**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

 

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**FORM10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**                                                                |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                            |
|       | **For the  quarterly period ended September 30, 2003**                                                                                                          |
|       |                                                                                                                                                            |
| **OR**     |
|       |                                                                                                                                                            |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF  1934**                                                              |
|       |                                                                                                                                                            |
|       | **For the  transition period from                      to** |

 

**Commission file number 0-27444**

 

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**SOURCECORP, INCORPORATED**

(Exactname of registrant as specified in its charter)

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

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

 

Asof November 5, 2003, 16,093,556 shares of the registrant’s Common Stock, $.01 par value per share, wereoutstanding.

 

 

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**SOURCECORP, INCORPORATED ANDSUBSIDIARIESFORM 10-Q FOR THE PERIOD ENDEDSEPTEMBER 30, 2003**

 

**INDEX**

 
| **PART  I.     FINANCIAL INFORMATION** |
|-----------------------------------------------------------------|
|                                                            |   |
| Item 1                                                          | Condensed  Financial Statements |
|                                                            |   |
|                                                            | Condensed  Consolidated Balance Sheets — December 31, 2002 and September 30, 2003  (unaudited) |
|                                                            |   |
|                                                            | Condensed  Consolidated Statements of Operations — Three and nine months ended September  30, 2002 and 2003 (unaudited) |
|                                                            |   |
|                                                            | Condensed  Consolidated Statements of Cash Flows — Nine months ended September 30, 2002  and 2003 (unaudited) |
|                                                            |   |
|                                                            | Notes  to Condensed Consolidated Financial Statements (unaudited) |
|                                                            |   |
| Item 2                                                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                                            |   |
| Item 3                                                          | Quantitative and  Qualitative Disclosures about Market Risk |
|                                                            |   |
| Item 4                                                          | Controls and  Procedures |
|                                                            |   |
| **PART  II.     OTHER INFORMATION**    |
|                                                            |   |
| Item 1                                                          | Legal Proceedings |
|                                                            |   |
| Item 6                                                          | Exhibits and Reports on Form 8-K |
|                                                            |   |
|                                                            | **SIGNATURES** |
|                                                            |   |
|                                                            | **Index to  Exhibits** |

 

2

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**PART I.FINANCIAL INFORMATION**

 

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

 

**SOURCECORP, INCORPORATED ANDSUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEETS****(IN THOUSANDS,EXCEPT SHARE DATA)**

 
|                                                                                                                                                                                                      |   | **December 31,********2002** |    | **September 30,********2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-------------------------------|--------|
|                                                                                                                                                                                                      |   | **(Unaudited)**              |    |
| **ASSETS**                                                                                                                                                                                                |   |                         |    |                          |   |
| **CURRENT ASSETS:**                                                                                                                                                                                       |   |                         |    |                          |   |
| Cash and cash equivalents                                                                                                                                                                                 |   | $                            | 3,217   |                          | $      | 618 |   |
| Accounts and notes receivable, less allowance for doubtful accounts  of $12,441 and $9,521, respectively                                                                                                  |   | 78,834                       |    | 68,696                        |   |
| Inventories                                                                                                                                                                                               |   | 2,360                        |    | 2,674                         |   |
| Deferred income taxes                                                                                                                                                                                     |   | 9,012                        |    | 6,648                         |   |
| Prepaid expenses and other current assets                                                                                                                                                                 |   | 3,887                        |    | 3,342                         |   |
| Total current assets                                                                                                                                                                                      |   | 97,310                       |    | 81,978                        |   |
| **PROPERTY, PLANT AND EQUIPMENT**, net of accumulated depreciation of  $53,471 and $61,806 respectively                                                                                                   |   | 40,575                       |    | 41,355                        |   |
| **GOODWILL,** net of amortization of $22,356                                                                                                                                                              |   | 317,256                      |    | 322,995                       |   |
| **INTANGIBLES,** net of amortization of $356 and $621,  respectively                                                                                                                                      |   | 4,084                        |    | 3,819                         |   |
| **OTHER NONCURRENT ASSETS**                                                                                                                                                                               |   | 8,382                        |    | 9,672                         |   |
| Total assets                                                                                                                                                                                              |   | $                            | 467,607 |                          | $      | 459,819 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                            |   |                         |    |                          |   |
| **CURRENT LIABILITIES:**                                                                                                                                                                                  |   |                         |    |                          |   |
| Accounts payable and accrued liabilities                                                                                                                                                                  |   | $                            | 58,029  |                          | $      | 55,851 |   |
| Current maturities of long-term obligations                                                                                                                                                               |   | 113                          |    | 184                           |   |
| Income tax payable                                                                                                                                                                                        |   | 180                          |    | 4,892                         |   |
| Total current liabilities                                                                                                                                                                                 |   | 58,322                       |    | 60,927                        |   |
| **LONG-TERM OBLIGATIONS**, net of current maturities                                                                                                                                                      |   | 89,640                       |    | 71,480                        |   |
| **DEFERRED INCOME TAXES**                                                                                                                                                                                 |   | 11,679                       |    | 15,492                        |   |
| **OTHER LONG-TERM OBLIGATIONS**                                                                                                                                                                           |   | 5,290                        |    | 6,990                         |   |
| Total liabilities                                                                                                                                                                                         |   | 164,931                      |    | 154,889                       |   |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                                         |   |                         |    |                          |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                                            |   |                         |    |                          |   |
| Preferred stock, $.01 par value, 1,000,000 shares authorized, no  shares issued and outstanding                                                                                                           |   | —                       |    | —                        |   |
| Common stock, $.01 par value, 26,000,000 shares authorized,  17,420,595 and 16,217,084 shares issued and 17,364,567 and 16,161,056  outstanding at December 31, 2002 and September 30, 2003, respectively |   | 175                          |    | 163                           |   |
| Additional paid-in-capital                                                                                                                                                                                |   | 206,843                      |    | 195,192                       |   |
| Accumulated other comprehensive loss                                                                                                                                                                      |   | (329                         | )       | —                        |   |
| Retained earnings                                                                                                                                                                                         |   | 96,969                       |    | 113,149                       |   |
|                                                                                                                                                                                                      |   | 303,658                      |    | 308,504                       |   |
| Less—Treasury stock, at cost, 56,028 shares                                                                                                                                                          |   | (982                         | )       | (982                          | )      |
| Less—Deferred compensation                                                                                                                                                                           |   | —                       |    | (2,592                        | )      |
| Total stockholders’ equity                                                                                                                                                                           |   | 302,676                      |    | 304,930                       |   |
| Total liabilities and stockholders’ equity                                                                                                                                                           |   | $                            | 467,607 |                          | $      | 459,819 |   |

 

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

 

3

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

 
|                                             |   | **Three Months Ended  September 30,** |    | **Nine Months Ended********September 30,** |   |
|--------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------------|--------|
|                                             |   | **2002**                              |    | **2003**                                   |   | **2002** |   | **2003** |   |
|                                             |   | **(Unaudited)**                       |    | **(Unaudited)**                            |   |
| **REVENUE**                                      |   | $                                     | 107,465 |                                       | $      | 100,926 |   | $ | 316,536 |   | $ | 312,221 |   |
| **COST OF SERVICES**                             |   | 64,683                                |    | 59,657                                     |   | 190,216 |   | 185,816 |   |
| **DEPRECIATION**                                 |   | 3,578                                 |    | 3,607                                      |   | 10,672 |   | 10,610 |   |
| Gross profit                                     |   | 39,204                                |    | 37,662                                     |   | 115,648 |   | 115,795 |   |
| **SELLING, GENERAL AND ADMINISTRATIVE EXPENSES** |   | 25,154                                |    | 26,098                                     |   | 76,182 |   | 79,010 |   |
| **AMORTIZATION**                                 |   | 89                                    |    | 89                                         |   | 267 |   | 266 |   |
| Operating income                                 |   | 13,961                                |    | 11,475                                     |   | 39,199 |   | 36,519 |   |
| **OTHER (INCOME) EXPENSE:**                      |   |                                  |    |                                       |   |   |   |   |   |
| Interest expense                                 |   | 1,555                                 |    | 441                                        |   | 4,592 |   | 2,856 |   |
| Interest income                                  |   | (28                                   | )       | (5                                         | )      | (79 | ) | (280 | ) |
| Other (income) expense, net                      |   | 75                                    |    | 119                                        |   | 539 |   | (36 | ) |
| Income before income taxes                       |   | 12,359                                |    | 10,920                                     |   | 34,147 |   | 33,979 |   |
| **PROVISION FOR INCOME TAXES**                   |   | 4,696                                 |    | 4,368                                      |   | 12,976 |   | 13,592 |   |
| **NET INCOME**                                   |   | $                                     | 7,663   |                                       | $      | 6,552 |   | $ | 21,171 |   | $ | 20,387 |   |
| **NET INCOME PER COMMON SHARE**                  |   |                                  |    |                                       |   |   |   |   |   |
| **BASIC**                                        |   | $                                     | 0.44    |                                       | $      | 0.40 |   | $ | 1.22 |   | $ | 1.23 |   |
| **DILUTED**                                      |   | $                                     | 0.44    |                                       | $      | 0.40 |   | $ | 1.20 |   | $ | 1.22 |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING**   |   |                                  |    |                                       |   |   |   |   |   |
| **BASIC**                                        |   | 17,358                                |    | 16,188                                     |   | 17,319 |   | 16,571 |   |
| **DILUTED**                                      |   | 17,369                                |    | 16,355                                     |   | 17,688 |   | 16,654 |   |

