | 2,611 |   |
| Operating income (loss)                                         |       | 300                                    |       | (823 | ) |
| **OTHER  (INCOME) EXPENSE:**                                    |       |                                   |       |   |   |
| Interest and other expense (income), net                        |       | (7                                     | )          | (11 | ) |
| Income (loss) from discontinued operations  before income taxes |       | 307                                    |       | (812 | ) |
| **PROVISION  FOR INCOME TAXES**                                 |       | 123                                    |       | (325 | ) |
| **INCOME  (LOSS) FROM DISCONTINUED OPERATIONS**                 |       | $                                      | 184        |   | $ | (487 | ) |

 

The assets and liabilities of the discontinued operations are statedseparately on the condensed consolidated balance sheets.  The major asset and liability categories areas follows (in thousands):

 
| ** **                                                             | ** ** | **December 31,  2003** | ** ** | **March 31,  2004** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                             | ** ** | **(Unaudited)**             | ** ** |
| **ASSETS OF DISCONTINUED OPERATIONS**                                  |       |                        |       |                     |       |
| **CURRENT  ASSETS:**                                                   |       |                        |       |                     |       |
| Accounts and notes receivable, net of  allowance for doubtful accounts |       | $                           | 5,693      |                     | $          | 5,598 |   |
| Inventories                                                            |       | 1,130                       |       | 1,195                    |       |
| Prepaid expenses and other current assets                              |       | 730                         |       | 456                      |       |
| Total current assets                                                   |       | 7,553                       |       | 7,249                    |       |
| **PROPERTY,  PLANT AND EQUIPMENT,** net of accumulated depreciation    |       | 6,923                       |       | 6,621                    |       |
| **OTHER  NONCURRENT ASSETS**                                           |       | 182                         |       | 163                      |       |
| Total assets of discontinued operations                                |       | $                           | 14,658     |                     | $          | 14,033 |   |
| **LIABILITIES  OF DISCONTINUED OPERATIONS**                            |       |                        |       |                     |       |
| **CURRENT  LIABILITIES:**                                              |       |                        |       |                     |       |
| Accounts payable and accrued liabilities                               |       | $                           | 5,423      |                     | $          | 6,346 |   |
| Total liabilities of discontinued operations                           |       | $                           | 5,423      |                     | $          | 6,346 |   |

 

**5. Business Combinations**

 

*Goodwill and Intangibles*

 

The changes in the carrying value of goodwill and the components ofintangibles are as follows (in thousands):

 

Goodwill:

 
| ** **                             | ** ** | **Information  Management and  Distribution** | ** ** | **Healthcare,  Regulatory  and Legal  Compliance** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------|------------|-----------|------------|
| Net balance as of January 1, 2004 |       | $                                             | 175,945    |                                               | $          | 131,968   |       | $ | 307,913 |   |
| Additional contingent consideration    |       | 348                                           |       | 506                                                |       | 854       |       |
| Net balance as of March 31, 2004  |       | $                                             | 176,293    |                                               | $          | 132,474   |       | $ | 308,767 |   |

 

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 |   |

 

14

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Aggregate amortization expense related to intangibles for the threemonths ended March 31, 2004 was $0.1 million. Estimated amortizationexpense for the periods ending December 31, 2004 through December 31,2006 is $0.4 million annually. Thereafter, annual amortization expense isestimated to be $0.3 million through December 31, 2016.

 

*Contingent Consideration*

 

Certainof the Company’s acquisitions are subject to adjustments in overallconsideration and recorded goodwill based upon the achievement of specifiedrevenue and/or earnings targets generally over one to three year periods. Incertain agreements, the Company reserves the right to change the payment mix touse common stock versus cash in satisfying contingent consideration liabilities.In transactions where the Company acquired a subsidiary through a tax-freestock merger, the Company is required to pay a minimum amount of totalconsideration in common stock rather than cash, including any contingentconsideration payments.

 

Management’sevaluation of the cumulative earnings of acquired companies through March 31,2004 indicated that certain acquired companies have met specified earningstargets beyond a reasonable doubt; therefore the Company accrued aggregateadditional consideration of approximately $0.5 million during the threemonths ended March 31, 2004. As of March 31, 2004, approximately $4.1million of additional consideration remains accrued of which $3.3 million isclassified as other current liabilities and is expected to be settled in cashand $0.8 million is classified as additional paid-in-capital and isexpected to be settled in common stock with final valuation determined at dateof issuance.

 

15

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Notall of the periods applicable for earnout targets are completed and additionalamounts may be payable in future periods under the terms of theagreements.  If all earnout targets underthe current agreements were achieved, the maximum contingent consideration tobe paid would be $9.4 million, including the $4.1 million accrued at March 31,2004, with approximately $4.1 million to be paid in 2004 and approximately$5.3 million to be paid in 2005.  Inaccordance with the agreements, the Company would be required to satisfy approximately$0.8 million of the $9.4 million potential liability in common stockrelated to a past tax-free stock merger and has the option to satisfy$7.7 million of the $9.4 million potential liability in common stock withfinal valuation for the number of shares to be determined at date ofissuance.  The remaining potentialliability would be paid in cash, as specified in the agreements.  These amounts exclude the contingent considerationoverpayments disclosed in Note 2.

 

# *Other Accrued Consideration*

#  

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

 

## *Acquisition Related Payments*

##  

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

 

**6. Segment Reporting**

 

The Company aggregates its service offerings and operations into two reportablesegments: (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 and income from continuing operations beforeincome taxes. All centrally incurred corporate costs are allocated to thesegments based principally on operating income. The reporting segments follow thesame accounting policies used for the Company’s consolidated financialstatements.

 

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.

 

**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.

 

The Company measures segment profit as income from continuingoperations before income taxes. Information on the segments follows (inthousands):

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED MARCH 31, 2004**     | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                    | ** ** | **Information  Management  and  Distribution** | ** ** | **Healthcare,  Regulatory  and Legal Compliance** | ** ** | **Consolidated** | ** ** |
| Revenue                                                       |       | $                                              | 52,407     |   | $ | 44,469 |   | $ | 96,876 |   |
| Income (loss) from continuing operations before  income taxes |       | (975                                           | )          | 5,228 |   | 4,253 |   |
|                                                               |            |                                                |            |  |  |  |  |  |  |  |

 
| ** **                                             | ** ** | **THREE MONTHS ENDED MARCH 31, 2003**     | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                             | ** ** | **Information  Management  and  Distribution** | ** ** | **Healthcare,  Regulatory  and Legal  Compliance** | ** ** | **Consolidated** | ** ** |
| Revenue                                                |       | $                                              | 54,020     |   | $ | 43,337 |   | $ | 97,357 |   |
| Income from continuing operations before  income taxes |       | 6,425                                          |       | 5,754 |   | 12,179 |   |
|                                                        |            |                                                |            |  |  |  |  |  |  |  |

 

16

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**7.****              Litigation**

 

The Company is, from time to time, a party tolitigation arising in the normal course of business. The following is adescription of the most significant legal matters that the Company is involvedin.  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”). On April 27,2001, HMA filed a lawsuit against MCP in the Circuit Court of the County of St.Louis, State of Missouri, alleging entitlement to commissions on revenuesgenerated from providers after the Termination Date who were initially broughtto MCP prior to the Termination Date. In March 2003, this lawsuit wastried before a judge and at the conclusion of the trial, the judge ruled in theplaintiff’s favor in the amount of approximately $1.8 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 appealed this ruling and oralarguments for the appeal were heard on February 24, 2004.  On May 4, 2004, the Court of Appeals affirmedthe Circuit Court’s judgment.

