**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-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, 2002,**                                                                                                                                       |
|       |
| **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             ** |

 

**Commissionfile number 0-27444**

 

| **SOURCECORP, INCORPORATED**                                    |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)          |
|                                                            |   |   |
| **DELAWARE**                                                    |   | **75-2560895** |
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |   |
| **3232 MCKINNEY AVENUE, SUITE 1000  DALLAS, TEXAS**             |   | **75204** |
| (Address of principal executive offices)                        |   | (Zip code) |

 

REGISTRANT’S TELEPHONENUMBER, INCLUDING AREA CODE:** (214)740 - 6500**

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

Yes         ý            No  o

 

As of October 31,2002,  17,495,664 shares of theregistrant’s Common Stock, $.01 par value per share, were outstanding.

 

 

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2002**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                          |
|--------------|--------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                               |
| Item 1       | Financial Statements                                                                                               |
|         |                                                                                                               |
|         | Consolidated Balance  Sheets — December 31, 2001 and September 30, 2002 (unaudited)                           |
|         |                                                                                                               |
|         | Consolidated  Statements of Operations — Three and nine months ended September 30, 2001 and  2002 (unaudited) |
|         |                                                                                                               |
|         | Consolidated  Statements of Cash Flows — Nine months ended September 30, 2001 and 2002  (unaudited)           |
|         |                                                                                                               |
|         | Notes to  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**

 

3

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

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

** **
|                                                                                                                                                                            |   | **December 31,  2001** |       | **September 30, 2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|
|                                                                                                                                                                            |   | **(Unaudited)**        |       |
| **ASSETS**                                                                                                                                                                      |   |                   | ** ** |                   | ** ** |
| **CURRENT ASSETS:**                                                                                                                                                             |   |                   |       |                   |       |
| Cash and cash equivalents                                                                                                                                                       |   | $                      | 7,182      |                   | $          | 5,976 |   |
| Accounts and notes  receivable, less allowance for doubtful accounts of $19,888 and $12,114,  respectively                                                                      |   | 88,547                 |       | 87,486                 |       |
| Inventories                                                                                                                                                                     |   | 2,587                  |       | 3,005                  |       |
| Deferred income taxes                                                                                                                                                           |   | 9,805                  |       | 9,834                  |       |
| Prepaid expenses and other  current assets                                                                                                                                      |   | 6,412                  |       | 3,995                  |       |
| Total current assets                                                                                                                                                            |   | 114,533                |       | 110,296                |       |
|                                                                                                                                                                            |   |                   |       |                   |       |
| **PROPERTY, PLANT AND EQUIPMENT**, net of accumulated depreciation of $40,863 and $48,838, respectively                                                                         |   | 41,942                 |       | 40,862                 |       |
| **GOODWILL,**net of amortization of  $22,356                                                                                                                                    |   | 298,519                |       | 315,031                |       |
| **INTANGIBLES,**net of amortization of  $0 and $266, respectively                                                                                                               |   | —                 |       | 4,174                  |       |
| **OTHER NONCURRENT ASSETS**                                                                                                                                                     |   | 8,077                  |       | 9,255                  |       |
|                                                                                                                                                                            |   |                   |       |                   |       |
| Total assets                                                                                                                                                                    |   | $                      | 463,071    |                   | $          | 479,618 |   |
|                                                                                                                                                                            |   |                   |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                   |   |                   |       |                   |       |
|                                                                                                                                                                            |   |                   |       |                   |       |
| **CURRENT LIABILITIES:**                                                                                                                                                        |   |                   |       |                   |       |
| Accounts payable and accrued  liabilities                                                                                                                                       |   | $                      | 51,087     |                   | $          | 67,471 |   |
| Current maturities of  long-term obligations                                                                                                                                    |   | 324                    |       | 208                    |       |
| Income tax payable                                                                                                                                                              |   | 4,588                  |       | 107                    |       |
| Total current liabilities                                                                                                                                                       |   | 55,999                 |       | 67,786                 |       |
|                                                                                                                                                                            |   |                   |       |                   |       |
| **LONG-TERM OBLIGATIONS**, net of current  maturities                                                                                                                           |   | 116,055                |       | 100,310                |       |
| **DEFERRED INCOME TAX**                                                                                                                                                         |   | 1,839                  |       | 8,380                  |       |
| **OTHER LONG-TERM OBLIGATIONS**                                                                                                                                                 |   | 18,005                 |       | 6,732                  |       |
| Total liabilities                                                                                                                                                               |   | 191,898                |       | 183,208                |       |
|                                                                                                                                                                            |   |                   |       |                   |       |
| **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, 17,341,674 and 17,455,128 shares issued and  outstanding at December 31, 2001 and September 30, 2002, respectively |   | 174                    |       | 176                    |       |
| Additional paid-in-capital                                                                                                                                                      |   | 204,086                |       | 207,538                |       |
| Accumulated other  comprehensive loss                                                                                                                                           |   | (1,242                 | )          | (630                   | )          |
| Retained earnings                                                                                                                                                               |   | 69,137                 |       | 90,308                 |       |
|                                                                                                                                                                            |   | 272,155                |       | 297,392                |       |
| Less — Treasury stock, at  cost, 56,028 shares at December 31, 2001 and September 30, 2002                                                                                 |   | (982                   | )          | (982                   | )          |
| Total stockholders’ equity                                                                                                                                                 |   | 271,173                |       | 296,410                |       |
|                                                                                                                                                                            |   |                   |       |                   |       |
| Total liabilities and  stockholders’ equity                                                                                                                                |   | $                      | 463,071    |                   | $          | 479,618 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

4

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(IN THOUSANDS, EXCEPT PER SHAREDATA)**