 

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

 

4

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**SOURCECORP, INCORPORATED ANDSUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(IN THOUSANDS)**

 
|                                                                                            |   | **Nine Months Ended********September 30,** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                            |   | **2002**                                   |   | **2003** |   |
|                                                                                            |   | **(Unaudited)**                            |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                       |   |                                       |   |   |   |
| Net income                                                                                      |   | $                                          | 21,171 |   | $ | 20,387 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:              |   |                                       |   |   |   |
| Depreciation and amortization                                                                   |   | 10,939                                     |   | 10,876 |   |
| Deferred tax provision                                                                          |   | 6,512                                      |   | 6,177 |   |
| Compensation expense on restricted stock grants                                                 |   | —                                     |   | 358 |   |
| Loss (gain) on sale of property, plant and equipment                                            |   | 242                                        |   | (361 | ) |
| Change in operating assets and liabilities:                                                     |   |                                       |   |   |   |
| Accounts and notes receivable                                                                   |   | 1,714                                      |   | 10,138 |   |
| Inventories, prepaid expenses and other assets                                                  |   | 1,032                                      |   | 957 |   |
| Accounts payable and accrued liabilities                                                        |   | 1,425                                      |   | 5,132 |   |
| Net cash provided by operating activities                                                       |   | 43,035                                     |   | 53,664 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                       |   |                                       |   |   |   |
| Proceeds from sale of property, plant and equipment                                             |   | —                                     |   | 439 |   |
| Purchase of property, plant and equipment                                                       |   | (8,912                                     | )      | (9,902 | ) |
| Net proceeds received from the sale of operating units in 2001                                  |   | 10                                         |   | — |   |
| Cash paid for acquisitions, net of cash acquired                                                |   | (19,151                                    | )      | (9,980 | ) |
| Net cash used for investing activities                                                          |   | (28,053                                    | )      | (19,443 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                       |   |                                       |   |   |   |
| Proceeds from exercise of common stock options                                                  |   | 108                                        |   | 173 |   |
| Cash paid for common stock repurchased                                                          |   | —                                     |   | (18,557 | ) |
| Proceeds from long-term obligations                                                             |   | 233,047                                    |   | 167,617 |   |
| Principal payments on long-term obligations                                                     |   | (249,014                                   | )      | (185,748 | ) |
| Cash paid for debt issuance costs                                                               |   | (329                                       | )      | (305 | ) |
| Net cash used for financing activities                                                          |   | (16,188                                    | )      | (36,820 | ) |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                                   |   | (1,206                                     | )      | (2,599 | ) |
| **CASH AND CASH EQUIVALENTS,**beginning of period                                               |   | 7,182                                      |   | 3,217 |   |
| **CASH AND CASH EQUIVALENTS,** end of period                                                    |   | $                                          | 5,976  |   | $ | 618 |   |
| **SUPPLEMENTAL DATA:**                                                                          |   |                                       |   |   |   |
| Cash paid for:                                                                                  |   |                                       |   |   |   |
| Income taxes, net of income tax refunds                                                         |   | $                                          | 11,007 |   | $ | 2,601 |   |
| Interest                                                                                        |   | $                                          | 4,595  |   | $ | 2,839 |   |
| **NONCASH FINANCING TRANSACTIONS:**                                                             |   |                                       |   |   |   |
| Common stock issued related to business combinations (114,112 and  20,268 shares, respectively) |   | $                                          | 3,335  |   | $ | 283 |   |
| Assets acquired through financing and capital lease arrangements                                |   | $                                          | 125    |   | $ | 40 |   |

 

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

 

5

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**SOURCECORP, INCORPORATED ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited)**

 

**1. Basis ofPresentation**

 

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

 

Inthe opinion of management, the accompanying condensed consolidated financialstatements include all accounts and the adjustments necessary to present fairlythe Company’s financial position at September 30, 2003, results of operationsfor the three and nine months ended September 30, 2002 and 2003, and cash flowsfor the nine months ended September 30, 2002 and 2003. All significantintercompany transactions have been eliminated. Although management believesthat the disclosures are adequate to make the information presented notmisleading, certain information and footnote disclosures normally included inannual financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted pursuant to the rules andregulations of the Securities and Exchange Commission (the “Commission”). Thesecondensed consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and the related notes theretoin the Annual Report on Form 10-K filed with the Commission on March 31, 2003.The results of operations for the three and nine months ended September 30,2002 and 2003 may not be indicative of the results for the full year.

 

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

 

**2. NewAccounting Standards**

 

*RecentAccounting Pronouncements*

 

InApril 2003, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities*. SFAS No. 149 amends and clarifies financial accountingand reporting for derivative instruments, including certain derivativeinstruments embedded in other contracts and for hedging activities under SFASNo. 133,*Accounting for DerivativeInstruments and Hedging Activities* and is effective for contractsentered into or modified after June 30, 2003. The Company adopted theprovisions of SFAS No. 149 on July 1, 2003 and such adoption did not have amaterial impact on the consolidated financial statements.

 

InMay 2003, the FASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.* SFAS No. 150 establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity and is effective for financial instruments enteredinto or modified after May 31, 2003. The provisions of SFAS No. 150, which theCompany adopted on June 1, 2003, did not have a material impact on theconsolidated financial statements.

 

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

 

*Stock-BasedCompensation*

 

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

 

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

 

6

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TheCompany applies Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*and related interpretations in accounting for stock-based compensation and awards.Stock option and warrant awards are granted at the market price of the commonstock on the date of grant. Accordingly, no compensation expense has beenrecognized 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 SFAS No. 123, *Accounting for Stock-Based Compensation,* the Company’s netincome and earnings per share would have been as follows (in thousands, exceptper share data):

 
|                                                                                                                                |   | **Three Months  Ended September 30,** |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                |   | **2002**                              |   | **2003**                             |   | **2002** |   | **2003** |   |
| Net income as reported                                                                                                              |   | $                                     | 7,663  |                                 | $      | 6,552 |   | $ | 21,171 |   | $ | 20,387 |   |
| Add: Deferred compensation expense included in reported net income,  net of related tax effect                                      |   | —                                |   | 160                                  |   | — |   | 215 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards, net of tax effect |   | (1,030                                | )      | (627                                 | )      | (2,948 | ) | (2,364 | ) |
| Proforma net income                                                                                                                 |   | $                                     | 6,633  |                                 | $      | 6,085 |   | $ | 18,223 |   | $ | 18,238 |   |
| Earnings per share:                                                                                                                 |   |                                  |   |                                 |   |   |   |   |   |
| Reported basic earnings per share                                                                                                   |   | $                                     | 0.44   |                                 | $      | 0.40 |   | $ | 1.22 |   | $ | 1.23 |   |
| Proforma basic earnings per share                                                                                                   |   | $                                     | 0.38   |                                 | $      | 0.38 |   | $ | 1.05 |   | $ | 1.10 |   |
| Reported diluted earnings per share                                                                                                 |   | $                                     | 0.44   |                                 | $      | 0.40 |   | $ | 1.20 |   | $ | 1.22 |   |
| Proforma diluted earnings per share                                                                                                 |   | $                                     | 0.38   |                                 | $      | 0.37 |   | $ | 1.03 |   | $ | 1.10 |   |

 

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

 
|                                     |   | **Three Months Ended********September 30,** |   | **Nine Months Ended********September 30,** |   |
|------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                     |   | **2002**                                    |   | **2002**                                   |   | **2003** |   |
| Weighted-average risk-free interest rate |   | 3.2%                                        |   | 4.5                                        | %      | 2.4 | % |
| Weighted-average dividend yield          |   | 0.0%                                        |   | 0.0                                        | %      | 0.0 | % |
| Weighted-average volatility              |   | 42.3%                                       |   | 40.1                                       | %      | 44.3 | % |
| Weighted-average expected life           |   | 3.0 years                                   |   | 3.0  years                                 |   | 3.1  years |   |

 

The Company issued no stock options orwarrants during the three-month period ended September 30, 2003.