 

*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. Furthermore, the impact of the settlement and related legal costs on theCompany’s 2004 operating cash flow will be approximately $5.7 million, beforeconsideration 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 wrongfullyfailed and refused to execute and deliver a requested estoppel certificate, andthat the failure to provide such estoppel certificate harmed the landlord inthat they were allegedly denied favorable terms on a refinancing of theproperty and were allegedly prevented from completing a timely sale of theproperty. Sellers’ allege damages of approximately $1.5 million. TheCompany asserted damages in excess of $8 million.

 

17

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**8. Subsequent Events**

 

*Acquisition*

 

On May 4, 2004, the Company announced the acquisition of KeyPointConsulting, LLC (“KeyPoint”).  KeyPoint,located in Emeryville and Los Angeles, California, provides economic,financial, and forensic accounting services to law firms, corporations andgovernment agencies.  KeyPoint will jointhe Company’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 certain post-close purchase price adjustments, and includesapproximately $14 million of goodwill and intangible assets.  The Company financed the acquisition throughits revolving credit facility. Furthermore, once integrated into the Company’s current legal consultingservice offering, Keypoint is expected to contribute to earnings after relatedintangible amortization and acquisition financing costs during 2005.

 

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

 

**Internal Investigation**

 

Subsequent to the issuance of our condensed consolidated financial statements for the three months ended March 31, 2004, the Company, with the oversight and approval of the Audit Committee of our Board of Directors, initiated an investigation of the financial results of one of our operating subsidiaries in the Information Management and Distribution reportable segment (the “Operating Subsidiary”).  The findings of the investigation concluded that the Operating Subsidiary had incorrectly recognized revenue for certain customer arrangements and omitted certain operating expenses from its reported financial results which in turn resulted in overpayments and overaccruals of amounts of contingent consideration due under the earn-out provisions of the acquisition agreement for the Operating Subsidiary which had been recognized as additional goodwill of the acquired business.  As a result, our condensed consolidated financial statements for the three months ended March 31, 2003 and 2004, and our condensed consolidated balance sheet at December 31, 2003, have been restated from the amounts previously reported.  In addition, we intend to restate the financial statements for the years ended December 31, 2001, 2002 and 2003 in our 2004 Annual Report on Form 10-K and we intend to restate the quarterly period ended June 30, 2004 in our Form 10-Q/A Amendment No. 1.

 

18

 

As described in our critical accounting policies, revenue is recognizable when each of the following conditions is met:  persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred or services have been rendered and collection is reasonably assured.  We have identified certain instances where one or more of the aforementioned revenue recognition conditions as applied to certain customer contracts were not met by the Operating Subsidiary.  As a result, the revenue previously recognized that did not meet all the revenue recognition conditions above has been reversed, resulting in a downward adjustment to certain asset accounts, or the recognition of a customer liability or deferred revenue if the customer has paid the invoices related to the reversed revenue.  Notwithstanding the reversal of revenue, the direct costs associated with the reversed revenue continue to be reported in the period incurred.  In addition, we have evaluated the direct costs related to deferred revenue and have determined to continue to include the direct costs in the period incurred due to the uncertainty regarding the future recoverability of the associated costs.  The following table identifies the revenue adjustments by issue that will be reflected in the restated financial statements for the annual periods ended December 31, 2001, 2002, and 2003 and for the three months ended March 31 and June 30, 2004:

 
| **(In  Thousands)**          | ** ** | **Year Ended  Dec. 31, 2001** | ** ** | **Year Ended  Dec. 31, 2002** | ** ** | **Year Ended  Dec. 31, 2003** | ** ** | **Three Months  Ended  March 31, 2004** | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Total  Adjustment  Through  June 30, 2004** | ** ** |
|------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|
| Asset accounts               |       | $                             | (887       | )                             | $          | (267                          | )          | $                                            | 133        |                                        | $          | (2,771                                             | )          | $ | 37 |   | $ | (3,755 | ) |
| Customer liability, net      |       | (675                          | )          | (593                          | )          | (2,631                        | )          | (1,474                                       | )          | 693                                         |       | (4,680                                             | )          |
| Deferred revenue, net        |       | (1,745                        | )          | (1,752                        | )          | (3,817                        | )          | (638                                         | )          | (233                                        | )          | (8,185                                             | )          |
| Total Net Revenue Adjustment |       | $                             | (3,307     | )                             | $          | (2,612                        | )          | $                                            | (6,315     | )                                           | $          | (4,883                                             | )          | $ | 497 |   | $ | (16,620 | ) |
|                              |            |                               |            |                               |            |                               |            |                                              |            |                                             |            |                                                    |            |  |  |  |  |  |  |  |

 

**Asset accounts:**

Represents the reversal of previously recognized revenue through the downward adjustment of certain asset accounts where one or more of the aforementioned revenue recognition conditions as applied to certain customer contracts were not met by the Operating Subsidiary.  To the extent that the write-down relates to performed services that exceeded the contractual funding limitation, a portion of the revenue may be recognized in future periods upon customer authorization.

 

**Customer liability, net:**

The Operating Subsidiary in certain instances recognized revenue for services that were never performed. The customers were invoiced for the non-performed services and collection of the invoices has occurred.  A portion of the customer liability may be recognized as revenue in future periods upon successful completion of services or negotiations with the Operating Subsidiary’s customer(s).  Remaining customer liability balances will be extinguished through either customer refund or applying such remaining customer liability against future provided services.

 

**Deferred revenue, net:**

The Operating Subsidiary recognized revenue for performed services although the related contractually required services designed to meet customer-specific acceptance provisions (i.e. quality standards) were not performed.  The customers were invoiced for the performed services and collection of the invoices has occurred.  However, by not complying with the contract, the Operating Subsidiary is unable to reasonably demonstrate that the performed services met the required quality standard(s).  This has resulted in the deferral of revenue for performed services for which acceptance is contingent upon meeting the required quality standard(s).  The Operating Subsidiary will recognize the revenue for performed services upon obtaining explicit acceptance from the customer(s).  In the event customer acceptance is not obtained, the deferred revenue will be reclassified to a customer liability.  The customer liability will be extinguished through either customer refund or applying such remaining customer liability against future provided services.

 

The investigation identified certain expenses of the Operating Subsidiary that were not properly recorded in the Operating Subsidiary’s consolidated statement of operations.  Certain former members of the Operating Subsidiary’s management allegedly diverted expenses to entities they controlled, but that are unrelated to the Company, resulting in the omission of the related expenses from the Operating Subsidiary’s and, as a result, our previously reported financial results.  We have identified the unrecorded expenses and have recorded them in the period the expenses were incurred as an adjustment to selling, general and administrative expense.  A liability for such an amount has been recorded in other long-term obligations in the restated financial statements.  The liability will be eliminated at such time we recover any contingent consideration overpayments paid to the former owners of the Operating Subsidiary, as discussed below.