** **
|                                             |   | **Three  Months Ended September 30,** |    | **Nine Months Ended September 30,** |   |
|--------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                             |   | **2001**                              |    | **2002**                            |   | **2001** |   | **2002** |   |
|                                             |   | **(Unaudited)**                       |    | **(Unaudited)**                     |   |
| **REVENUE**                                      |   | $                                     | 106,239 |                                | $      | 107,465 |   | $ | 354,548 |   | $ | 316,536 |   |
|                                             |   |                                  |    |                                |   |   |   |   |   |
| **COST OF SERVICES**                             |   | 61,554                                |    | 64,683                              |   | 210,418 |   | 190,216 |   |
| **SPECIAL CHARGES**                              |   | —                                |    | —                              |   | 417 |   | — |   |
| **DEPRECIATION**                                 |   | 3,054                                 |    | 3,578                               |   | 11,203 |   | 10,672 |   |
| Gross profit                                     |   | 41,631                                |    | 39,204                              |   | 132,510 |   | 115,648 |   |
| **SELLING, GENERAL AND ADMINISTRATIVE EXPENSES** |   | 23,380                                |    | 25,154                              |   | 78,299 |   | 76,182 |   |
| **SPECIAL CHARGES**                              |   | (5,741                                | )       | —                              |   | 62,167 |   | — |   |
| **AMORTIZATION**                                 |   | 2,454                                 |    | 89                                  |   | 7,506 |   | 267 |   |
| Operating income (loss)                          |   | 21,538                                |    | 13,961                              |   | (15,462 | ) | 39,199 |   |
|                                             |   |                                  |    |                                |   |   |   |   |   |
| **OTHER (INCOME) EXPENSE:**                      |   |                                  |    |                                |   |   |   |   |   |
| Interest expense                                 |   | 2,117                                 |    | 1,555                               |   | 7,578 |   | 4,592 |   |
| Interest income                                  |   | (39                                   | )       | (28                                 | )      | (171 | ) | (79 | ) |
| Other (income) expense, net                      |   | 165                                   |    | 75                                  |   | 131 |   | 539 |   |
| Income (loss) before income  taxes               |   | 19,295                                |    | 12,359                              |   | (23,000 | ) | 34,147 |   |
|                                             |   |                                  |    |                                |   |   |   |   |   |
| **PROVISION (BENEFIT) FOR INCOME TAXES**         |   | 7,332                                 |    | 4,696                               |   | (527 | ) | 12,976 |   |
| **NET INCOME (LOSS)**                            |   | $                                     | 11,963  |                                | $      | 7,663 |   | $ | (22,473 | ) | $ | 21,171 |   |
|                                             |   |                                  |    |                                |   |   |   |   |   |
| **NET INCOME (LOSS) PER COMMON SHARE:**          |   |                                  |    |                                |   |   |   |   |   |
| **BASIC**                                        |   | $                                     | 0.70    |                                | $      | 0.44 |   | $ | (1.36 | ) | $ | 1.22 |   |
| **DILUTED**                                      |   | $                                     | 0.67    |                                | $      | 0.44 |   | $ | (1.36 | ) | $ | 1.20 |   |
|                                             |   |                                  |    |                                |   |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES  OUTSTANDING:** |   |                                  |    |                                |   |   |   |   |   |
| **BASIC**                                        |   | 16,969                                |    | 17,358                              |   | 16,569 |   | 17,319 |   |
| **DILUTED**                                      |   | 17,779                                |    | 17,369                              |   | 16,569 |   | 17,688 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

5

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(IN THOUSANDS)**

 
|                                                                                      |   | **Nine Months  Ended  September 30,** |    |
|-------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                      |   | **2001**                              |    | **2002** |   |
|                                                                                      |   | **(Unaudited)**                       |    |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 |   |                                  |    |   |   |
| Net income (loss)                                                                         |   | $                                     | (22,473 | ) | $ | 21,171 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by operating activities: |   |                                  |    |   |   |
| Special charges                                                                           |   | 62,584                                |    | — |   |
| Depreciation and amortization                                                             |   | 18,709                                |    | 10,939 |   |
| Deferred tax provision  (benefit)                                                         |   | (5,059                                | )       | 6,512 |   |
| Loss on sale of property,  plant and equipment                                            |   | —                                |    | 242 |   |
| Change in operating assets  and liabilities:                                              |   |                                  |    |   |   |
| Accounts and notes receivable                                                             |   | (8,523                                | )       | 1,714 |   |
| Prepaid expenses and other  assets                                                        |   | (2,086                                | )       | 1,032 |   |
| Accounts payable and accrued  liabilities                                                 |   | (4,908                                | )       | 1,425 |   |
| Net cash provided by operating  activities                                                |   | 38,244                                |    | 43,035 |   |
|                                                                                      |   |                                  |    |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 |   |                                  |    |   |   |
| Purchase of property, plant  and equipment                                                |   | (10,661                               | )       | (8,912 | ) |
| Proceeds from sale of  operating company assets                                           |   | 16,169                                |    | 10 |   |
| Cash paid for acquisitions,  net of cash acquired                                         |   | (59,771                               | )       | (19,151 | ) |
| Net cash used for investing  activities                                                   |   | (54,263                               | )       | (28,053 | ) |
|                                                                                      |   |                                  |    |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |   |                                  |    |   |   |
| Proceeds from exercise of  common stock options                                           |   | 13,308                                |    | 108 |   |
| Proceeds from long-term  obligations                                                      |   | 183,482                               |    | 233,047 |   |
| Principal payments on  long-term obligations                                              |   | (183,061                              | )       | (249,014 | ) |
| Cash paid for debt issuance  costs                                                        |   | (1,460                                | )       | (329 | ) |
| Net cash provided by (used  for) financing activities                                     |   | 12,269                                |    | (16,188 | ) |
|                                                                                      |   |                                  |    |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                             |   | (3,750                                | )       | (1,206 | ) |
|                                                                                      |   |                                  |    |   |   |
| **CASH AND CASH EQUIVALENTS,**beginning of period                                         |   | 9,504                                 |    | 7,182 |   |
|                                                                                      |   |                                  |    |   |   |
| **CASH AND CASH EQUIVALENTS,**end of period                                               |   | $                                     | 5,754   |   | $ | 5,976 |   |
|                                                                                      |   |                                  |    |   |   |
| **SUPPLEMENTAL DATA:**                                                                    |   |                                  |    |   |   |
| Cash paid for:                                                                            |   |                                  |    |   |   |
| Income taxes                                                                              |   | $                                     | 5,382   |   | $ | 11,007 |   |
| Interest                                                                                  |   | $                                     | 7,393   |   | $ | 4,595 |   |
|                                                                                      |   |                                  |    |   |   |
| **NONCASH FINANCING TRANSACTIONS:**                                                       |   |                                  |    |   |   |
| Common stock issued for  accrued earnouts and holdbacks                                   |   | $                                     | 17,348  |   | $ | 3,335 |   |
| Assets acquired through  capital lease agreements                                         |   | $                                     | —  |   | $ | 125 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

6

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**SOURCECORP*,* INCORPORATED AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.  Basis of Presentation:**

 

The accompanying consolidatedfinancial statements and related notes to consolidated financial statementsinclude the accounts of SOURCECORP, Incorporated and subsidiaries(collectively, the “Company”).

 

In the opinion of management,the accompanying consolidated financial statements include all accounts and theadjustments necessary to present fairly the Company's financial position atSeptember 30, 2002, results of operations for the three and nine months endedSeptember 30, 2001 and 2002, and cash flows for the nine months ended September30, 2001 and 2002. All significant intercompany transactions have beeneliminated. Although management believes that the disclosures are adequate tomake the information presented not misleading, certain information and footnotedisclosures normally included in annual financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to the rules and regulations of the Securities and ExchangeCommission (the “Commission”). These consolidated financial statements shouldbe read in conjunction with the Company's consolidated financial statements andthe related notes thereto in the Annual Report on Form 10-K filed with theCommission on April 1, 2002, as amended by the Form 10-K/A filed with theCommission on April 10, 2002.  Theresults of operations for the nine-month periods ended September 30, 2001 and2002 may not be indicative of the results for the full year.