 

Duringthe three months ended June 30, 2003, the Company awarded 164,300 shares ofrestricted stock under the 2002 Plan. The restricted shares were issued at nocost to the recipients; therefore, the Company recorded deferred compensationof approximately $2.9 million based on the market value of the stock at thedate of issuance. The deferred compensation charge will be amortized to expenseover the vesting period of the restricted stock. The restricted shares vestover a three-year period ending July 1, 2006, with acceleration of the vestingperiod occurring if a certain stock price or performance target is achieved.For the three and nine months ended September 30, 2003, approximately $0.3 and$0.4 million, respectively of deferred compensation was amortized to expense.

 

*Common Stock Repurchase Program*

 

During 2003, the Company activated the $30.0 million stock repurchaseprogram authorized by the Board of Directors in April 2001.  During the nine months ended September 30,2003, the Company purchased 1,216,979 shares of its common stock at a cost ofapproximately $18.6 million.  Therepurchased shares were recorded in the accompanying balance sheet as areduction to common stock, additional paid-in-capital, and retainedearnings.  These shares have beenretired and returned to the status of authorized but unissued shares of theCompany.

 

*Net IncomePer Share:*

 

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

 
|                                                                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                               |   | **2002**                              |   | **2003**                             |   | **2002** |   | **2003** |   |
| Basic weighted average common shares                                               |   | 17,358                                |   | 16,188                               |   | 17,319 |   | 16,571 |   |
| Weighted average options, warrants, restricted stock and contingent  consideration |   | 11                                    |   | 167                                  |   | 369 |   | 83 |   |
| Diluted weighted average common shares                                             |   | 17,369                                |   | 16,355                               |   | 17,688 |   | 16,654 |   |

 

AtSeptember 30, 2002 and 2003, approximately 3.6 million and 2.9 million,respectively, of common stock equivalents were not included in the dilutedearnings per share calculation because they were anti-dilutive. These commonstock equivalents may be dilutive to future earnings per share calculations.

 

7

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**4.Strategic Realignment Plan**

 

Duringthe second and third quarters of 2001, the Company completed a strategicrealignment plan, in which the Company identified certain non-strategic serviceofferings for divestiture or closure. During the nine months ended September30, 2003, the activity related to the realignment plan consisted primarily ofsettlements of legal claims and lease payments. The following table reflectsthe realignment activity for the nine months ended September 30, 2003 (inmillions):

 
|                        |   | **January 1, 2003** |   | **Settlements** |   | **September 30, 2003** |   |
|-----------------------------|--------|---------------------|--------|-----------------|--------|------------------------|--------|
| Realignment Costs Liability |   | $                   | 1.5    |            | $      | (1.5                   | )      | $ | — |   |
|                             |        |                     |        |                 |        |                        |        |  |  |  |

 

**5. BusinessCombinations**

 

*Goodwilland Intangibles*

 

Thechanges by segment 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, 2003                |   | $                                             | 186,378 |                                                     | $      | 130,878   |   | $ | 317,256 |   |
| Additional accrued consideration and adjustments |   | 5,833                                         |    | (94                                                      | )      | 5,739     |   |
| Net balance as of September 30, 2003             |   | $                                             | 192,211 |                                                     | $      | 130,784   |   | $ | 322,995 |   |

 

Intangibles:

 
|                   |   | **September 30, 2003**    |   |
|------------------------|--------|---------------------------|--------|
|                   |   | **Gross  Carrying Value** |   | **Accumulated  Amortization** |   | **Net  Intangibles** |   |
| Customer Relationships |   | $                         | 4,000  |   | $ | (467 | ) | $ | 3,533 |   |
| Non Compete Agreements |   | 440                       |   | (154 | ) | 286 |   |
| Total                  |   | $                         | 4,440  |   | $ | (621 | ) | $ | 3,819 |   |

 

Aggregateamortization expense related to intangibles for the nine months ended September30, 2003 was $0.3 million. Estimated amortization expense for the periodsending December 31, 2003 through December 31, 2006 is $0.4 million annually.Thereafter, annual amortization expense is estimated to be $0.3 million throughDecember 31, 2016.

 

*ContingentConsideration*

 

Certainof the Company’s acquisitions are subject to adjustments in overallconsideration and recorded goodwill based primarily upon the achievement ofspecified revenue and/or earnings targets and the settlement of certainrepresentations and warranties stipulated in the purchase agreements, generallyover one to three year periods. During the first nine months of 2003, theCompany paid consideration of $11.0 million in cash and 20,268 shares of commonstock at an average price of $13.96 per share in relation to contingentconsideration agreements that have been finalized.  During the three months ended September 30, 2003, the companyreceived a reimbursement of approximately $1.0 million of purchase pricerelated to a past acquisition in the Information Management and Distributionsegment, which was recorded as a reduction to goodwill.

 

Incertain agreements, the Company has the option of changing the payment mix touse cash versus common stock in satisfying the liability. Upon review ofcurrent market conditions, the Company finds it favorable to satisfy itscurrently recorded contingent consideration liabilities in cash rather thancommon stock. Management’s evaluation of the cumulative earnings of acquiredcompanies through September 30, 2003 indicates that certain acquired companieshave met specified earnings targets beyond a reasonable doubt; therefore,during the nine months ended September 30, 2003 the Company accrued additionalnet consideration of approximately $6.8 million, which resulted in an increaseto goodwill. As of September 30, 2003, the Company’s total current liabilityrelated to contingent consideration agreements of past acquisitions is $3.3million, which is reported in accounts payable and accrued liabilities and isexpected to be settled in cash.

 

Notall of the periods applicable for the contingent consideration targets havebeen completed and additional amounts may be payable in future periods underthe terms of the agreements. If all contingent consideration targets under thecurrent agreements were achieved, the maximum contingent consideration to bepaid would be $17.2 million. In accordance with the agreements, the Company hasthe option to satisfy $12.7 million of the $17.2 million potential liability incommon stock. The contingent consideration payments would be made as outlinedin the agreements and paid over the next two years, with the final paymentbeing made in 2005.

 

8

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**6. SegmentReporting**

 

TheCompany aggregates its service offerings and operations into two reportablesegments: (i) Information Management and Distribution, and (ii) Healthcare,Regulatory, and Legal Compliance. The Company’s reportable segments areorganized around customer types and service offerings possessing similareconomic characteristics. Management evaluates segment performance based onrevenue and income before income taxes. All centrally incurred corporate costsare allocated to the segments based principally on operating income. Thereporting segments follow the same accounting policies used for the Company’sconsolidated financial statements as described in the summary of significantaccounting policies.

 

Theidentified segments are as follows:

 

**Information Management and Distribution.** This segment includes operations thatprovide the following services: electronic imaging; analog services; datacapture and database management; internet repository services; and print andmail services, including statement processing, direct mail and fulfillmentservices and in-bound mail room services.

 

**Healthcare, Regulatory and Legal Compliance.** This segment includes operations thatprovide the following services: fulfillment of requests for medical recordsinformation; off-site active storage of a healthcare institutions’ medicalrecords; online delivery of images of selected medical records; temporarystaffing services; providing managed care compliance reviews; medical recordcoding; legal claims administration; and professional economic researchservices and litigation support.

 

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

 
|                       |   | **THREE MONTHS ENDED SEPTEMBER 30, 2003**       |    |
|----------------------------|--------|-------------------------------------------------|---------|
|                       |   | **Information  Management   and  Distribution** |    | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                               | 57,431  |   | $ | 43,495 |   | $ | 100,926 |   |
| Income before income taxes |   | 4,939                                           |    | 5,981 |   | 10,920 |   |
|                       |   |                                            |    |   |   |   |   |
|                       |   | **THREE MONTHS ENDED SEPTEMBER 30, 2002**       |    |
|                       |   | **Information  Management   and  Distribution** |    | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                               | 62,072  |   | $ | 45,393 |   | $ | 107,465 |   |
| Income before income taxes |   | 5,930                                           |    | 6,429 |   | 12,359 |   |
|                       |   |                                            |    |   |   |   |   |
|                       |   | **NINE MONTHS ENDED SEPTEMBER 30, 2003**        |    |
|                       |   | **Information  Management   and  Distribution** |    | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                               | 183,485 |   | $ | 128,736 |   | $ | 312,221 |   |
| Income before income taxes |   | 17,512                                          |    | 16,467 |   | 33,979 |   |
|                       |   |                                            |    |   |   |   |   |
|                       |   | **NINE MONTHS ENDED SEPTEMBER 30, 2002**        |    |
|                       |   | **Information  Management   and  Distribution** |    | **Healthcare,  Regulatory  and Legal  Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                               | 190,732 |   | $ | 125,804 |   | $ | 316,536 |   |
| Income before income taxes |   | 19,727                                          |    | 14,420 |   | 34,147 |   |

 

**7. OtherComprehensive Income (Loss)**

 

SFASNo. 130, *Reporting Comprehensive Income,*establishes standards for reporting and display of comprehensive income and itscomponents in the financial statements. The objective of SFAS No. 130 is toreport a measure of all changes in equity of an enterprise that result fromtransactions and other economic events of the period other than transactionswith owners. Comprehensive income is the total of net income and all othernon-owner changes within a company’s equity.