 

19

 

The revenue recognition and expense omission issues affected previously paid contingent consideration related to the acquisition of the Operating Subsidiary.  As a result of the structure of the acquisition agreement, the former owners of the Operating Subsidiary had the opportunity to earn additional purchase consideration for the twelve-month periods ended February 28, 2002, February 28, 2003 and February 29, 2004 (the “Earn-out Period(s)”) based on earnings before interest and taxes of the Operating Subsidiary, in excess of designated thresholds, calculated in accordance with accounting principles generally accepted in the United States of America for each respective period (the “Earn-out Agreement”).  Based on the findings of the investigation, earnings before interest and taxes attributable to the Operating Subsidiary were overstated during the Earn-out Period(s) resulting in overpayments and overaccruals under the provisions of the Earn-out Agreement that otherwise would not have been made.  We have expensed the contingent consideration overpayments in the financial statements in the periods in which they were paid, resulting in expense of $8.6 million, $7.2 million and $10.2 million for the years ended December 31, 2002 and 2003, and the quarter ended September 30, 2004, respectively.  These amounts had previously been accrued as contingent consideration and an addition to goodwill. We have reversed these accruals and related goodwill in the periods originally recorded.  We will record a gain in future periods to the extent such contingent consideration overpayments are recovered.

 

Restating the financial statements for the revenue recognition, expense omission and contingent consideration overpayment issues results in an adjustment to the provision for income taxes and to certain other balance sheet tax accounts for the periods restated.

 

The following tables represent restated financial information from the amounts previously reported for the years ended December 31, 2001, 2002 and 2003 and for the quarters ended March 31, 2003 and 2004 (in thousands, except per share data):

 

**BALANCE SHEET INFORMATION**

**(All Periods Presented Unaudited)**

 
| ** **                                | ** ** | **At December 31, 2001** | ** ** | **At December 31, 2002** | ** ** | **At December 31, 2003** | ** ** | **At March 31, 2004** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **As Previously   Reported**  | ** ** | **As  Restated**              | ** ** | **As Previously   Reported**  | ** ** | **As  Restated**           | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                | ** ** | **(Item 1)**                  | ** ** | ** **                    | ** ** | **(Item 1)**                  | ** ** | ** **                 | ** ** | **(Item 1)** | ** ** | ** ** | ** ** | **(Item 1)** | ** ** | ** ** | ** ** |
| Accounts  and Notes Receivable, Net       |       | $                             | 78,411     |                          | $          | 78,164                        |       | $                          | 70,241     |   | $ | 69,800 |   | $ | 67,873 |   | $ | 63,522 |   | $ | 74,628 |   | $ | 65,669 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Income  Tax Receivable                    |       | NC                            |       | NC                            |       | $                             | —     |                       | $          | 2,406 |   | $ | — |   | $ | 3,000 |   | $ | — |   | $ | 3,139 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Goodwill                                  |       | $                             | 298,519    |                          | $          | 293,475                       |       | $                          | 317,256    |   | $ | 305,026 |   | $ | 324,305 |   | $ | 307,913 |   | $ | 333,692 |   | $ | 308,767 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Total  Assets                             |       | $                             | 463,071    |                          | $          | 457,780                       |       | $                          | 467,607    |   | $ | 456,887 |   | $ | 470,273 |   | $ | 452,530 |   | $ | 488,546 |   | $ | 457,801 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Accounts  Payable and Accrued Liabilities |       | $                             | 43,802     |                          | $          | 39,645                        |       | $                          | 51,739     |   | $ | 49,001 |   | $ | 52,054 |   | $ | 52,375 |   | $ | 54,696 |   | $ | 46,494 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Income  Tax Payable                       |       | $                             | 4,588      |                          | $          | 3,258                         |       | $                          | 180        |   | $ | — |   | $ | 2,186 |   | $ | — |   | $ | 4,003 |   | $ | — |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Deferred  Income Taxes                    |       | NC                            |       | NC                            |       | $                             | 11,679     |                       | $          | 7,873 |   | $ | 18,084 |   | $ | 11,753 |   | $ | 19,533 |   | $ | 13,202 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term  Customer Liability             |       | $                             | —     |                          | $          | 615                           |       | $                          | —     |   | $ | 1,255 |   | $ | — |   | $ | 1,862 |   | $ | — |   | $ | 1,878 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Deferred  Revenue                         |       | $                             | —     |                          | $          | 1,558                         |       | $                          | —     |   | $ | 3,337 |   | $ | — |   | $ | 5,135 |   | $ | — |   | $ | 5,392 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Other  Long-term Obligations              |       | $                             | 18,005     |                          | $          | 18,567                        |       | $                          | 5,290      |   | $ | 6,518 |   | $ | 7,839 |   | $ | 9,306 |   | $ | 8,163 |   | $ | 9,632 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Retained  Earnings                        |       | $                             | 69,137     |                          | $          | 66,598                        |       | $                          | 96,969     |   | $ | 87,244 |   | $ | 119,236 |   | $ | 101,225 |   | $ | 124,236 |   | $ | 103,288 |   |
|                                      |       |                          |       |                          |       |                          |       |                       |       |   |   |   |   |   |   |   |   |
| Total  Stockholdes’ Equity           |       | $                             | 271,173    |                          | $          | 268,634                       |       | $                          | 302,676    |   | $ | 292,951 |   | $ | 311,088 |   | $ | 293,077 |   | $ | 317,002 |   | $ | 296,054 |   |

 

20

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----

**Item 1:** Amounts as previously reported aftergiving effect to adjustments required to reflect the Company’s discontinuedoperations discussed in Note 4 to the condensed consolidated financialstatements.

 

**Item 2:** NC denotesno change from the previously reported amount.

 

21

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**STATEMENT OF OPERATIONS INFORMATION**

**(All Periods Presented Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended  March 31, 2003** | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **As Previously   Reported**                | ** ** | **As  Restated**                            | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                             | ** ** | **(Item 1)**                                | ** ** | ** **                                  | ** ** | **(Item 1)** | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                           | 98,464     |                                        | $          | 97,357 |   | $ | 101,759 |   | $ | 96,876 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Gross Profit                                           |       | $                                           | 38,537     |                                        | $          | 37,430 |   | $ | 41,397 |   | $ | 36,514 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Selling, General & Administrative  Expenses        |       | $                                           | 23,793     |                                        | $          | 23,831 |   | $ | 31,388 |   | $ | 31,397 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Income From Continuing Operations Before  Income Taxes |       | $                                           | 13,324     |                                        | $          | 12,179 |   | $ | 9,145 |   | $ | 4,253 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Provision for Income Taxes                             |       | $                                           | 5,329      |                                        | $          | 4,873 |   | $ | 3,658 |   | $ | 1,701 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Income From Continuing Operations                      |       | $                                           | 7,995      |                                        | $          | 7,306 |   | $ | 5,487 |   | $ | 2,552 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Net Income                                             |       | $                                           | 8,179      |                                        | $          | 7,490 |   | $ | 5,000 |   | $ | 2,065 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| **Net  Income Per Common Share**                       | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                              |       |                                        |       |                                        |       |   |   |   |   |
| Continuing Operations                                  |       | $                                           | 0.47       |                                        | $          | 0.43 |   | $ | 0.34 |   | $ | 0.16 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Total                                                  |       | $                                           | 0.48       |                                        | $          | 0.44 |   | $ | 0.31 |   | $ | 0.13 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| **Diluted**                                            |       |                                        |       |                                        |       |   |   |   |   |
| Continuing Operations                                  |       | $                                           | 0.46       |                                        | $          | 0.42 |   | $ | 0.33 |   | $ | 0.16 |   |
|                                                   |       |                                        |       |                                        |       |   |   |   |   |
| Total                                                  |       | $                                           | 0.47       |                                        | $          | 0.43 |   | $ | 0.30 |   | $ | 0.13 |   |

 

----

**Item 1:** Amounts as previously reported aftergiving effect to adjustments required to reflect the Company’s discontinuedoperations discussed in Note 4 to the consolidated financial statements.