 

**2.  New Accounting Standards:**

 

*RecentAccounting Pronouncements*

 

In June 2001, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.” SFAS No. 141 requires the use of the purchasemethod of accounting for all business combinations initiated afterJune 30, 2001, thereby eliminating the pooling-of-interests method ofaccounting. SFAS No. 141 also addresses the recognition and measurement ofgoodwill and other intangible assets acquired in a business combination. Theadoption of SFAS No. 141 by the Company on July 1, 2001, did not havea significant effect on the Company’s financial statements.

 

As required by the FASB, the Company adopted theprovisions of SFAS No. 142 on January 1, 2002. Upon the adoption ofSFAS No. 142, goodwill and intangible assets that have indefinite usefullives will not be amortized but rather will be tested at least annually forimpairment.  At January 1, 2002, theCompany compared the fair values of the reporting units to their carryingvalues.  In determining the fair valuesof the reporting units, the Company used the discounted cash flow method andthe market value approach method.  Sincethe fair values of all reporting units exceeded the carrying values, noimpairment was recorded at January 1, 2002.

 

Other intangible assets with definite lives will continueto be amortized over their useful lives. The intangible assets with definite lives were acquired in the 2002acquisition.  See Note 4.

 

7

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The following table reflects the effect of SFAS No. 142on net income and earnings per share as if SFAS No. 142 had been in effect for2001 (in thousands):

 
|                                                  |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                  |   | **2001**                              |   | **2002**                             |   | **2001** |   | **2002** |   |
| Net income (loss) as reported                         |   | $                                     | 11,963 |                                 | $      | 7,663 |   | $ | (22,473 | ) | $ | 21,171 |   |
| Add back goodwill  amortization, net of tax provision |   | 2,131                                 |   | —                               |   | 6,445 |   | — |   |
| Adjusted net income (loss)                            |   | $                                     | 14,094 |                                 | $      | 7,663 |   | $ | (16,028 | ) | $ | 21,171 |   |
|                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Basic earnings per share:                             |   |                                  |   |                                 |   |   |   |   |   |
| Reported basic earnings (loss)  per share             |   | $                                     | 0.70   |                                 | $      | 0.44 |   | $ | (1.36 | ) | $ | 1.22 |   |
| Add back goodwill  amortization, net of tax provision |   | 0.13                                  |   | —                               |   | 0.39 |   | — |   |
| Adjusted basic earnings (loss)  per share             |   | $                                     | 0.83   |                                 | $      | 0.44 |   | $ | (0.97 | ) | $ | 1.22 |   |
|                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Diluted earnings per share:                           |   |                                  |   |                                 |   |   |   |   |   |
| Reported diluted earnings  (loss) per share           |   | $                                     | 0.67   |                                 | $      | 0.44 |   | $ | (1.36 | ) | $ | 1.20 |   |
| Add back goodwill  amortization, net of tax provision |   | 0.12                                  |   | —                               |   | 0.39 |   | — |   |
| Adjusted diluted earnings  (loss) per share           |   | $                                     | 0.79   |                                 | $      | 0.44 |   | $ | (0.97 | ) | $ | 1.20 |   |

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” Thisstatement supercedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The statementretains the previously existing accounting requirements related to therecognition and measurement of the impairment of long-lived assets to be held andused while expanding the measurement requirements of long-lived assets to bedisposed of by sale to include discontinued operations. It also expands thepreviously existing reporting requirements for discontinued operations toinclude a component of an entity that either has been disposed of or isclassified as held for sale. As required by the FASB, the Company adopted SFASNo. 144 on January 1, 2002, and tested the long-lived assets forimpairment utilizing expected future undiscounted cash flows.  This evaluation indicated that there was notan asset impairment for long-lived assets.

 

As required by the FASB, the Company adopted FASBEmerging Issues Task Force (“EITF”) Issue 01-14, “Income StatementCharacterization of Reimbursements Received for ‘Out-of-Pocket’ ExpensesIncurred” on January 1, 2002.  ThisIssue requires that reimbursements for out-of-pocket expenses such as, airfare,hotels, mileage, etc., be characterized as revenue in the income statement.  The effect of this reclassification on thethree months ended September 30, 2001 was $3.2 million increase in revenue,$2.6 million increase in cost of services and $0.6 million increase in selling,general and administrative expenses and no effect on net income.  The effect of this reclassification on thenine months ended September 30, 2001 was $10.3 million increase in revenue,$8.9 million increase in cost of services and $1.4 million increase in selling,general and administrative expenses and no effect on net income.  Prior quarter amounts have been reclassifiedto conform to the current quarter presentation.

 

**3.  Strategic Realignment Plan**

 

During the second and third quarters of 2001, theCompany completed its strategic realignment plan, in which the Companyidentified certain non-strategic operating units for divestiture orclosure.  The Company incurred a $68.3million charge, included as special charges in the statement of operations, forthe three months ended June 30, 2001 and a $5.7 million gain for the threemonths ended September 30, 2001 for a total loss of $62.6 million due torealignment costs in 2001.

 

8

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During the nine months ended September 30, 2002, theactivity related to the realignment plan has been settlements of legal claims,contract terminations, various selling expenses, and the write-down of certainreceivables related to operating units divested and closed.  The following table reflects the realignmentactivity for the nine months ended September 30, 2002 (in millions):

 
|                        |   | **January 1, 2002** |   | **Settlements** |   | **September 30, 2002** |   |
|-----------------------------|--------|---------------------|--------|-----------------|--------|------------------------|--------|
| Realignment Costs Liability |   | $                   | 5.8    |            | $      | 3.5                    |   | $ | 2.3 |   |
|                             |        |                     |        |                 |        |                        |        |  |  |  |

 

TheSeptember 30, 2002 realignment costs liability balance consists of accruedlitigation, contract termination costs, lease payments and various disposalexpenses.