 

Othercomprehensive income (loss) is defined as the change in equity during a periodfrom transactions and other events, except those resulting from investments byand distributions to stockholders. The components of comprehensive income(loss) for the three and nine months ended September 30, 2002 and 2003 are asfollows (in thousands):

 

9

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|                                                                                                          |   | **Three Months********Ended********September 30,** |   | **Nine Months********Ended********September 30,** |   |
|---------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                                          |   | **2002**                                           |   | **2003**                                          |   | **2002** |   | **2003** |   |
| Net income                                                                                                    |   | $                                                  | 7,663  |                                              | $      | 6,552 |   | $ | 21,171 |   | $ | 20,387 |   |
| Other comprehensive income (loss):                                                                            |   |                                               |   |                                              |   |   |   |   |   |
| Change in fair value of interest rate swap, net of tax effect of  $(121), $0, $(341) and $(219), respectively |   | 252                                                |   | —                                            |   | 612 |   | 329 |   |
| Total comprehensive income                                                                                    |   | $                                                  | 7,915  |                                              | $      | 6,552 |   | $ | 21,783 |   | $ | 20,716 |   |

 

10

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

 

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

 

**Introduction**

 

Wewere founded in September 1994, to create a national, single source provider ofdocument and information outsourcing solutions to document and informationintensive industries, including: financial services, government, legal,healthcare and transportation. We acquired the seven Founding Companies (the“Founding Companies”) simultaneously with the closing of our initial publicoffering (the “IPO”) on January 26, 1996, and effectively began operations atthat time. The consideration for the Founding Companies consisted of acombination of cash and common stock of our Company.

 

Sincethe IPO, we have acquired 65 companies and divested 17 operating units by salesor closures. We evaluate candidates for acquisition and periodically fordivestiture as a part of our strategic plan of providing customers a singlesolution for business process outsourcing. The criteria for evaluation includegeographic need, additional technology, market growth potential, industryexpertise, service expansion to broaden service offerings, expansion of ourcustomer base, revenue and earnings growth potential, and expected sources anduses of capital.

 

**Basis forManagement Discussion and Analysis**

 

Revenueis characterized as either project or recurring. Project revenue consists ofone-time projects in which the customer relationship is not guaranteed tocontinue after project completion. Project revenue margins are usually higherthan our average margins and the volumes of project business can be highlyvolatile from period to period. Recurring revenue is characterized by customerrelationships that are generally for one year and may continue for longer. Recurringrevenue is typically based on transaction volumes sent to us by our customersand these volumes are generally not contractually guaranteed. Recurring revenuegenerally has lower margins than project revenue and is usually morepredictable. The difference between project and recurring revenue is relevantto the discussion of profitability and margins.

 

Costof services consists primarily of compensation and benefits to employeesproviding goods and services to our clients; occupancy costs; equipment costsand supplies. Our cost of services also includes the cost of products sold formicrographics supplies and equipment, computer hardware and software andbusiness imaging supplies and equipment.

 

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

 

**BusinessSegments**

 

Weaggregate our service offerings and operations into two reportable segments:(i) Information Management and Distribution, and (ii) Healthcare, Regulatory,and Legal Compliance. Our reportable segments are organized around customertypes and service offerings possessing similar economic characteristics.Management evaluates segment performance based on revenue and income 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 as describedin the summary of significant accounting policies.

 

Theidentified segments are as follows:

 

**Information Management and Distribution.** This segment includes operations thatprovide the following services: electronic imaging; analog services; datacapture and database management; internet repository services; and print andmail services, including statement processing, direct mail and fulfillmentservices and in-bound mail room services. For the three months ended September30, 2002 and 2003, revenue in the Information Management and Distributionsegment consisted of approximately $54.9 million and $52.6 million of recurringrevenue, respectively, and approximately $7.2 million and $4.8 million ofproject revenue, respectively. For the nine months ended September 30, 2002 and2003, revenue in the Information Management and Distribution segment consistedof approximately $168.5 million and $164.5 million of recurring revenue,respectively and approximately $22.2 million and $19.0 million of projectrevenue, respectively.

 

**Healthcare, Regulatory and Legal Compliance.** This segment includes operations thatprovide the following services: fulfillment of requests for medical recordsinformation; off-site active storage of a healthcare institutions’ medicalrecords; online delivery of images of selected medical records; temporarystaffing services; providing managed care compliance reviews; medical recordcoding; legal claims administration; and professional economic researchservices and litigation support. During the three months ended September 30,2002 and 2003, revenue in the Healthcare, Regulatory and Legal Compliancesegment consisted of

 

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approximately $16.4 million and $15.3 millionof recurring revenue, respectively, and approximately $29.0 million and $28.2million of project revenue, respectively. During the nine months endedSeptember 30, 2002 and 2003, revenue in the Healthcare, Regulatory and LegalCompliance segment consisted of approximately $47.8 million and $46.4 millionof recurring revenue, respectively, and approximately $78.0 million and $82.3million of project revenue, respectively.

 

**THREEMONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,2003**

 
|                  |   | **Three Months Ended September 30,** |    |
|-----------------------|--------|--------------------------------------|---------|
|                  |   | **2002**                             |    | **2003** |   |
|                  |   | **($000’s)**                    |    | **%****of  Revenue** |   | **($000’s)** |   | **%****of  Revenue** |   |
| **Revenue**           |   | $                                    | 107,465 |   | 100.0 | % | $ | 100,926 |   | 100.0 | % |
| **Gross Profit**      |   | 39,204                               |    | 36.5 | % | 37,662 |   | 37.3 | % |
| **SG&A**          |   | 25,154                               |    | 23.4 | % | 26,098 |   | 25.9 | % |
| **Operating income**  |   | 13,961                               |    | 13.0 | % | 11,475 |   | 11.4 | % |
| **Income before tax** |   | 12,359                               |    | 11.5 | % | 10,920 |   | 10.8 | % |
| **Net income**        |   | 7,663                                |    | 7.1 | % | 6,552 |   | 6.5 | % |
|                       |        |                                      |         |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Ouroperations generated revenues of $100.9 million for the three months endedSeptember 30, 2003, a decrease of 6.1% compared to the same period in 2002.Project revenue accounted for $33.0 million or 32.7% of revenue in the current quartercompared to $36.2 million or 33.6% of revenue in the prior year quarter. (See“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Basis for Management Discussion and Analysis.”)

 

Revenuewithin our Information Management and Distribution segment decreased 7.5% from$62.1 million for the three months ended September 30, 2002 to $57.4 millionfor the three months ended September 30, 2003. Project revenue accounted for 8.4% of segment revenue in the thirdquarter of 2003 compared to 11.6% for the same period in 2002.  Segment revenues were lower during thequarter principally due to declines in volumes related to our governmentservices business of approximately $4.7 million.  The City of New York Human Resources Administration (“HRA”) fullytransitioned to a new vendor during the second quarter of 2003.  During the third quarter of 2002, HRAcontributed approximately $3.1 million in revenue.  The remaining portion of the decline within our governmentservices business is primarily the result of lower volumes with a singlefederal government customer. Additionally, the segment experienced declines in volumes within ourdirect mail service offering, which was down $2.9 million or 26.7% compared tothe prior year quarter, due to unfavorable economic conditions and a highlycompetitive environment throughout the direct mail industry.  These declines were partially offset byhigher transaction volumes from our financial services customers combined withincreased volumes within our statement processing service offering.

 

Revenuewithin our Healthcare, Regulatory and Legal Compliance segment decreased 4.2%from $45.4 million for the three months ended September 30, 2002 to $43.5million for the three months ended September 30, 2003. Project revenueaccounted for 64.7% of segment revenue in the second quarter of 2003 and 63.8%for the same period in 2002.  Thedecline in segment revenue resulted primarily from decreases in revenue within ourhealthcare businesses of approximately $1.6 million due to the plannedattrition of lower margin customers combined with lower volumes from ourmedical records coding business.  Duringthe third quarter of 2003, our legal consulting and claims administrationservice offerings produced strong volumes, essentially level with the thirdquarter of 2002.

 

**Grossprofit**

 

Grossprofit declined 3.9% from $39.2 million for the three months ended September30, 2002 to $37.7 million for the three months ended September 30, 2003. Thedecrease in gross profit was primarily related to the decline in revenuediscussed above.  Gross profit as apercentage of revenue increased from 36.5% for the three months ended September30, 2002 to 37.3% for the three months ended September 30, 2003 primarily dueto productivity improvements from the deployment of high-speed scanners inaddition to expense control and reduction initiatives implemented within theInformation Management and Distribution segment.  Also contributing to the improvement of gross profit as a percentageof revenue was lower bad debt expense of approximately $0.5 million compared tothe prior year as a result of increased collections of account receivablebalances outstanding greater than ninety days.