 

22

----

 

**STATEMENT OF OPERATIONS INFORMATION**

**(All Periods Presented Unaudited)**

 
| ** **                                                    | ** ** | **Year Ended  December 31, 2001** | ** ** | **Year Ended  December 31, 2002** | ** ** | **Year Ended  December 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **As Previously   Reported**           | ** ** | **As  Restated**                       | ** ** | **As Previously   Reported**           | ** ** | **As  Restated** | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                                    | ** ** | **(Item 1)**                           | ** ** | ** **                             | ** ** | **(Item 1)**                           | ** ** | ** ** | ** ** | **(Item 1)** | ** ** | ** ** | ** ** |
| Revenue                                                       |       | $                                      | 400,201    |                                   | $          | 396,894                                |       | $ | 381,156 |   | $ | 378,544 |   | $ | 384,474 |   | $ | 378,159 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Gross Profit                                                  |       | $                                      | 151,323    |                                   | $          | 148,016                                |       | $ | 144,146 |   | $ | 141,534 |   | $ | 149,720 |   | $ | 143,405 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Selling, General & Administrative  Expense                |       | $                                      | 92,010     |                                   | $          | 92,572                                 |       | $ | 93,578 |   | $ | 94,245 |   | $ | 98,770 |   | $ | 99,008 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Contingent Consideration Overpayments                         |       | $                                      | —     |                                   | $          | —                                 |       | $ | — |   | $ | 8,605 |   | $ | — |   | $ | 7,223 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Income (Loss) From Continuing Operations  Before Income Taxes |       | $                                      | (21,429    | )                                      | $          | (25,298                                | )          | $ | 43,712 |   | $ | 31,828 |   | $ | 46,994 |   | $ | 33,218 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Provision for Income Taxes                                    |       | $                                      | 70         |                                   | $          | (1,260                                 | )          | $ | 16,611 |   | $ | 11,920 |   | $ | 18,798 |   | $ | 13,294 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Income (Loss) From Continuing Operations                      |       | $                                      | (21,499    | )                                      | $          | (24,038                                | )          | $ | 27,101 |   | $ | 19,908 |   | $ | 28,196 |   | $ | 19,924 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Net Income (Loss)                                             |       | $                                      | (18,149    | )                                      | $          | (20,688                                | )          | $ | 27,832 |   | $ | 20,639 |   | $ | 27,353 |   | $ | 19,081 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Net Income (Loss) Per Common Share**                        |       |
| **Basic**                                                     |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Continuing Operations                                         |       | $                                      | (1.28      | )                                      | $          | (1.44                                  | )          | $ | 1.57 |   | $ | 1.15 |   | $ | 1.71 |   | $ | 1.21 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Total                                                         |       | $                                      | (1.08      | )                                      | $          | (1.24                                  | )          | $ | 1.61 |   | $ | 1.19 |   | $ | 1.66 |   | $ | 1.16 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| **Diluted**                                                   |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Continuing Operations                                         |       | $                                      | (1.28      | )                                      | $          | (1.44                                  | )          | $ | 1.54 |   | $ | 1.13 |   | $ | 1.70 |   | $ | 1.20 |   |
|                                                          |       |                                   |       |                                   |       |                                   |       |   |   |   |   |   |   |
| Total                                                         |       | $                                      | (1.08      | )                                      | $          | (1.24                                  | )          | $ | 1.58 |   | $ | 1.17 |   | $ | 1.65 |   | $ | 1.15 |   |
|                                                               |            |                                        |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

**Item 1:** Amounts as previously reported aftergiving effect to adjustments required to reflect the Company’s discontinuedoperations discussed in Note 4 to the condensed consolidated financialstatements.

 

**STATEMENT OF CASH FLOW INFORMATION**

**(All Periods Presented Unaudited)**

 
| ** **                                                            | ** ** | **Year Ended  December 31, 2002** | ** ** | **Year Ended  December 31, 2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                            | ** ** | **As Previously   Reported**           | ** ** | **As  Restated**                       | ** ** | **As Previously   Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                                            | ** ** | **(Item 1)**                           | ** ** | ** **                             | ** ** | **(Item 1)** | ** ** | ** ** | ** ** |
| Net cash provided by operating activities  from continuing operations |       | $                                      | 64,429     |                                   | $          | 55,824 |   | $ | 59,412 |   | $ | 52,189 |   |
|                                                                  |       |                                   |       |                                   |       |   |   |   |   |
| Net cash used in investing activities from  continuing operations     |       | $                                      | (43,154    | )                                      | $          | (34,549 | ) | $ | (26,184 | ) | $ | (18,961 | ) |
|                                                                       |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |

 

----

**Item 1:** Amounts as previously reported aftergiving effect to adjustments required to reflect the Company's discontinuedoperations discussed in Note 4 to the condensed consolidated financialstatements.

 

Theabove cash flow categories are impacted as a result of restating the contingentconsideration overpayments previously discussed from cash paid for acquisitions(included in net cash used in investing activities from continuing operations)to cash provided by operating activities from continuing operations as a periodexpense.  The cash flow restatementimpact of contingent consideration overpayments and related expense was limitedto the three and twelve months ended December 31, 2002 and the three and ninemonths ended September 30, 2003.

 

The following discussion should be read in conjunction with ourfinancial statements and the related notes thereto appearing elsewhere in thisReport on Form 10-Q/A.  In addition, the followingdiscussion gives effect to the restatement adjustments discussed above.

 

**Overview**

 

We were founded in September 1994, to create a national, singlesource provider of document and information

 

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outsourcing solutions to document and information intensive industries,including healthcare insurance, financial services, healthcare provider,transportation/logistics, federal and state government, and legal industries.We acquired the seven Founding Companies (the “Founding Companies”)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 theFounding Companies consisted of a combination of cash and common stock of ourCompany.

 

Since the IPO and through March 31, 2004, we have acquired 65companies and divested 17 operating units by sales or closures. We evaluatecandidates for acquisition and periodically for divestiture as a part of ourstrategic plan of providing customers a single solution for business processoutsourcing and knowledge-based processing and consulting services. Thecriteria for evaluation include geographic need, additional technology, marketgrowth potential, industry expertise, service expansion to broaden serviceofferings, expansion of our customer base, revenue and earnings growthpotential, 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 join our legalconsulting service offering and will be reported in the Healthcare, Regulatoryand Legal Compliance segment.  Onceintegrated into the Company’s current legal consulting service offering,Keypoint is expected to contribute to earnings after related intangibleamortization and acquisition financing costs during 2005.