 

**4.  Business Combinations**

 

*2002Acquisitions*

 

Effective January 1, 2002, the Company acquired UnitedInformation Services, Inc. (“UIS”), located in Iowa, and expanded the Company’sstatement solutions group, which had existing locations in Arizona and NewYork.  The aggregate consideration paidfor UIS consisted of $17.2 million in cash. Also, the former shareholders of UIS are eligible to receive up to anadditional $10.0 million in the Company’s common stock and cash if there is nobreach in representations and warranties of the acquisition agreement, andcertain future revenue and earnings targets are achieved.  The preliminary allocation of the purchaseprice is set forth below (in thousands):

 
| Consideration Paid                            |   | $      | 17,160 |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Estimated Fair Value of  Identifiable Assets: |   |   |   |
| Cash                                          |   | 1,944  |   |
| Receivables                                   |   | 615    |   |
| Prepaid expenses                              |   | 157    |   |
| Property, plant and  equipment, net           |   | 359    |   |
| Other assets                                  |   | 379    |   |
| Total Assets                                  |   | 3,454  |   |
| Estimated Fair Value of  Liabilities:         |   |   |   |
| Accounts payable and accrued  expenses        |   | (1,824 | )      |
| Accrued compensation                          |   | (524   | )      |
| Deferred tax liability                        |   | (98    | )      |
| Note payable                                  |   | (305   | )      |
| Total Liabilities                             |   | (2,751 | )      |
|                                          |   |   |   |
| Goodwill and other  intangibles               |   | $      | 16,457 |   |

 

Of the $16.5 million of goodwill and other intangiblesrecorded from the acquisition, $4.0 million was assigned to customerrelationships with a useful life of 15 years and $0.5 million was assigned tonon-compete agreements with a useful life of 5 years.  The remaining goodwill of $12.0 million has an indefinite lifeand will be tested annually for impairment per the requirements of SFAS No.142.

 

The estimated fair market values reflected above arebased on preliminary estimates and assumptions and are subject to revision. Inmanagement’s opinion, the preliminary allocations are not expected to bematerially different from the final allocations, which will be completed byDecember 31, 2002.

 

9

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*Goodwill and Intangibles*

 

Thechanges in the carrying value of goodwill and intangibles are as follows (inthousands):

 

Goodwill:

 
|                                  |   | **Information  Management and  Distribution** |    | **Healthcare, Regulatory  and Legal Compliance** |   | **Total** |   |
|---------------------------------------|--------|-----------------------------------------------|---------|--------------------------------------------------|--------|-----------|--------|
| Net balance as of January 1,  2002    |   | $                                             | 169,139 |                                             | $      | 129,380   |   | $ | 298,519 |   |
| Goodwill Acquired                     |   | 12,017                                        |    | —                                           |   | 12,017    |   |
| Additional Accrued  Consideration     |   | 3,152                                         |    | 1,343                                            |   | 4,495     |   |
| Net balance as of September  30, 2002 |   | $                                             | 184,308 |                                             | $      | 130,723   |   | $ | 315,031 |   |

 

Intangibles:

 
|                   | **September 30, 2002**   |   |
|------------------------|--------------------------|--------|
|                   | **Gross Carrying Value** |   | **Accumulated  Amortization** |   | **Net Intangibles** |   |
| Customer Relationships | $                        | 4,000  |   | $ | (200 | )  | $ | 3,800 |   |
| Non Compete Agreements | 440                      |   | (66 | )  | 374 |   |
| Total                  | $                        | 4,440  |   | $ | (266 | )  | $ | 4,174 |   |
|                        |                          |        |  |  |  |  |  |  |  |  |

 

Aggregate amortization expense related tointangibles for the nine months ended September 30, 2002 was $0.3 million.  Estimated amortization expense for theperiods ended December 31, 2003 through December 31, 2006 is $0.4 millionannually.  Thereafter, annualamortization expense is estimated to be $0.3 million through December 31, 2016.

 

*ContingentConsideration*

 

Certain of our acquisitions are subject to adjustmentsin overall consideration and recorded goodwill based upon the achievement ofspecified revenue and/or earnings targets generally over one to three yearperiods. During the first nine months of 2002, we paid consideration of $3.1million in cash and 112,374 shares of common stock at an average price of$29.28 in relation to contingent consideration agreements that have beenfinalized.

 

In certain agreements, the Company has the option ofchanging the payment mix to use common stock versus cash in satisfying theliability. Upon review of current market conditions, the Company finds itfavorable to satisfy its currently recorded earnout liabilities in cash ratherthan common stock.  As such, a reclassificationof $7.1 million of earnout liabilities from long-term obligations to accountspayable and accrued liabilities was made in the current quarter.  Management's evaluation of the cumulativeearnings of acquired companies through September 30, 2002 indicates thatcertain acquired companies have met specified earnings targets beyond areasonable doubt; therefore the Company has accrued aggregate additionalconsideration of approximately $19.4 million, which is classified as accountspayable and accrued liabilities and is expected to be settled in cash.

 

Not all of the periods applicable for the earnouttargets have been completed and additional amounts may be payable in futureperiods under the terms of the agreements. If all earnout targets under the current agreements were achieved, themaximum contingent consideration to be paid would be $47.1 million, includingthe $19.4 million liability recorded as of September 30, 2002. In accordancewith the agreements, the Company has the option to satisfy $26.7 million of the$47.1 million potential liability in common stock.  The earnout payments would be made as outlined in the agreementsand paid over the next three years, with the final payment made in 2005.

 

**5.  Weighted Average Shares Outstanding**

 

Basic and diluted net income per common share werecomputed in accordance with SFAS No. 128, “Earnings Per Share.” The differencesbetween basic weighted average common shares and diluted weighted averagecommon shares and common stock equivalents are as follows (in thousands):

 
|                                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                |   | **2001**                              |   | **2002**                             |   | **2001** |   | **2002** |   |
| Basic weighted average common shares                                |   | 16,969                                |   | 17,358                               |   | 16,569 |   | 17,319 |   |
| Weighted average options,  warrants and other accrued consideration |   | 810                                   |   | 11                                   |   | — |   | 369 |   |
| Diluted weighted average  common shares                             |   | 17,779                                |   | 17,369                               |   | 16,569 |   | 17,688 |   |

 

AtSeptember 30, 2001 and 2002, approximately 3.1 million and 3.6 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.

 

10

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**6.  Segment Reporting**

 

In connection with the 2001strategic realignment plan, the Company reduced the number of business segmentsfrom four to two to reflect the go-forward segment focus.  At January 1, 2002, the Company transferredfour operating units from the Healthcare, Regulatory and Legal Compliance segmentto the Information Management and Distribution segment and one operating unitfrom the Information Management and Distribution segment to the Healthcare,Regulatory and Legal Compliance segment. These transfers were completed to better align these operating units’results with operating units of similar core competencies.  The net effect of transferring theseoperating units on the 2001 segment information is an increase in theInformation Management and Distribution segment’s revenue and income beforetaxes of $6.9 million and $0.6 million, respectively for the three months endedSeptember 30, 2001, and $21.5 million and $2.8 million, respectively forthe nine months ended September 30, 2001. The identified 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.