 

**Selling,general and administrative expenses**

 

SG&Aincreased 3.8% from $25.2 million, or 23.4% of revenue, for the three monthsended September 30, 2002 to $26.1 million, or 25.9% of revenue, for the threemonths ended September 30, 2003. This is primarily due to increased personnelcosts related to our strategic sales and technology initiatives within ourInformation Management service offering aimed at generating revenue growth andimproved operational efficiencies.

 

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**Operatingincome**

 

Operatingincome decreased 17.8% from $14.0 million, or 13.0% of revenue, for the threemonths ended September 30, 2002 to $11.5 million, or 11.4% of revenue, for thethree months ended September 30, 2003. The decline in operating income waslargely attributable to the decline in revenue and increased SG&A expensesdiscussed above.

 

**Incomebefore income taxes and net income**

 

Incomebefore income taxes decreased 11.6% from $12.4 million for the three monthsended September 30, 2002 to $10.9 million for the three months ended September30, 2003, largely attributable to the items discussed above. Partiallyoffsetting the decline in income before income taxes was lower interestexpense.  Interest expense for the threemonths ended September 30, 2003 declined $1.1 million compared to the sameperiod in 2002 primarily due to the expiration of the interest rate swap onMarch 31, 2003, lower debt levels and more favorable interest rates.

 

Netincome decreased 14.5% from $7.7 million for the three months ended September30, 2002 to $6.6 million for the three months ended September 30, 2003 due tothe items discussed above. The effective tax rate of 38.0% and 40.0% for thethree months ended September 30, 2002 and 2003, respectively, differs from thestatutory federal rate of 35.0% principally due to state and local taxes. Theeffective tax rate has changed between the years principally due to the incomemix shifting to higher tax states.

 

**NINE MONTHSENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003**

 
|                  |   | **Nine Months Ended September 30,** |    |
|-----------------------|--------|-------------------------------------|---------|
|                  |   | **2002**                            |    | **2003** |   |
|                  |   | **($000’s)**                   |    | **%****of  Revenue** |   | **($000’s)** |   | **%****of  Revenue** |   |
| **Revenue**           |   | $                                   | 316,536 |   | 100.0 | % | $ | 312,221 |   | 100.0 | % |
| **Gross Profit**      |   | 115,648                             |    | 36.5 | % | 115,795 |   | 37.1 | % |
| **SG&A**          |   | 76,182                              |    | 24.1 | % | 79,010 |   | 25.3 | % |
| **Operating income**  |   | 39,199                              |    | 12.4 | % | 36,519 |   | 11.7 | % |
| **Income before tax** |   | 34,147                              |    | 10.8 | % | 33,979 |   | 10.9 | % |
| **Net income**        |   | 21,171                              |    | 6.7 | % | 20,387 |   | 6.5 | % |
|                       |        |                                     |         |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Ouroperations generated revenues of $312.2 million for the nine months endedSeptember 30, 2003, a decrease of 1.4% compared to the same period in2002.  Project revenue increased $1.1million from the prior year, resulting in a slight shift in revenue mix betweenour project and recurring revenue.  Projectrevenue accounted for 32.5% of total revenue in the current year compared to31.6% in the prior year. (See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Basis for Management Discussionand Analysis.”)

 

Revenuewithin our Information Management and Distribution segment decreased 3.8% from $190.7million for the nine months ended September 30, 2002 to $183.5 million for thenine months ended September 30, 2003. Project revenue accounted for 10.3% ofsegment revenue in the current year compared to 11.6% for the same period of2002. Segment revenues were lower during the current year principally as aresult of declining volumes within our direct mail service offering, which wasdown $6.0 million or 18.8% compared to the prior year, due to unfavorableeconomic conditions and a highly competitive environment throughout the directmail industry. Additionally, the segment experienced declines in volumesrelated to our government services business of approximately $6.4 million. TheCity of New York Human Resources Administration (“HRA”) contract was fullytransitioned to a new vendor during the second quarter of 2003. For the ninemonths ended September 30, 2003, HRA contributed $5.3 million in revenuecompared to $9.2 million during the nine months ended September 30, 2002. Theremaining portion of the decline within our government services business isprimarily the result of lower volumes with a single federal governmentcustomer. These declines were partially offset by increased volumes from ourfinancial services customers combined with increased volumes within ourstatement processing service offering.

 

Revenuewithin our Healthcare, Regulatory and Legal Compliance segment increased 2.3%from $125.8 million for the nine months ended September 30, 2002 to $128.7million for the nine months ended September 30, 2003. Project revenue accountedfor 64.0% of segment revenue for the nine months ended September 30, 2003compared to 62.0% for the same period in 2002. The increase in segment revenuewas primarily a result of increased volumes of approximately $6.2 millionwithin our legal consulting service offering due to three significant projectsin production during the first six months of 2003. Volumes within our claimsadministration service offering were essentially level with the prior year.Revenue in our healthcare businesses declined approximately $3.1 millionprimarily as a result of planned customer attrition of lower margin customerscombined with lower volumes from our medical records coding business.

 

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**Grossprofit**

 

Grossprofit increased 0.1% from $115.6 million for the nine months ended September30, 2002 to $115.8 million for the nine months ended September 30, 2003. Theincrease in gross profit was primarily the result of increased volumes withinour legal consulting service offering, which typically produces highermargins.  Also contributing to theimproved gross margin was lower bad debt expense of approximately $2.3 millioncompared to last year due to increased collections of accounts receivablebalances outstanding greater than ninety days. These items were partially offset by an overall decline in revenuecombined with an unusually large medical claims expense of approximately $1.1million incurred during the second quarter of 2002.  As a result, gross profit as a percentage of revenue increasedfrom 36.5% for the nine months ended September 30, 2002 to 37.1% for the sixmonths ended September 30, 2003.

 

**Selling,general and administrative expenses**

 

SG&Aincreased 3.7% from $76.2 million, or 24.1% of revenue, for the nine monthsended September 30, 2002 to $79.0 million, or 25.3% of revenue, for the ninemonths ended September 30, 2003. This is primarily due to increased personnelcosts related to our strategic sales and technology initiatives within ourInformation Management service offering aimed at generating revenue growth andimproved operational efficiencies combined with increased professional fees.

 

**Operatingincome**

 

Operatingincome decreased 6.8% from $39.2 million, or 12.4% of revenue, for the ninemonths ended September 30, 2002 to $36.5 million, or 11.7% of revenue, for thenine months ended September 30, 2003. The decline in operating income waslargely attributable to the decline in revenue, increased medical claims expenseand increased SG&A expenses, as discussed above.

 

**Incomebefore income taxes and net income**

 

Incomebefore income taxes decreased 0.5% from $34.1 million for the nine months endedSeptember 30, 2002 to $34.0 million for the nine months ended September 30,2003.  The decline in income beforetaxes was largely attributed to the items discussed above, offset by a netdecrease in interest and other income and expense items.  Interest expense for the nine months endedSeptember 30, 2003 declined approximately $1.7 million compared to the sameperiod in 2002 due primarily to the expiration of the interest rate swap onMarch 31, 2003, lower debt levels and more favorable interest rates.  Interest income increased $0.2 millionduring the current year due to the collection of a $2.3 million income taxreceivable during the first quarter of 2003. During the nine months ended September 30, 2003, gains of approximately$0.4 million were realized related to the sale of property, plant andequipment.

 

Netincome decreased 3.7% from $21.2 million for the nine months ended September30, 2002 to $20.4 million for the nine months ended September 30, 2003, largelyattributable to the items discussed above. The effective tax rate of 38.0% and40.0% for the nine months ended September 30, 2002 and 2003, respectively,differs from the statutory federal rate of 35.0% principally due to state andlocal taxes. The effective tax rate has changed between the years principallydue to the income mix shifting to higher tax states.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

AtSeptember 30, 2003, we had $21.1 million of working capital, including $0.6million of cash. Working capital at December 31, 2002 was $39.0 million,including $3.2 million of cash. For the first nine months of 2003, cash providedby operating activities was $53.7 million compared to $43.0 million for thesame period in 2002. Significant collections of accounts receivable balancesand the receipt of $2.3 million of income tax refunds in the current year werekey drivers for the increase in operating cash flow. Other factors contributingto the increased operating cash flow include the timing of income tax paymentscombined with lower interest payments as a result of more favorable interestrates and lower debt levels compared to the prior year.