 

During the first quarter of 2004, we completed a strategic evaluationof our operations based on certain criteria, such as strategic and financialfit, and future growth prospects.  As aresult, on May 6, 2004, we formally committed to a plan of divestiture forcertain non-strategic asset groups.  Theasset groups to be divested include the Direct Mail operations, previouslyreported in our Information Management and Distribution segment, and twomedical records management operations that were reported in our Healthcare,Regulatory and Legal Compliance segment. Collectively, these asset groupsincurred losses, net of tax, of $0.8 million for the full year ended December 31,2003.  During the quarter ended June 30,2004, we completed the sale of one of the medical records managementoperations.  The divestiture of the othermedical records management operation and the Direct Mail operations werecompleted during the quarter to end September 30, 2004.  We have reclassified related operating assetsas available for sale during the current quarter.  Any gain or loss on disposition will berecorded during the period of sale, but we expect all disposition activities toconclude within 12 months of formalizing the plan.  The expected impairment losses, net of anyexcepted gain or loss on disposition related to these activities, which haveyet to be finalized, are estimated to be between $1.5 million and $2.5 million,net of taxes.  The asset groups’operating results are classified as discontinued operations.  See Note 4, Discontinued Operations, of Notesto Condensed Consolidated Financial Statements, for a more detailed discussion,including the adjustments that were recorded during the current quarter.

 

**Basis for Management Discussion and Analysis**

 

The following discussion and analysis focuses on the results ofoperations and financial condition from the Company’s continuing operations forall periods presented.

 

Our revenue possesses both project and recurring characteristics.  Project revenue includes one-time projects inwhich 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.

 

Cost of services consists primarily of compensation and benefits toemployees providing goods and services to our clients; occupancy and facilitycosts; equipment costs and supplies. Our cost of services also includes thecost of products sold for micrographics supplies and equipment; computerhardware and software; and business imaging supplies and equipment.

 

Selling, general and administrative expenses (“SG&A”) consistprimarily of compensation and related benefits to sales and marketing,executive management, accounting, human resources and other administrativeemployees; other sales and marketing costs; communications costs; generalbusiness insurance costs; and legal and accounting professional fees and expenses.

 

In addition, except for the restatement issues identified above, thecondensed consolidated financial statements included in Item 1 “FinancialStatements”, should be read in conjunction with our consolidated financialstatements and the related notes thereto in the Annual Report on Form 10-Kfiled with the Securities and Exchange Commission on March 12, 2004.

 

**Business Segments**

 

We aggregate our service offerings and operations into two reportablesegments: (i) Information Management and Distribution, and(ii) Healthcare, Regulatory, and Legal Compliance. Service offerings areaggregated when they are similar in the following areas: economiccharacteristics, products and services, production processes, methods fordistributing or delivering

 

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products, and type or class of customers. We evaluate segmentperformance based on revenue and income from continuing operations beforeincome taxes. All centrally incurred corporate costs are allocated to the segmentsbased principally on operating income. The reporting segments follow the sameaccounting policies used for our consolidated financial statements.  The identified segments are as follows:

 

**Information Management and Distribution.**  We offer Business Process Outsourcing (“BPO”)solutions that help our customers manage the *DocumentIn-flow*, *Workflow Processing*and *Statement Out-flow* of theirmission 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 31,2003 and 2004, revenue in the Information Management and Distribution segmentconsisted of approximately $47.0 million and $47.5 million of recurringrevenue, respectively, and $7.0 million and $4.9 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 $14.3million and $13.8 million of recurring revenue, respectively, and $29.0 millionand $30.7 million of project revenue, respectively.

 

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

 
| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2003**                              | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **($000’s)**                     | ** ** | **% of  Revenue** | ** ** | **($000’s)** | ** ** | **% of  Revenue** | ** ** |
| **Revenue**                                                |       | $                                     | 97,357     |   | 100.0 | % | $ | 96,876 |   | 100.0 | % |
| **Gross  Profit**                                          |       | 37,430                                |       | 38.4 | % | 36,514 |   | 37.7 | % |
| **SG&A**                                               |       | 23,831                                |       | 24.5 | % | 31,397 |   | 32.4 | % |
| **Operating  income**                                      |       | 13,510                                |       | 13.9 | % | 5,028 |   | 5.2 | % |
| **Income  from continuing operations before income taxes** |       | 12,179                                |       | 12.5 | % | 4,253 |   | 4.4 | % |
| **Income  from continuing operations**                     |       | 7,306                                 |       | 7.5 | % | 2,552 |   | 2.6 | % |
|                                                            |            |                                       |            |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Our operations generated revenues of $96.9 million for the three monthsended March 31, 2004, a decrease of 0.5% compared to the same period in2003. Project revenue accounted for $35.6 million or 36.8% of revenue in thecurrent quarter compared to $36.0 million or 37.0% of revenue in the prior yearquarter. (See “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Basis for Management Discussion and Analysis.”)

 

Revenue within our Information Management and Distribution segmentdecreased 3.0% from $54.0 million for the three months ended March 31,2003 to $52.4 million for the three months ended March 31, 2004.  Project revenue accounted for 9.4% of segmentrevenue in the first quarter of 2004 compared to 13.1% for the same period in2003.  Seasonal statement processingvolumes, which increased $1.1 million, or 11.3%, compared to the prior year,were more than offset by overall lower volumes in our information managementservice offering of $2.7 million (principally related to government projects).

 

Revenue within our Healthcare, Regulatory and Legal Compliance segmentincreased 2.6% from $43.3 million for the three months ended March 31,2003 to $44.5 million for the three months ended March 31, 2004. Projectrevenue accounted for 69.0% of segment revenue in the first quarter of 2004 and66.8% for the same period in 2003.  Theincrease in revenue was primarily a result of higher project revenue within ourclass action claims administration service offering, which increased 39%, or$2.4 million, compared to the prior year, partially offset by lower volumes inour medical coding and release of medical information service offerings due toincreased competition.

 

**Gross profit**

 

Gross profit decreased 2.4% from $37.4million, or 38.4% of revenue, for the three months ended March 31, 2003 to$36.5 million, or 37.7% of revenue, for the three months ended March 31,2004.  The decline in gross margin is duein part to the lower revenue in our Information Management and Distributionreportable segment.  As discussed in “InternalInvestigation” above, certain revenue previously recognized at an OperatingSubsidiary in our Information Management and Distribution segment has beenreversed or deferred to future periods as certain revenue recognition criteria,as applied to certain customer contracts, were not met.  However, the costs associated with the adjustedrevenue continue to be reported in the period incurred.  Asa result of the adjusted revenue, gross margin was negatively impacted 0.7%during the three months ended March 31, 2003 and 3.0% the three monthsended March 31, 2004.