 

**Healthcare, Regulatory and Legal Compliance.**  Thissegment includes operations that provide the following services: medicalrecords release; off-site active storage of a healthcare institutions’ medicalrecords; online delivery of images of selected medical records; temporarystaffing services; providing attending physicians’ statements for life andhealth insurance underwriting; managed care compliance reviews; legal claimsadministration; and professional economic research services and litigation support.

 

The Company measures segmentprofit as income before income taxes. The Company has reclassified the 2001amounts to be consistent with the new segment reporting.  Information on the revised segments follows(in thousands):

 
|                               |   | **THREE  MONTHS ENDED SEPTEMBER 30, 2002**     |       |
|------------------------------------|--------|------------------------------------------------|------------|
|                               |   | **Information  Management  and  Distribution** |       | **Healthcare,  Regulatory  and  Legal Compliance** |   | **Divestitures, Closures  and  Special Charges** |   | **Consolidated** |   |
| Revenue                            |   | $                                              | 62,072     |   | $ | 45,393 |   | $ | — |   | $ | 107,465 |   |
| Income (loss) before income  taxes |   | 5,930                                          |       | 6,429 |   | — |   | 12,359 |   |
|                               |   |                                           |       |   |   |   |   |   |   |
|                               |   | **THREE MONTHS ENDED SEPTEMBER 30, 2001**      |       |
|                               |   | **Information  Management  and  Distribution** |       | **Healthcare,  Regulatory  and  Legal Compliance** |   | **Divestitures, Closures  and  Special Charges** |   | **Consolidated** |   |
| Revenue                            |   | $                                              | 58,018     |   | $ | 47,132 |   | $ | 1,089 |   | $ | 106,239 |   |
| Income (loss) before income  taxes |   | 5,893                                          |       | 7,804 |   | 5,598 |   | 19,295 |   |
|                               |   |                                           |       |   |   |   |   |   |   |
|                               |   | **NINE MONTHS ENDED SEPTEMBER 30, 2002**       | ** ** |
|                               |   | **Information  Management  and  Distribution** | ** ** | **Healthcare,  Regulatory  and  Legal Compliance** | ** ** | **Divestitures, Closures  and  Special Charges** |   | **Consolidated** |   |
| Revenue                            |   | $                                              | 190,732    |   | $ | 125,804 |   | $ | — |   | $ | 316,536 |   |
| Income (loss) before income  taxes |   | 19,727                                         |       | 14,420 |   | — |   | 34,147 |   |
|                               |   |                                           |       |   |   |   |   |   |   |
|                               |   | **NINE MONTHS ENDED SEPTEMBER 30, 2001**       | ** ** |
|                               |   | **Information  Management  and  Distribution** |       | **Healthcare,  Regulatory  and  Legal Compliance** |   | **Divestitures, Closures  and  Special Charges** |   | **Consolidated** |   |
| Revenue                            |   | $                                              | 177,363    |   | $ | 140,890 |   | $ | 36,295 |   | $ | 354,548 |   |
| Income (loss) before income  taxes |   | 20,568                                         |       | 22,127 |   | (65,695 | ) | (23,000 | ) |
|                                    |        |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

11

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**7.  Derivatives and Other Comprehensive Income(Loss)**

 

Effective January 1, 2001, the Company adopted SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities.” Thisstatement requires that all derivative financial instruments be recognized aseither assets or liabilities in the balance sheet and carried at fair value.Gains or losses on derivatives designated as cash flow hedges are initiallyreported as a component of other comprehensive income and later classified intoearnings in the period in which the hedged item also affects earnings.

 

The Company has entered into an interest rate swap for anotional amount of $50 million to hedge, through March 31, 2003, its exposureto fluctuations in interest rates on $50 million of its debt.  The swap has been designated by the Companyas a cash flow hedge.  As of September30, 2002 the fair value of the interest rate swap was a liability of $1.0million ($0.6 million, net of tax), which was recorded in the accompanyingconsolidated balance sheet in other long-term obligations with an offsetrecorded in equity as other comprehensive loss.  This swap has the effect of fixing the interest rate on $50million of the Company’s debt at 5.775% plus the applicable floating spread(7.025% and 7.275% at December 31, 2001 and September 30, 2002, respectively).

 

SFAS No. 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 to report a measure of all changes inequity of an enterprise that result from transactions and other economic eventsof the period other than transactions with owners.  Comprehensive income is the total of net income and all othernon-owner changes within a company’s equity.

 

Comprehensive income (loss) is defined as the change inequity during a period from transactions and other events, except thoseresulting from investments by and distributions to stockholders.  The components of comprehensive income(loss) for the three and nine month periods ended September 30, 2001 and 2002are as follows (in thousands):

 

|                                                                                                           |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                           |   | **2001**                              |   | **2002**                             |   | **2001** |   | **2002** |   |
| Net income  (loss)                                                                                             |   | $                                     | 11,963 |                                 | $      | 7,663 |   | $ | (22,473 | ) | $ | 21,171 |   |
| Other comprehensive income  (loss):                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Change in fair value of  interest rate swap, net of tax effect of $405, $(121), $811 and $(341),  respectively |   | (660                                  | )      | 252                                  |   | (1,322 | ) | 612 |   |
| Total comprehensive income (loss)                                                                              |   | $                                     | 11,303 |                                 | $      | 7,915 |   | $ | (23,795 | ) | $ | 21,783 |   |

 

12

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**Item 2.     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussion should be read in conjunctionwith our financial statements and the related notes thereto appearing elsewherein this Report on Form 10-Q.

 

**Introduction**

 

Weare a leading provider of business process outsourcing solutions.  We offer customers in information intensiveindustries — such as healthcare, legal, financial services and government — thesolutions to manage their information and document intensive businessprocesses, enabling these organizations to concentrate on their corecompetencies.

 

Since our inception, we haveacquired 72 companies and divested 17 companies.  We evaluate candidates for acquisition and periodically fordivestiture as a part of our strategic plan of providing customers a singlesource solution for business process outsourcing.  The criteria for evaluation include geographic need, additionaltechnology, market growth potential, industry expertise, service expansion tobroaden service offerings, expansion of our customer base, revenue and earningsgrowth potential, and expected sources and uses of capital.

 

**BusinessSegments**

 

Ourrevenue relates to the following segments:

 

**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.

 

**Healthcare, Regulatory and Legal Compliance.**  Thissegment includes operations that provide the following services: medical recordsrelease; off-site active storage of a healthcare institutions’ medical records;online delivery of images of selected medical records; temporary staffingservices; providing attending physicians’ statements for life and healthinsurance underwriting; managed care compliance reviews; legal claimsadministration; and professional economic research services and litigationsupport.