 

Forthe nine months ended September 30, 2003, investing activities consisted ofacquisitions of property, plant and equipment of $9.9 million, proceeds fromsale of property, plant and equipment of $0.4 million, and net acquisitionrelated payments of $10.0 million. Capital expenditures were primarily drivenby technological investments within our information management serviceoffering. Acquisition related payments consist of cash payments of $11.0million in relation to contingent consideration agreements that have beenfinalized, offset by the reimbursement of approximately $1.0 million ofpurchase price related to a past acquisition in the Information Management andDistribution segment. It is expected that we will pay an additional $0.3million in cash for contingent consideration agreements during the remainder of2003.

 

Netcash used for financing activities was $36.8 million for the nine months endedSeptember 30, 2003. During 2003, we activated the $30.0 million stockrepurchase program authorized by our Board of Directors in April 2001. Duringthe nine months ended September 30, 2003, we purchased 1,216,979 shares of ourcommon stock at a cost of approximately $18.6 million.  Since September 30, 2003 (through November5, 2003), we have purchased an additional 90,000 shares at a cost ofapproximately $2.1 million.  Thesepayments were offset by $167.6 million in proceeds from our line of credit, netof payments of $185.7 million. In addition, we paid $0.3 million in feesrelated to amending the terms of our credit agreement and extending the creditfacility for an additional year, which is discussed below.

 

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InApril 2001, we entered into our line of credit agreement with a group of banksled by Bank of America, SunTrust Bank and Wells Fargo Bank, as co-agents (the“2001 Credit Agreement”). Under the agreement, we can borrow up to $297.5million through April 2, 2004. In 2002, member banks extended $290.0 million ofthe commitment through April 1, 2005. Effective April 3, 2003, member banksextended $230.0 million of the commitment for an additional year to April 1,2006. Our ability to borrow under the agreement is subject to customaryborrowing capacity requirements. Meeting these requirements is highly dependentupon maintaining a minimum level of operating results and the continued demandfor our services among other factors.

 

Managementbelieves that it has sufficient liquidity from its cash flow and its revolvingcredit facility to meet ongoing business needs. However, our ability to borrowis contingent on certain leverage and fixed cost coverage ratios. Afterapplication of such ratios and our total commercial commitments of $10.9million for standby letters of credit and our current outstanding borrowings of$71.7 million, we had $76.6 million available to borrow under our 2001 CreditAgreement as of September 30, 2003.  InSeptember 2002, an amendment was approved that extended the fixed cost coverageratio requirement of 1.25 until January 1, 2004. This ratio was set to becomemore restrictive in the fourth quarter of 2002 by increasing to 1.50. Under theamended agreement, the fixed cost ratio will remain at 1.25 until January 1,2004 and will increase to 1.35 at all times thereafter. Effective March 26,2003, an amendment was approved that allows for a reduction to the minimum networth requirement for up to $30 million of share repurchases. Additionally,depending on the mix of stock and cash used in our strategic acquisition program,if any, we may need to seek further financing through the public or privatesale of equity or debt securities. There can be no assurance we could securesuch financing if and when it is needed or on terms we deem acceptable.

 

InJanuary 2000, we registered on Form S-4 (Registration No. 333-92981) 3,012,217shares of common stock for issuance in connection with our acquisition program(the “Acquisition Shelf”), of which 1,390,176 shares were available as ofSeptember 30, 2003. The shares available have not been reduced for any sharesthat may be issuable in the future to previous owners of acquired companies ascontingent consideration liabilities.

 

**CriticalAccounting Policies**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations arebased on the related consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of the financial statements requires the use ofestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses.

 

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

 

*Allowancefor Doubtful Accounts*

 

Theallowance for doubtful accounts is established and maintained based on ourestimate of accounts receivable collectibility. Management estimatescollectibility by specifically analyzing accounts receivable and otherhistorical factors that affect collections. Such factors include the historicaltrends of write-offs and recovery of previously written-off accounts, thefinancial strength of the customer and projected economic and marketconditions. The evaluation of these factors involves subjective judgments andchanges in these factors may significantly impact our consolidated financialstatements.

 

*Goodwilland Intangible Assets*

 

Weadopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets*, on January 1, 2002. Upon the adoption of SFAS No. 142,goodwill and other intangible assets that have indefinite useful lives are notamortized but rather are tested at least annually for impairment. At January 1,2002, we compared the fair values of the reporting units to their carryingvalues. In determining the fair values of the operating units, we used thediscounted cash flow method and the market value approach method. Since thefair value of each reporting unit exceeded the carrying value, no impairmentwas recorded at January 1, 2002. In October 2002, we performed the annual testfor impairment using the discounted cash flow method and the market value approachmethod. Since the fair value of each reporting unit exceeded the carryingvalue, no impairment was recorded.

 

Otherintangible assets with definite lives will continue to be amortized over theiruseful lives. Impairment will be evaluated when events or changes incircumstances indicate that the carrying value may not be recoverable inaccordance with SFAS No. 144, *Accounting forthe Impairment or Disposal of Long-Lived Assets*.

 

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*Long-LivedAsset Impairment*

 

Weadopted the provisions of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long Lived Assets*, on January 1,2002. As required by SFAS No. 144, management continually evaluates whetherevents and circumstances indicate that the carrying value of long-lived assetsmay not be recoverable. When events require, management makes the valuation bycomparing the estimated undiscounted future cash flows over the remaining lifeof the long-lived assets to the carrying amount of the asset being evaluated.An impairment loss is recognized to the extent the carrying amount of assetsbeing evaluated exceeds the expected future undiscounted cash flow. Managementbelieves that during the nine months ended September 30, 2003, no facts orcircumstances existed that required evaluation of potential impairment.

 

*RevenueRecognition*

 

Werecognize our revenue as it becomes realized or realizable and earned accordingto the criteria provided by Staff Accounting Bulletin 101, *Revenue Recognition in Financial Statements*.Revenue recognition occurs once persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered, the sales price is fixedor otherwise determinable, and collection is reasonably assured. Ourrevenue-earnings activities possess both project and recurring customerrelationships.

 

Projectrevenue includes one-time projects in which the customer relationship is notexpected to continue after project completion. Project revenue is typicallybased on time and material arrangements. Revenue recognition occurs at thecontractual rates as the labor hours and direct expenses are incurred. Projectrevenue represented approximately 33% of total 2002 revenues and typicallyoccurs within our Healthcare, Regulatory, and Legal Compliance segment.

 

Recurringrevenue is characterized by customer relationships that are generally for oneyear and may continue for longer. Recurring revenue is typically based on thetransaction volumes provided by our customer at an agreed upon fixed rate perunit. Our customer’s volumes are typically not contractual or otherwiseguaranteed. Revenue recognition occurs once work is completed and delivery hasoccurred or services have been rendered. Recurring revenue represented theremaining 67% of total 2002 revenues and typically occurs within ourInformation Management and Distribution segment.

 

Asa part of providing services to our customers, we incur incidental expensescommonly referred to as “out-of-pocket” expenses. These expenses include itemssuch as airfare, hotels, and mileage and are often reimbursable by ourcustomers. 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 Statement Characterizationof Reimbursements Received for “Out-of-Pocket” Expenses Incurred.*

 

Unearnedincome, included in accounts payable and accrued 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.

 

*Self-InsuranceLiabilities and Reserves*

 

Weare self-insured for workmen’s compensation liabilities and a significantportion of our employee medical costs. We account for our self-insuranceprograms based on actuarial estimates of the amount of loss inherent in thatperiod’s claims, including losses for which claims have not been reported.These loss estimates rely on actuarial observations of ultimate loss experiencefor similar historical events. We limit our risk by carrying stop-loss policiesand aggregate claim limits for significant claims incurred for both workmen’scompensation liabilities and medical costs.

 

*Other LossContingencies*

 

Werecord liabilities when it is probable that a liability has been incurred andthe amount of the loss is reasonably estimable in accordance with SFAS No. 5,*Accounting for Contingencies*. Disclosureis required when there is a reasonable possibility that the ultimate loss willexceed the recorded provision. Contingent liabilities are often resolved overlong periods of time. Estimating probable losses requires analysis of multipleforecasts that often depend on judgments about potential actions by thirdparties such as regulators.

 

*StockBased Compensation*

 

Wehave elected to follow Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*.Under APB No. 25, compensation expense is recorded when the exercise price ofemployee stock options is less than the fair value of the underlying stock onthe measurement date. We have adopted the disclosure-only provisions of SFASNo. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*. See Note 3, Stockholders’Equity and Stock-Based Compensation, of the Notes to Condensed ConsolidatedFinancial Statements.

 

*RecentAccounting Pronouncements*

 

InApril 2003, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 149, *Amendment of Statement 133 on Derivative Instruments and HedgingActivities*. SFAS No. 149 amends and

 

16

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clarifies financial accounting/ and reportingfor derivative instruments, including certain derivative instruments embeddedin other contracts and for hedging activities under SFAS No, 133,*Accounting for Derivative Instruments and HedgingActivities* and is effective for contracts entered into or modifiedafter June 30, 2003. We adopted the provisions of SFAS No. 149 on July 1, 2003and such adoption did not have a material impact on the consolidated financialstatements.