 

Factors contributing to the lower gross profit were higher facilitiescosts of approximately $0.9 million related to the opening of new productionfacilities, mainly to support growth initiatives within our InformationManagement and Distribution segment, and higher bad debt expense ofapproximately $0.3 million.  A reductionin personnel related costs, as a percentage of revenue, partially offset thefactors discussed above.  Personnelrelated costs, as a percentage of revenue, decreased from 45.2% in the prioryear quarter to 42.6% in the current quarter. The improvement is primarily relatedto our productivity and technology initiatives, such as high-speed scanners,offshore production and pay for performance compensation plans.

 

**Selling, general and administrative expenses**

 

SG&A increased 31.7% from $23.8 million,or 24.5% of revenue, for the three months ended March 31, 2003 to $31.4million, or 32.4% of revenue, for the three months ended March 31, 2004.The increase in SG&A expense is largely attributable to the costsassociated with the settlement of a significant legal matter in the InformationManagement and Distribution segment during the quarter of approximately $3.9million, higher personnel related costs of approximately $1.8 millionassociated with our investments in sales and technology resources that began in2003 and other professional fees of approximately $0.6 million.

 

**Income from continuing operations before income taxes**

 

Income from continuing operations before income taxes decreased 65.1%from $12.2 million, or 12.5% of revenue, for the

 

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threemonths ended March 31, 2003 to $4.3 million, or 4.4% of revenue, for thethree months ended March 31, 2004. The decline was largely attributable to the decline in gross profit andincreased SG&A expenses discussed above, partially offset by lower interestexpense.  Interest expense decreased $0.8million compared to the prior year due to lower balances on long-termobligations, a lower interest rate environment, and the expiration of ourinterest rate hedge on March 31, 2003.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At March 31, 2004, we had $45.9 million of working capital,including $4.2 million of cash. Working capital at December 31, 2003 was$36.6 million, including $2.1 million of cash. For the first three months of2004, cash provided by operating activities was $0.4 million compared to $9.4million for the same period in 2003. Factors contributing to the decline in operating cash flow consisted ofslower cash collections during the current year quarter, higher annualincentive compensation payments compared to the prior year quarter and thereceipt of income tax refunds of $2.3 million in the prior year quarter.  Days sales outstanding increased two businessdays during the quarter to 43 business days at March 31, 2004 compared to41 business days at December 31, 2003.

 

For the three months ended March 31, 2004, investing activitiesconsisted of acquisitions of property, plant and equipment of $3.3 million andnet acquisition 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 $9.4 million, withapproximately $4.1 million to be paid in 2004 and approximately$5.3 million to be paid in 2005. In accordance with the agreements, the Companywould be required to satisfy approximately $0.8 million of the$9.4 million potential liability in common stock related to a pasttax-free stock merger and has the option to satisfy $7.7 million of the$9.4 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.  These amounts exclude thecontingent consideration overpayments discussed above in “InternalInvestigation”.

 

Net cash provided by financing activities was $5.1 million for thethree months ended March 31, 2004. Payments of $87.7 million on our line of credit were more than offset bynet proceeds borrowed from our line of credit of $92.7 million and net proceedsfrom common stock issuances of $0.1 million. We utilize our line of credit to fund general operating requirements ofthe Company as well as fund significant investments such as acquisitions orcapital 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 could 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. In September 2002,additional extensions were granted by member banks, bringing the totalcommitment extended to April 2, 2005 to $290.0 million. Total feespaid in 2002 related to the extensions and amendments to the 2001 CreditAgreement 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.

 

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Management fully expects to replace or refinance the 2001 CreditAgreement upon its maturity scheduled for April 1, 2006. As a result ofthe extension agreements discussed in the previous two paragraphs, the$297.5 million commitment under the 2001 Credit Agreement is scheduled tomature 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 to borrow is contingent on certain leverage and fixed costcoverage ratios. These ratios were scheduled to become more restrictivebeginning in the quarter ended December 31, 2002 with the leverage ratiodeclining from 3.0 times to 2.5 times and the fixed charge coverage ratioincreasing from 1.25 times to 1.50 times. However, in September 2002, anamendment was approved that extended the fixed cost coverage ratio requirementof 1.25 until January 1, 2004 and will increase to 1.35 at all timesthereafter. In addition to the leverage and fixed cost coverage ratios, we aresubject to minimum net worth requirements. Effective March 26, 2003, anamendment was approved that allows for the reduction to the minimum net worthrequirement for up to $30 million of share repurchases.

 

Asa result of our internal investigation, more fully described above in “InternalInvestigation”, we were unable to file our September 30, 2004 QuarterlyReport on Form 10-Q within the timeframe prescribed by the Securities ExchangeAct of 1934.  The failure to timely filethe September 30, 2004 Quarterly Report on Form 10-Q resulted in a defaultunder the 2001 Credit Agreement.  Weentered into a waiver agreement on November 12, 2004 with the lendersparty to the 2001 Credit Agreement.  Pursuant to the terms of the waiveragreement, the lenders agreed, among other things, to waive any default underthe 2001 Credit Agreement that resulted from potential non-compliance with adesignated fixed charge coverage ratio, and our failure to timely file ourQuarterly Report on Form 10-Q for the September 30, 2004 quarter.  The waiver agreement also provides thatduring the period that the waiver agreement is in effect, the outstandingprincipal amount of the loans under the 2001 Credit Agreement may not exceed$112,000,000. The waiver agreement was to expire on March 15, 2005;however, on March 15, 2005, we entered into an Extension and Modificationof Waiver to Credit Agreement, which extended such waiver through March 23,2005.  The foregoing summary of theExtension and Modification and Waiver to Credit Agreement is qualified by andshould be read in connection with the actual text of the Extension andModification of Waiver to Credit Agreement, which is referenced as Exhibit 10.1to this Quarterly Report.

 

We are currently workingwith our lenders to approve an amendment to the 2001 Credit Agreementthat would allow for the exclusion of certain contingent considerationoverpayments to the former owners of the Operating Subsidiary, as describedmore fully above in “Internal Investigation” and in Note 2 to the condensedconsolidated financial statements, from the definition of Earnings BeforeInterest, Depreciation and Amortization (“EBITDA”). Pursuant to the terms ofthe Company’s 2001 Credit Agreement, Earnings Before Interest, Taxes,Depreciation and Amortization (“EBITDA”) is used in calculating certainleverage and fixed cost coverage ratios. The Company exceeded the allowableleverage ratio of 2.5 times for the quarters ended June 30, 2004 and September30, 2004 as a result of the earn-out overpayments, previously discussed.  This has resulted in a default under the 2001Credit Agreement.  As a result, theCompany has classified the debt under such Credit Agreement as a CurrentMaturity included in the current liability section of its balance sheet, untilsuch time as an appropriate amendment is in place.  The Company is currently working with itslenders to secure such an amendment and it is anticipated that this amendmentwill soon become effective. In any event, as the maturity date of the debtunder the 2001 Credit Agreement is April 1, 2006, unless the maturity date ofsuch debt is subsequently modified, such debt will be classified as a CurrentMaturity on and after April 1, 2005.

 

Management believes that it hassufficient liquidity from its cash flow and its revolving credit facility tomeet ongoing business needs. Additionally, depending on the mix of stock and cash used in ourstrategic acquisition program, if any, we may need to seek further financingthrough the public or private sale of equity or debt securities.  However, there can be no assurance we couldsecure such financing if and when it is needed or with terms we deemacceptable.