 

**Basis forManagement Discussion and Analysis**

 

Cost of services consistsprimarily of compensation and benefits to employees providing goods andservices to our clients; occupancy costs; equipment costs and supplies. Ourcost of services also includes the cost of products sold for micrographicssupplies and equipment, computer hardware and software and business imagingsupplies 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 andaccounting professional fees and expenses.

 

13

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**THREE MONTHSENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001**

 

Theresults for the three months ended September 30, 2001 include the operatingunits that were divested in the third quarter of 2001.  To understand the ongoing company, thefollowing table is provided to show the results of ongoing operations after proforma adjustments eliminating (i) the results from operations for the divestedcompanies and closed facilities, and the related special charges from thedivestitures and closures, and (ii) the adoption of SFAS No. 142, whicheliminated amortization of goodwill. The following discussion of results of operations for the three monthsended September 30, 2001 and 2002, will concentrate on ongoing operations.

 
|                         |   | **Three Months Ended September 30,  (in thousands)** |    |
|------------------------------|--------|------------------------------------------------------|---------|
|                         |   | **2001**                                             |    | **2002** |   |
|                         |   | **Ongoing Segments**                                 |    | **Pro-forma  Adjustments** |   | **Consolidated** |   | **Ongoing Segments** |   | **Pro-forma  Adjustments** |   | **Consolidated** |   |
| **Revenue**                  |   | $                                                    | 105,150 |   | $ | 1,089 |   | $ | 106,239 |   | $ | 107,465 |   | $ | — |   | $ | 107,465 |   |
| **Gross profit**             |   | 41,512                                               |    | 119 |   | 41,631 |   | 39,204 |   | — |   | 39,204 |   |
| **SG&A**                 |   | 23,110                                               |    | 270 |   | 23,380 |   | 25,154 |   | — |   | 25,154 |   |
| **Operating income (loss)**  |   | 18,402                                               |    | 3,136 |   | 21,538 |   | 13,961 |   | — |   | 13,961 |   |
| **Income (loss) before tax** |   | 16,142                                               |    | 3,153 |   | 19,295 |   | 12,359 |   | — |   | 12,359 |   |
| **Net income (loss)**        |   | 10,250                                               |    | 1,713 |   | 11,963 |   | 7,663 |   | — |   | 7,663 |   |
|                              |        |                                                      |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Ouroperations generated revenues of $107.5 million for the three months endedSeptember 30, 2002, an increase of 2.2% as compared to the same period in2001.  Our revenue is characterized asboth project and recurring.  Projectrevenue consists of one-time projects in which the customer relationship is notguaranteed to continue after project completion.  Project revenue margins are usually higher than our averagemargins and the workload can be highly volatile.  Recurring revenue is characterized by customer relationships thatare generally for one year and may continue for longer.  Recurring revenue is typically based ontransaction volumes sent to us by our customers and these volumes are generallynot contractually guaranteed.  Recurringrevenue generally has lower margins than project revenue and is usually morepredictable.  Project revenue declined$2.2 million from the prior year quarter resulting in a revenue mix shiftbetween our project and recurring revenue. Project revenue accounted for 33.7% of total revenue compared to 36.6%in the prior year’s quarter.  Thedifference between project and recurring revenue is important to the discussionof profitability and margins.

 

Revenuewithin our Information Management and Distribution segment increased 7.0% from$58.0 million for the three months ended September 30, 2001 to $62.1 millionfor the three months ended September 30, 2002. This increase was due primarily to continued strong business volumesfrom our government and mortgage industry customers and the strategic acquisitionof United Information Services, Inc. (“UIS”), a provider of statementprocessing services, during the first quarter of 2002.  Direct mail volumes were down slightlycompared to the prior year quarter due primarily to the decline in industryspending, especially since September 11, 2001, and to customers’ reducedadvertising budgets.  During the currentquarter, the City of New York Human Resources Administration informed us thatwe did not receive their renewal contract award.  This contract has contributed approximately $3 million ofrevenues each quarter in 2002 and is expected to decline during the fourthquarter of 2002.

 

Revenuewithin our Healthcare, Regulatory and Legal Compliance segment decreased 3.7%from $47.1 million for the three months ended September 30, 2001 to $45.4million for the three months ended September 30, 2002.  The decrease was attributable to a declinein project revenue within our claims administration business, which was downapproximately $5.0 million.  Severallarge claims administration cases were completed during the third quarter of2001, while the third quarter of 2002 includes several medium size projects andthe start-up of one large project expected to be materially completed by theend of the first quarter 2003.  Thelower project revenue was partially offset by increased volumes in ourhealthcare medical coding units and in our legal consulting and complianceunits.

 

**Gross profit**

 

Gross profit decreased 5.6% from $41.5 million for thethree months ended September 30, 2001 to $39.2 million for the three monthsended September 30, 2002.  The declinewas due largely to the lower project revenue in claims administration, whichhistorically produces higher margins than our recurring business.  Consequently, gross profit as a percentageof revenue decreased from 39.5% for the three months ended September 30, 2001to 36.5% for the three months ended September 30, 2002.

 

**Selling, general and administrative expenses**

 

SG&A increased 8.8% from $23.1 million, or 22.0% ofrevenue, for the three months ended September 30, 2001 to $25.2 million, or23.4% of revenue, for the three months ended September 30, 2002.  This increase was primarily the result ofincreased national sales and marketing expenses, operational projectmanagement, and technology personnel to support the information managementgrowth strategy.  Additionally, we haveexperienced higher workers’ compensation expense, increased personnel costs dueto higher medical insurance expense and performance based incentive compensation,partially offset by expense control and reduction initiatives implementedduring the first quarter of 2002.

 

**Operatingincome**

 

Operating income decreased 24.1% from $18.4 million, or17.5% of revenue, for the three months ended September 30, 2001 to $14.0million, or 13.0% of revenue, for the three months ended September 30,2002.  The decline in operating incomewas largely attributable to the shift in revenue mix from higher margin projectrevenue to lower margin recurring revenue and the higher SG&A expensesdiscussed above.

 

14

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**Income beforeincome taxes and net income**

 

Income before income taxes decreased 23.4% from $16.1million for the three months ended September 30, 2001 to $12.4 million for thethree months ended September 30, 2002, and net income decreased 25.2% from$10.3 million for the three months ended September 30, 2001 to $7.7 million forthe three months ended September 30, 2002, largely attributable to the itemsdiscussed above.

 

The effective tax rate of 36.5% and 38.0% for the threemonths ended September 30, 2001 and 2002, respectively, differs from thestatutory federal rate of 35.0% principally due to state and local taxes.  The effective tax rate has changed betweenthe years due to acquiring companies in high income tax states and the adoptionof SFAS 142, which eliminated the amortization of goodwill and intangibleassets with indefinite lives for financial reporting purposes.