 

InMay 2003, the FASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.* SFAS No. 150 establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity and is effective for financial instruments enteredinto or modified after May 31, 2003. The provisions of SFAS No. 150, which weadopted on June 1, 2003, did not have a material impact on the consolidatedfinancial statements.

 

**RISKSASSOCIATED WITH FORWARD-LOOKING STATEMENTS**

 

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

 

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

 

**Item 3****.**                   **Quantitative and Qualitative Disclosures about MarketRisk**

 

Weare subject to interest rate risk on our term loans, revolving credit facilityand Industrial Revenue Bonds. A 100 basis point increase in short-term interestrates would result in approximately $0.2 million of additional expense in 2003based on our expected average balance outstanding under the credit facilityduring 2003. Interest rates are fixed on the capitalized lease obligations.

 

Weentered into an interest rate swap for a notional amount of $50 million tohedge, through March 31, 2003, our exposure to fluctuations in interest rateson $50 million of our revolving credit facility. We designated the swap as acash flow hedge. The interest rate swap expired on March 31, 2003 and was notreplaced.

 

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

 

(a) Evaluation of Disclosure Controls andProcedures

 

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this report. Based on that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures as of the end of the period covered by this report have beendesigned and are functioning effectively to provide reasonable assurance thatthe information required to be disclosed by the Company in reports filed underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms. TheCompany believes that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.

 

17

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(b)Change in Internal Control over Financial Reporting

 

Nochange in the Company’s internal control over financial reporting occurredduring the Company’s most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

**PART II. OTHER INFORMATION**

 

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

 

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

 

*RoyWeatherford, et al vs. Franklin Bank and Franklin Bank vs. MAVRICC ManagementSystems, Inc.*

 

OnFebruary 24, 1992, MAVRICC Management Systems, Inc. (one of our wholly-ownedsubsidiaries, the operating assets of which were divested by us as part of our2001 strategic realignment plan) (“MAVRICC”) entered into an agreement withFranklin Bank, N.A. whereby MAVRICC agreed to maintain records for individualIRAs and Keogh Plans and to perform certain activities (specifically describedin the contract) necessary to assist Franklin Bank, N.A. in serving as acustodian for specific IRAs. On August 6, 2001, Plaintiffs Roy Weatherford,Lois Weatherford, James L. Loper and Alma D. Owen initiated a class actionlawsuit against Franklin Bank, N.A. in Tennessee’s Sumner County Circuit Court,Chancellory Division, alleging breach of fiduciary duty, breach of contract,negligence and violation of the Consumer Protection Act. The Weatherford complaintseeks compensatory and punitive damages from Franklin Bank, N.A. On September28, 2001, Franklin Bank, N.A. filed its Third-Party Complaint against MAVRICCfor indemnification, alleging that MAVRICC breached the agreement. On February27, 2003, the parties to this action filed an agreed order of dismissal withoutprejudice, which the court entered on March 10, 2003. The order dismisses boththe complaint against Franklin Bank and Franklin Bank’s Third Party Complaintagainst MAVRICC; however, as the complaints are dismissed without prejudice, itis possible for such parties to later reassert such claims. We believe that ifsuch claims were reasserted, we would have meritorious defenses and wouldvigorously defend any such claims made against us in this matter.

 

*HealthcareMarketing Associates, Inc. vs. Managed Care Professionals, Inc.*

 

OnFebruary 9, 1995, prior to the acquisition by the Company, Managed CareProfessionals, Inc. (one of our wholly-owned subsidiaries) (“MCP”) entered intoan “Exclusive Marketing Agreement” with Healthcare Marketing Associates, Inc.(“HMA”) whereby MCP granted to HMA the exclusive right to market, and HMAagreed to market exclusively for MCP, the MCP products and services to healthcare providers in the United States for which MCP agreed to pay HMA apercentage (30%) of gross revenues paid to MCP by the provider (customer). Theduration of the Agreement was for a period of five (5) years and expired onFebruary 9, 2000 (“Termination Date”). On April 27, 2001, HMA filed a lawsuitagainst MCP in the Circuit Court of the County of St. Louis, State of Missouri,alleging entitlement to commissions on revenues generated from providers afterthe Termination Date who were initially brought to MCP prior to the TerminationDate. On August 26, 2002, our motion for summary judgment was denied. In March2003, this lawsuit was tried before a judge and at the conclusion of the trial,the judge ruled in the plaintiff’s favor in the amount of $1.782 million plusprejudgment interest, which equates to approximately $2.2 million in total asof March 5, 2003. The judgment amount plus prejudgment interest costs wereincluded in our 2002 results. In October 2003, we filed our appeal in thismatter. We believe we have meritorious points of error for appeal and intend tocontinue to vigorously defend the claims made against us in this matter.

 

*VariousROI Copy Charge Matters*

 

Fromtime to time, various of our subsidiaries that perform release of information(“ROI”) services become defendants to putative class action lawsuits generallyalleging that the charge for reproducing certain medical records is not inconformity with such plaintiffs’ reading of the applicable regulated charge.Such suits typically include multiple ROI companies and hospitals as defendantsand demand reimbursement for prior charges as well as for prospective pricingadjustments. We are currently a party to several such suits in various stagesof development. We believe we have meritorious defenses and intend to continueto vigorously defend any claims made against us in these matters.

 

*Mattel v.SOURCECORP*

 

OnFebruary 18, 2003, Mattel, Inc. filed suit against the Company in the LosAngeles County California Superior Court. In the suit, the plaintiff allegesthat one of our subsidiaries is liable for the loss of various products andprototypes allegedly stored at one of our subsidiary’s box storage facilitiesunder theories of breach of contract, breach of fiduciary duty, negligence,breach of implied covenants of good faith and fair dealing and/or conversion.The plaintiff has not definitively articulated their damages, but alleges theyare in excess of $2.5 million. We believe we have meritorious defenses andintend to vigorously defend any claims made against us in this matter.

 

18

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*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, in which weasserted claims for breach of contract, fraud, and negligent misrepresentationagainst the sellers of two related companies that we acquired in December 1998(the “Texas Action”). The Texas Action was later removed to federal court andultimately dismissed on jurisdictional grounds. We reasserted these claims intwo actions that were later consolidated; one styled *F.Y.I. Incorporated v. Spohr, et. al.* in Superior Court ofthe State of California in the 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 theState of California 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.Specifically, the sellers allege that our former subsidiary wrongfully failedand refused to execute and deliver a requested estoppel certificate, and thatthe failure to provide such estoppel certificate harmed the landlord in thatthey were allegedly denied favorable terms on a refinancing of the property andwere allegedly prevented from completing a timely sale of the property.Sellers’ allege damages of approximately $1.5 million. We have asserted damagesin excess of $8 million. We believe we have meritorious defenses to sellers’claims and intend to vigorously defend any claims made against us in thismatter.

 

19

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

 

(a) Exhibits

 
| 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   |   | Credit Agreement, dated as  of April 3, 2001, by and among F.Y.I. Incorporated, Bank of America, N.A.,  and the other signatories thereto (Incorporated by reference to Exhibit 10.1  on the Company’s Form 10-Q filedNovember 14, 2001)                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2   |   | First Amendment to Credit  Agreement, dated as of June 27, 2001, by and among F.Y.I. Incorporated, Bank  of America, N.A., and the other signatories thereto (Incorporated by  reference to Exhibit 10.92 on the Company’s Form 10-Q filed August 14, 2001)                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3   |   | Second Amendment to Credit  Agreement, dated as of September 27, 2002 between SOURCECORP, Incorporated,  Bank of America, N.A., and the other signatories thereto (Incorporated by  reference to Exhibit 10.1 on the Company’s Form 10-Q filed November 14, 2002)                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4   |   | Third Amendment to Credit  Agreement, dated as of March 26, 2003 by and among SOURCECORP, Incorporated,  Bank of America, N.A., and the other Agents and Lenders party hereto  (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed  May 13, 2003)                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5   |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Bank of America, N.A. (Incorporated by reference to  Exhibit 10.86 to the Company’s Form 10-K filed March 31, 2003)                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of SunTrust Bank (Incorporated by reference to Exhibit  10.87 to the Company’s Form 10-K filed March 31, 2003)                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of BNP Paribas (Incorporated by reference to Exhibit 10.88  to the Company’s Form 10-K filed March 31, 2003)                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of First Union National Bank (Incorporated by reference to  Exhibit 10.89 to the Company’s Form 10-K filed March 31, 2003)                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of The Bank of Nova Scotia (Incorporated by reference to  Exhibit 10.90 to the Company’s Form 10-K filed March 31, 2003)                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of JPMorgan Chase Bank formerly known as The Chase  Manhattan Bank (Incorporated by reference to Exhibit 10.91 to the Company’s  Form 10-K filed March 31, 2003) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Wachovia Bank, N.A. (Incorporated by reference to  Exhibit 10.92 to the Company’s Form 10-K filed March 31, 2003)                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.12  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Washington Mutual Bank (Incorporated by reference to  Exhibit 10.93 to the Company’s Form 10-K filed March 31, 2003)                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Wells Fargo Bank Texas, National Association  (Incorporated by reference to Exhibit 10.94 to the Company’s Form 10-K filed  March 31, 2003)                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.14  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Bank One, NA (Incorporated by reference to Exhibit  10.95 to the Company’s Form 10-K filed March 31, 2003)                                                    |