 

In January 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; however, such registrationstatement may require amendment prior to use.

 

**Critical Accounting Policies**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations are based on the related consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America. The preparation of the financial statementsrequires the use of estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses.

 

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We have identified the following critical accounting policies that, asa result of the judgments, uncertainties, uniqueness and complexities of theunderlying accounting standards and operations involved, could result inmaterial changes to our financial condition or results of operations underdifferent conditions or using different assumptions. We apply a consistentmethodology at the end of each quarter to determine our account balances thatrequire judgmental analysis.

 

**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 possess bothproject and recurring customer relationships.

 

Project revenue includes one-time projects in which the customerrelationship is not expected to continue after project completion. Projectrevenue is typically based on time and material arrangements. Revenuerecognition occurs at the contractual rates as the labor hours and directexpenses are incurred. Project revenue represented approximately 33% of total2003 revenues and typically occurs within our Healthcare, Regulatory, and LegalCompliance segment.

 

Recurring revenue is characterized by customer relationships that aregenerally for one year and may continue for longer. Recurring revenue istypically based on the transaction volumes provided by our customer at anagreed upon fixed rate per unit. Our customer’s volumes are typically notcontractual or otherwise guaranteed. Revenue recognition occurs once work iscompleted and delivery has occurred or services have been rendered. Recurringrevenue represented the remaining 67% of total 2003 revenues and typicallyoccurs within our Information Management and Distribution segment.

 

As a part of providing services to our customers, we incur incidentalexpenses commonly referred to as “out-of-pocket” expenses. These expensesinclude items such as airfare, hotels, and mileage and are often reimbursableby our customers. When reimbursable, we record both revenue and direct cost ofservices in accordance with the provisions of Emerging Issues Task Force (“EITF”)Issue 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.*

 

Unearned income, included in other current liabilities, representspayments from our customers in advance of services being provided. Advancedpayments are deferred as unearned income when received and recognized asrevenue as services are rendered.

 

**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.**  Asrequired by SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets,*managementcontinually evaluates whether events and circumstances indicate that thecarrying value of long-lived assets may not be recoverable. When eventsrequire, management performs the valuation by comparing the estimatedundiscounted future cash flows over the remaining life of the long-lived assetsto the carrying amount of the asset being evaluated. An impairment loss isrecognized if the carrying amount of assets being evaluated exceeds theexpected future undiscounted cash flow based on the difference between thecarrying value and fair value.  At March 31,2004, no events were evident that required valuation for potential impairment.

 

**Goodwill Impairment.**  On January 1, 2002, weadopted SFAS No. 142, *Goodwill andOther Intangible Assets.* This statement states that goodwill andintangible assets that have indefinite useful lives will not be amortized butrather will be tested at least annually for impairment. Our annual impairmenttest is performed at October 31. The impairment test is based on fair value rather than undiscounted cashflows. Additionally, goodwill is tested at a reporting unit level rather thanthe individual operating unit level. A reporting unit is either at theoperating 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 similarpublicly traded companies (Market Approach). In preparing these valuations,management utilizes estimates to determine fair value of the reporting units.These estimates include future cash flows, growth rates, capital needs, andprojected earning margins among other factors. Estimates utilized in futurecalculations could differ from estimates used in the current period. Futureyears’ estimates that are unfavorable compared to current estimates could causean impairment of goodwill and other intangible assets. Due to the fact that weare primarily a services company, our business acquisitions typically result insignificant amounts of goodwill and other intangible assets. Therefore, animpairment charge resulting from goodwill or other intangible assets couldresult in a material adverse impact on our financial statements during theperiod incurred.

 

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**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.

 

**RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS**

 

This Report contains certain forward-lookingstatements such as our intentions, hopes, beliefs, expectations, strategies,predictions or any other variation thereof or comparable phraseology of ourfuture activities or other future events or conditions within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Act”), and Section 21E ofthe Securities Exchange Act of 1934, as amended, which are intended to becovered by the safe harbors created thereby. Investors are cautioned that allforward-looking statements involve risks and uncertainty, including, withoutlimitation, the actual final costs of our internal investigation, the Company’songoing SEC investigation, the potential impairment of our ability to enterinto government contracts as a result of the conduct that was the subject ofour investigation, remediation costs relating to our investigation, thepotential customer impact of the results of our investigation, the effect ofour investigation and financial statement restatement on the trading price ofour stock,the risk ofintegrating our operating companies, of managing our rapid growth, of thetiming and magnitude of technological advances, of the occurrences of futureevents that could diminish our customers’ needs for our services, of a changein the degree to which companies continue to outsource business processes, ofan adverse outcome in any given legal proceeding or claim, of the denial ofinsurance on a particular claim or of a party obligated to provideindemnification being financially unable to do so, as well as such other risksset forth under the heading Risk Factors included in our most recent annualreport on Form 10-K.

 

Although we believe that the assumptions underlying the forward-lookingstatements contained herein are reasonable, any of the assumptions could beinaccurate, and, therefore, there can be no assurance that the forward-lookingstatements included in this Report will prove to be accurate. In light of thesignificant uncertainties inherent in the forward-looking statements includedherein, the inclusion of such information should not be regarded as arepresentation by us or any other person that our objectives and plans will beachieved. Further, we disclaim any obligation to update any suchforward-looking statements, except as required by law.

 

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

 

We are subject to interest rate risk on our term loans, revolvingcredit facility and Industrial Revenue Bonds. A 100 basis point increase inshort-term interest rates would result in approximately $0.6 million ofadditional expense in 2004 based on our expected average balance outstandingunder the credit facility during 2004. Interest rates are fixed on thecapitalized lease obligations.

 

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

 

*(a) Evaluation of disclosure controls andprocedures.*

 

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d –15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), whichhave been designed to help ensure that material information related to theCompany, including its consolidated subsidiaries, is made known to a groupcomprised of designated members of the Company’s senior management, designatedmembers of functional divisions of the Company, and/or the certifying officers(i.e., Chief Executive Officer and Chief Financial Officer) (collectively, the“Disclosure Committee”), on a timely basis and that the information required tobe disclosed by the Company in reports that it files under the Exchange Act isrecorded, processed, and filed accurately and on a timely basis.  In light of the events giving rise to theCompany’s restatement, more fully described in Item 2, Management’s Discussion and Analysis of Financial Condition andResults of Operations and in Note 2 to the condensed consolidatedfinancial statements, the Company’s Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures werenot effective in alerting them, in an accurate and timely fashion, to materialinformation relating to the revenue and operating expenses of the Companyrequired to be included in the Company's reports filed or submitted under theExchange Act.

 

We have restated the condensed consolidated financialstatements for the three months ended March 31, 2003 and 2004.  In addition, we will restate the consolidatedfinancial statements for the years ended December 31, 2001, 2002 and 2003 inour 2004 Annual Report on Form 10-K.  Therestated financial results address the accounting errors described in Item 2, Management’s Discussion and Analysisof Financial Condition and Results of Operations and in Note 2 of thenotes to the consolidated financial statements that were identified during thecourse of the investigation into the financial results of the OperatingSubsidiary.  The circumstances giving rise to these accountingerrors were reported to our Audit Committee and Independent Registered PublicAccounting Firm.  The restatement of ouroperating results is an indicator of a material weakness under standardsestablished by the Public Company Accounting Oversight Board. The Company’sinvestigation identified the following issues, which collectively were amaterial weakness in our internal control over financial reporting which werefound to have existed as of March 31, 2004:

 

•      Certain employees of the OperatingSubsidiary responsible for the internal control processes at the OperatingSubsidiary either colluded with or coerced individuals to override the internalcontrols related to the following processes:

•      Billing and revenue recognition.