 

**NINE MONTHSENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001**

 

The results for the nine months ended September 30,2001 include the operating units that were divested in the second and thirdquarters of 2001.  To understand theongoing company, the following table is provided to show the results of ongoingoperations after pro forma adjustments eliminating (i) the results fromoperations for the divested companies and closed facilities, and the relatedspecial charges from the divestitures and closures, and (ii) the adoption of SFASNo. 142, which eliminated amortization of goodwill.  The following discussion of results of operations for the ninemonths ended September 30, 2001 and 2002, will concentrate on ongoingoperations.

** **
|                         |   | **Nine Months  Ended September 30,  (in thousands)** |    |
|------------------------------|--------|------------------------------------------------------|---------|
|                         |   | **2001**                                             |    | **2002** |   |
|                         |   | **Ongoing  Segments**                                |    | **Pro-forma  Adjustments** |   | **Consolidated** |   | **Ongoing  Segments** |   | **Pro-forma  Adjustments** |   | **Consolidated** |   |
| **Revenue**                  |   | $                                                    | 318,253 |   | $ | 36,295 |   | $ | 354,548 |   | $ | 316,536 |   | $ | — |   | $ | 316,536 | ** ** |
| **Gross profit**             |   | 125,162                                              |    | 7,348 |   | 132,510 |   | 115,648 |   | — |   | 115,648 | ** ** |
| **SG&A**                 |   | 68,123                                               |    | 10,176 |   | 78,299 |   | 76,182 |   | — |   | 76,182 | ** ** |
| **Operating income (loss)**  |   | 57,039                                               |    | (72,501 | ) | (15,462 | ) | 39,199 |   | — |   | 39,199 | ** ** |
| **Income (loss) before tax** |   | 49,430                                               |    | (72,430 | ) | (23,000 | ) | 34,147 |   | — |   | 34,147 | ** ** |
| **Net income (loss)**        |   | 31,388                                               |    | (53,861 | ) | (22,473 | ) | 21,171 |   | — |   | 21,171 | ** ** |
|                              |        |                                                      |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Revenue decreased 0.5% from$318.3 million for the nine months ended September 30, 2001 to $316.5 millionfor the nine months ended September 30, 2002. A decline in project revenue, which was down $15.4 million for the ninemonths ended September 30, 2002 compared to the prior year, and lower volumesin direct mail were the primary drivers.

 

Project revenue was downprimarily due the number of very large legal claims administration casescompleted during the first nine months of 2001 while the current year consistedmostly of medium size projects with one large project commencing at the end ofSeptember that is expected to conclude during the first quarter of 2003.  Project revenue accounted for 31.5% of totalrevenue for the nine months ended September 30, 2002 compared with 36.2% forthe nine months ended September 30, 2001. Revenue in direct mail was down $4.5 million or 12.2% compared to theprior year primarily due to the decline in industry spending, especially sinceSeptember 11, 2001, and to customers’ reduced advertising budgets.  The weaknesses in project revenue and directmail have been offset by increased volumes in information management and theacquisition of UIS in the first quarter of 2002.  The higher volumes in information management have mainly comefrom our governmental and mortgage industry customers.

 

During the third quarter of2002, the City of New York Human Resources Administration informed us that wedid not receive their renewal contract award. This contract has contributed approximately $9 million of revenue yearto date in 2002 and is expected to decline during the fourth quarter of 2002.

 

**Gross Profit**

 

Gross profit decreased 7.6%from $125.2 million for the nine months ended September 30, 2001 to $115.6million for the nine months ended September 30, 2002. The decline was primarilydue to lower project revenue, which historically produces higher margins thanour recurring business, pricing pressures and lower volumes from direct mail.  Higher costs related to employee benefits,mainly medical insurance costs, and higher workers’ compensation insuranceexpense in the current year put additional pressure on margins.  Consequently, gross profit as a percentageof revenue decreased from 39.3% for the nine months ended September 30, 2001 to36.5% for the nine months ended September 30, 2002.

 

**Selling,general and administrative expenses**

 

SG&A increased 11.8% from$68.1 million, or 21.4% of revenue, for the nine months ended September 30, 2001to $76.2 million, or 24.1% of revenue, for the nine months ended September 30,2002.  This increase was primarily theresult of increased national sales and marketing expenses, operational projectmanagement, and technology personnel to support the information managementgrowth strategy.  Additionally, weexperienced increased personnel costs due to higher medical insurance expenseand performance based incentive compensation, partially offset by expensecontrol and reduction initiatives implemented during the first quarter of 2002.

 

15

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**Operatingincome**

 

Operating income decreased31.3% from $57.0 million, or 17.9% of revenue, for the nine months endedSeptember 30, 2001 to $39.2 million, or 12.4% of revenue, for the nine monthsended September 30, 2002. The decline was largely attributable to the shift inrevenue mix from higher margin project revenue to lower margin recurringrevenue.  Other factors contributing tothe decline were pricing pressures and a highly competitive market place indirect mail and the higher SG&A expenses discussed above.

 

**Incomebefore income taxes and net income**

 

Income before income taxesdecreased 30.9% from $49.4 million for the nine months ended September 30, 2001to $34.1 million for the nine months ended September 30, 2002, and net incomedecreased 32.6% from $31.4 million for the nine months ended September 30, 2001to $21.2 million for the nine months ended September 30, 2002, largely due tothe items discussed above.

 

Theeffective tax rate of 36.5% and 38.0% for the nine months ended September 30,2001 and 2002, respectively, differs from the statutory federal rate of 35.0%principally due to state and local taxes. The effective tax rate has changedbetween the years due to acquiring companies in high income tax states and theadoption of SFAS 142, which eliminated the amortization of goodwill andintangible assets with indefinite lives for financial reporting purposes.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

At September 30, 2002, we had $42.5 million of workingcapital, including $6.0 million of cash. Working capital at December 31, 2001, was $58.5 million, including $7.2million of cash.  For the first ninemonths of 2002, cash provided by operating activities was $43.0 millioncompared to $38.2 million for the same period in 2001.  The increase in cash provided by operatingactivities is primarily attributable to improved collections in accountsreceivable.  Net accounts receivablewere $87.5 million at September 30, 2002 compared to $88.5 million at December31, 2001.  Our days sales outstandingimproved 2 days to 49 days at September 30, 2002 compared to 51 days atDecember 31, 2001.  During the ninemonths ended September 30, 2002, $12.2 million of uncollectible trade receivableswere written-off against the allowance for doubtful accounts.  While these write-offs had no impact on cashflows or operating results during the nine months ended September 30, 2002, weexpect lower estimated tax payments in the fourth quarter of 2002 due to therelated tax deduction.