 

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| 10.15  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Texas Capital Bank, National Association (Incorporated  by reference to Exhibit 10.96 to the Company’s Form 10-K filed March 31,  2003) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Bank of America, N.A. (Incorporated by reference to  Exhibit 10.7 to the Company’s Form 10-Q filed May 13, 2003)                         |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of The Bank of Nova Scotia (Incorporated by reference to  Exhibit 10.8 to the Company’s Form 10-Q filed May 13, 2003)                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.18  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Bank One, N.A. (Incorporated by reference to Exhibit  10.9 to the Company’s Form 10-Q filed May 13, 2003)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.19  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of BNP Paribas (Incorporated by reference to Exhibit 10.10  to the Company’s Form 10-Q filed May 13, 2003)                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.20  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of JPMorgan Chase Bank (Incorporated by reference to  Exhibit 10.11 to the Company’s Form 10-Q filed May 13, 2003)                          |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.21  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Suntrust Bank (Incorporated by reference to Exhibit  10.12 to the Company’s Form 10-Q filed May 13, 2003)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.22  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Washington Mutual Bank (Incorporated by reference to  Exhibit 10.13 to the Company’s Form 10-Q filed May 13, 2003).                      |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.23  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Wells Fargo Bank, N.A. (Incorporated by reference to  Exhibit 10.14 to the Company’s Form 10-Q filed May 13, 2003)                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.24  |   | F.Y.I. Incorporated 1995  Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Company’s  Registration Statement on Form S-1 (Registration No. 33-98608) effective  January 12, 1996)                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.25  |   | SOURCECORP, Incorporated  2002 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 to  the Company’s Form 10-Q filed August 14, 2002)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 32.2   |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |

 

(b) Reports on Form 8-K

 

On August 6, 2003, the Company filed a Current Report on Form 8-K withthe Commission dated August 6, 2003, reporting, under Item 5 and Item 7thereto, the filing of a press release to announce the departure of theCompany’s Chief Operating Officer and reporting, under Item 7 and Item 12thereto, the filing of a press release to announce its financial results forthe second quarter ended June 30, 2003.

 

OnNovember 5, 2003, the Company filed a Current Report on Form 8-K with theCommission dated November 5, 2003, reporting under Item 7 and Item 12 thereto,the filing of a press release to announce its financial results for the thirdquarter ended September 30, 2003.

 

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**SIGNATURES**

 

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

 
|                     | SOURCECORP, INCORPORATED |
|--------------------------|--------------------------|
|                     |                     |   |
| Date:  November 13, 2003 | By:                      | /s/  ED H. BOWMAN, JR. |   |
|                     |                     | Ed  H. Bowman, Jr. Chief Executive Officer and President |
|                     |                     |   |
| Date:  November 13, 2003 | By:                      | /s/  BARRY L. EDWARDS |   |
|                     |                     | Barry  L. EdwardsExecutive  Vice President and Chief Financial Officer  (Principal Financial and  Accounting Officer) |
|                          |                          |  |  |  |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                        |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                |   | Credit Agreement, dated as  of April 3, 2001, by and among F.Y.I. Incorporated, Bank of America, N.A.,  and the other signatories thereto (Incorporated by reference to Exhibit 10.1  on the Company’s Form 10-Q filedNovember 14, 2001)                                                                                                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2                |   | First Amendment to Credit  Agreement, dated as of June 27, 2001, by and among F.Y.I. Incorporated, Bank  of America, N.A., and the other signatories thereto (Incorporated by  reference to Exhibit 10.92 on the Company’s Form 10-Q filed August 14, 2001)                                                                                                       |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3                |   | Second Amendment to Credit  Agreement, dated as of September 27, 2002 between SOURCECORP, Incorporated,  Bank of America, N.A., and the other signatories thereto (Incorporated by  reference to Exhibit 10.1 on the Company’s Form 10-Q filed November 14, 2002)                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4                |   | Third Amendment to Credit  Agreement, dated as of March 26, 2003 by and among SOURCECORP, Incorporated,  Bank of America, N.A., and the other Agents and Lenders party hereto  (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed  May 13, 2003)                                                                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5                |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Bank of America, N.A. (Incorporated by reference to  Exhibit 10.86 to the Company’s Form 10-K filed March 31, 2003)                                           |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6                |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of SunTrust Bank (Incorporated by reference to Exhibit  10.87 to the Company’s Form 10-K filed March 31, 2003)                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7                |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of BNP Paribas (Incorporated by reference to Exhibit 10.88  to the Company’s Form 10-K filed March 31, 2003)                                                     |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8                |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of First Union National Bank (Incorporated by reference to  Exhibit 10.89 to the Company’s Form 10-K filed March 31, 2003)                                       |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9                |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of The Bank of Nova Scotia (Incorporated by reference to  Exhibit 10.90 to the Company’s Form 10-K filed March 31, 2003)                                         |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10               |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of JPMorgan Chase Bank formerly known as The Chase  Manhattan Bank (Incorporated by reference to Exhibit 10.91 to the Company’s  Form 10-K filed March 31, 2003) |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.11               |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Wachovia Bank, N.A. (Incorporated by reference to  Exhibit 10.92 to the Company’s Form 10-K filed March 31, 2003)                                             |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.12               |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Washington Mutual Bank (Incorporated by reference to  Exhibit 10.93 to the Company’s Form 10-K filed March 31, 2003)                                          |
|                |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 10.13               |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Wells Fargo Bank Texas, National Association  (Incorporated by reference to Exhibit 10.94 to the Company’s Form 10-K filed  March 31, 2003)                   |

 

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| 10.14  |   | Extension Agreement, effective  April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders party  thereto, Bank of America, N.A., and Banc of America Securities LLC, executed  on behalf of Bank One, NA (Incorporated by reference to Exhibit 10.95 to the  Company’s Form 10-K filed March 31, 2003)                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.15  |   | Extension Agreement,  effective April 3, 2002 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A., and Banc of America Securities LLC,  executed on behalf of Texas Capital Bank, National Association (Incorporated  by reference to Exhibit 10.96 to the Company’s Form 10-K filed March 31,  2003) |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Bank of America, N.A (Incorporated by reference to  Exhibit 10.7 to the Company’s Form 10-Q filed May 13, 2003)                          |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of The Bank of Nova Scotia (Incorporated by reference to  Exhibit 10.8 to the Company’s Form 10-Q filed May 13, 2003)                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.18  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Bank One, N.A. (Incorporated by reference to Exhibit  10.9 to the Company’s Form 10-Q filed May 13, 2003)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.19  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of BNP Paribas (Incorporated by reference to Exhibit 10.10  to the Company’s Form 10-Q filed May 13, 2003)                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.20  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC, executed  on behalf of JPMorgan Chase Bank (Incorporated by reference to Exhibit 10.11  to the Company’s Form 10-Q filed May 13, 2003)                          |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.21  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Suntrust Bank (Incorporated by reference to Exhibit  10.12 to the Company’s Form 10-Q filed May 13, 2003)                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.22  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Washington Mutual Bank (Incorporated by reference to  Exhibit 10.13 to the Company’s Form 10-Q filed May 13, 2003).                      |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.23  |   | Extension Agreement,  effective April 3, 2003 among SOURCECORP, Incorporated, each of the Lenders  party thereto, Bank of America, N.A. and Bank of America Securities LLC,  executed on behalf of Wells Fargo Bank, N.A. (Incorporated by reference to  Exhibit 10.14 to the Company’s Form 10-Q filed May 13, 2003)                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.24  |   | F.Y.I. Incorporated 1995  Stock Option Plan (Incorporated by reference to Exhibit 10.1 to the Company’s  Registration Statement on Form S-1 (Registration No. 33-98608) effective  January 12, 1996)                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.25  |   | SOURCECORP, Incorporated  2002 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 to  the Company’s Form 10-Q filed August 14, 2002)                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification Pursuant to  section 302 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 32.2   |   | Certification Pursuant to  section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                    |

 

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