•      Contractual compliance.

•      Change management controls over the ITenvironment, specifically with regard to software programs designed tocalculate customer invoicing and revenue recognition.

 

•      Monitoring of non-system generated journalentries of the Operating Subsidiary that were recorded by those individualsinvolved in the activities mentioned above.

 

In connection with the restatement of our operatingresults, we reviewed the circumstances giving rise to the restatement, anddetermined that the following actions were required to correct the underlyingmaterial weaknesses giving rise to the restatement:

 

•     Terminate certain individuals involved in overridingthe internal controls at the Operating Subsidiary and replace them with newmanagement.

•     Perform a review and make improvements to theproduction and revenue accounting systems affecting our revenue accounting andcustomer invoicing at the Operating Subsidiary.

•     Further segregate internal control responsibilities ofthe Operating Subsidiary through the centralization of accounting relatedfunctions into the Company’s corporate accounting department.

•     Establish additional monitoring controls andprocedures regarding compliance with the Company’s customer arrangements.

•     Increase Internal Audit’s company-wide testing ofinternal controls related to customer invoicing and revenue recognition to helpensure the internal controls are operating as designed.

•      The addition of a company-wide contract compliancefunction.

 

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*(b) Changes in internal controls*

 

The changes to internal control over financialreporting described above were either implemented in the fourth quarter of 2004or, in the case of the addition of a company-wide contract compliance function,is in the process of being implemented.  Except as described above, there has been no other significant change inour internal control over financial reporting during the quarter ended March31, 2004, which materially affected, or is reasonably likely to affect, ourinternal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

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

 

We are, from time to time, a party tolitigation arising in the normal course of business. The following is adescription for the most significant legal matters that we are involved in. Inthe event of an adverse outcome in one or more of our legal proceedings,operating results for a given quarter may 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 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”). On April 27,2001, HMA filed a lawsuit against MCP in the Circuit Court of the County of St.Louis, State of Missouri, alleging entitlement to commissions on revenuesgenerated from providers after the Termination Date who were initially broughtto MCP prior to the Termination Date. In March 2003, this lawsuit wastried before a judge and at the conclusion of the trial, the judge ruled in theplaintiff’s favor in the amount of approximately $1.8 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 appealed this ruling and oralarguments for our appeal were heard on February 24, 2004.  On May 4, 2004, the Court of Appeals affirmedthe Circuit Court’s judgment.  Subsequentto the period covered by this Report, we paid such judgment and interest.

 

*Various ROI Copy Charge Matters*

 

From time to time, various of our subsidiaries that perform release ofinformation (“ROI”) services become defendants to putative class actionlawsuits generally alleging that the charge for reproducing certain medicalrecords is not in conformity with such plaintiffs’ reading of the applicableregulated charge. Such suits typically include multiple ROI companies andhospitals as defendants and demand reimbursement for prior charges as well asfor prospective pricing adjustments. We are currently a party to several suchsuits in various stages of development. We believe we have meritorious defensesand intend to continue to vigorously defend any claims made against us in thesematters.

 

*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 our subsidiaries is liable for the loss ofvarious products, 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 $3.9million.  Furthermore, the impact of thesettlement and related legal costs on our 2004 operating cash flow will beapproximately $5.7 million, before consideration 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

 

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“SacramentoAction”) 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, we additionally filed claimsagainst the sellers’ accountants and the two sellers filed claims against us;however, in February 2004, the judge in the Sacramento Action dismissedour claims against the sellers’ accountants. The sellers allege that our formersubsidiary wrongfully failed and refused to execute and deliver a requestedestoppel certificate, and that the failure to provide such estoppel certificateharmed the 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 asserted damages in excess of $8 million.  Subsequent to the period covered bythis Report, the parties settled this matter on mutually acceptable termsconsistent with previous amounts accrued.

 

**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 (Incorporated by reference to Exhibit 2.1 to  the Company’s Quarterly Report on Form 10-Q filed May 10, 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)                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1                |       | Extension  and Modification of Waiver to Credit Agreement, effective March 15,  2005, by and among SOURCECORP, Incorporated, Bank of America, N.A. as a  Lender and as Administrative Agent for Lenders and the other Agents and  Lenders party thereto (Incorporated by reference to Exhibit 99.1 to the  Company’s Current Report on Form 8-K filed March 16, 2005). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |
| 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 similar attachments are omitted in accordance with Item601(b)(2) of Regulation SK and a brief description of such omitted schedulesand similar attachments is included in the agreement.  The Company undertakes to supplementallyprovide the Commission with a copy of any such omitted schedule or similarattachment upon request.

 

(b) Reports on Form 8-K

 

On February 18, 2004, the Company fileda Current Report on Form 8-K with the Commission dated February 18, 2004,reporting, under Item 7 and Item 12 thereto, the filing of a press release toannounce its financial results for the fourth quarter and fiscal year ended December 31,2003.

 

On February 19, 2004, the Company filed a Current Report(Amendment No. 1) on Form 8-K/A with the Commission dated February 18,2004, reporting under Item 7 and Item 12 thereto, a correction to the earningsrelease issued on February 18, 2004 related to the Company’s financeresults for the fourth quarter and fiscal year end December 31, 2003.  The earnings release contained an error withrespect to total new business wins in 2003 for the Company, which were $125million rather than the $133 million reported in the earnings release.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this Report on Form 10-Q/A to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|                      | SOURCECORP,  INCORPORATED |
|---------------------------|---------------------------|
|                      |                      |
| Date: March 23, 2005 | By:                       | /s/ ED H. BOWMAN, JR. |   |
|                      |                      | Ed H. Bowman, Jr. Chief Executive  Officer and President |   |
|                      |                      |   |   |
| Date: March 23, 2005 | By:                       | /s/ BARRY L. EDWARDS |   |
|                      |                      | Barry L. Edwards  Executive  Vice  President and Chief Financial Officer(Principal Financial and Accounting  Officer) |   |

 

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**INDEX TO 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 (Incorporated by reference to Exhibit  2.1 to the Company’s Quarterly Report on Form 10-Q filed May 10, 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)                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1                |       | Extension and Modification of Waiver to Credit Agreement, effective March 15,  2005, by and among SOURCECORP, Incorporated, Bank of America, N.A. as a  Lender and as Administrative Agent for Lenders and the other Agents and  Lenders party thereto (Incorporated by reference to Exhibit 99.1 to the  Company’s Current Report on Form 8-K filed March 16, 2005). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                 |
| 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 similar attachments are omitted in accordance with Item601(b)(2) of Regulation SK and a brief description of such omitted schedulesand similar attachments is included in the agreement.  The Company undertakes to supplementallyprovide the Commission with a copy of any such omitted schedule or similarattachment upon request.

 

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