 

Certain of our acquisitions are subject to adjustmentsin overall consideration based upon the achievement of specified revenue and/orearnings targets generally over one to three year periods.  Under certain agreements, we have the optionof changing the payment mix to use common stock versus cash in satisfying theliability.  Upon review of currentmarket conditions, we believe it is more favorable to satisfy our current recordedobligations in cash rather than in common stock.  As a result,  duringthe  current quarter, a reclassificationof $7.1 million of earnout liabilities from long-term obligations to accountspayable and accrued liabilities was made. This reclassification had no impact on our cash flow from operations.

 

For the nine months ended September 30, 2002, investingactivities consisted of additions to property, plant and equipment of $8.9million and acquisition related payments of $19.2 million.  Acquisition related payments consist of thepurchase of UIS in the first quarter of 2002 and certain other cash paymentsrelated to contingent consideration agreements of past acquisitions.  It is expected that we will pay anadditional $15 million for contingent consideration agreements during theremainder of 2002.

 

Net cash used by financing activities was $16.2 millionfor the nine months ended September 30, 2002, primarily related to payments of$249.0 million on our line of credit, net of proceeds borrowed from our line ofcredit of  $233.0 million.

 

In April 2001, we entered into our line of creditagreement with Bank of America, SunTrust Bank and Wells Fargo Bank, asco-agents (the “2001 Credit Agreement”). Under this agreement, we can from timeto time borrow up to $297.5 million through April 2, 2004, subject tocertain customary borrowing capacity requirements. Meeting these requirementsis highly dependent upon maintaining a minimum level of operating results andthe continued demand for our services among other factors. Effective April 3,2002, we extended $220.0 million of the $297.5 million commitment for anadditional year to April 2, 2005.  InSeptember 2002, additional extensions were granted by member banks, bringingthe total commitment extended to April 2, 2005 to $290.0 million.  We paid fees of approximately $0.3 millionfor extending the commitment.

 

Management believes that ithas sufficient liquidity from its cash flow and its revolving credit facilityto meet ongoing business needs. However, our ability to borrow is contingent on certain leverage andfixed cost coverage ratios.  Afterapplication of such ratios and our total commercial commitments of $8.7 millionfor standby letters of credit, we had $83.6 million available to borrow underour 2001 Credit Agreement as of September 30, 2002.  In September 2002, an amendment was approved that extends thecurrent fixed cost coverage ratio requirement of 1.25 until January 1,2004.  This ratio was set to become morerestrictive in the fourth quarter of 2002 by increasing to 1.50.  Under the amended agreement, the fixed costratio will remain at 1.25 until January 1, 2004 and will increase to 1.35 atall times thereafter.  Additionally,depending on the mix of stock and cash used in our strategic acquisitionprogram, if any, we may need to seek further financing through the public orprivate sale of equity or debt securities. There can be no assurance we could secure such financing if and when itis 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 1,410,444 shares were available as ofSeptember 30, 2002.  The shares availablehave not been reduced for any shares that may be issuable in the future toprevious owners of acquired companies as contingent consideration liabilities.

 

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**CriticalAccounting Policies**

 

The Company has identified the following critical accountingpolicies that, as a result of the judgments, uncertainties, uniqueness andcomplexities of the underlying accounting standards and operations involved,could result in material changes to its financial condition or results ofoperations under different conditions or using different assumptions.  We apply a consistent methodology at the endof each quarter to determine our account balances that require judgmentalanalysis.

 

**Revenue Recognition.**  Our revenue is principallydriven by transaction volumes.  Wegenerally recognize revenue as transactions are completed and accepted bycustomers.  In a few instances, due tocontractual terms and billing cycle cutoffs, we are unable to bill for workcompleted in a certain period.  In thesecases, we recognize the revenue in the month that the work is performed inorder to match the revenue with the cost of services.  The work is billed to the customer according to the terms of theagreement or during the following billing cycle.

 

**Allowance for Doubtful Accounts.**  The allowance for doubtful accounts isgenerally established during the period in which the loss is expected and ismaintained at a level deemed appropriate by management based on historical andother factors that affect collectibility. 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 the Consolidated FinancialStatements.

 

**Long-Lived Asset Impairment.**  As required by SFAS No. 144, managementcontinually evaluates whether events and circumstances indicate that thecarrying value of long-lived assets may not be recoverable. To make thisevaluation, management compares the estimated undiscounted future cash flowsover the remaining life of the long-lived assets to the carrying amount of theassets being evaluated. An impairment loss is recognized to the extent thecarrying amount of assets being evaluated exceeds the expected futureundiscounted cash flow.

 

**Goodwill Impairment.**  At January 1, 2002, we adopted SFASNo. 142, “Goodwill and Other Intangible Assets.” This statement statesthat goodwill and intangible assets that have indefinite useful lives will notbe amortized but rather will be tested at least annually for impairment. Theimpairment test is based on fair value rather than undiscounted cash flows.Additionally, goodwill and intangible assets are tested at a reporting grouplevel rather than the individual operating unit level.  Management utilizes estimates to determinefair value of the reporting units. These estimates include future cash flows, growth rates, capital needs,and projected earning margins among other factors.  Estimates utilized in future calculations could differ fromestimates used in the current period. Future years’ estimates that are unfavorable compared to currentestimates could cause an impairment of goodwill in the given year.

 

**Self-Insurance Liabilities and Reserves. **We are self-insured for workman’s compensation liabilities and asignificant portion of our employees’ medical costs.  We account for our self-insurance programs based on actuarialestimates of the amount of loss inherent in that period’s claims, includinglosses for which claims have not been reported. These loss estimates rely onactuarial observations of ultimate loss experience for similar historicalevents.  We limit our risk by carryingstop-loss policies for significant claims incurred for both workman’scompensation liabilities and medical costs.

 

**Other Loss Contingencies.**  Werecord liabilities when it is probable that a liability has been incurred andthe amount of the loss is reasonably estimable.  Disclosure is required when there is a reasonable possibilitythat the ultimate loss will exceed the recorded provision.  Contingent liabilities are often resolvedover long time periods.  Estimatingprobable losses requires analysis of multiple forecasts that often depend onjudgments about potential actions by third parties such as regulators.

 

**RISKSASSOCIATED WITH FORWARD-LOOKING STATEMENTS**

 

This Report contains certainforward-looking statements such as our intentions, hopes, beliefs, expectations,strategies, predictions or any other variation thereof or comparablephraseology of our future activities or other future events or conditionswithin the meaning of Section 27A of the Securities Act of 1933, as amended(the “Act”), and Section 21E of the Securities Exchange Act of 1934, asamended, which are intended to be covered by the safe harbors created thereby.Investors are cautioned that all forward-looking statements involve risks anduncertainty, including, without limitation, the risk of integrating ouroperating companies, of managing our rapid growth, of the timing and magnitudeof technological advances, of the occurrences of future events that coulddiminish our customers’ needs for our services, of a change in the degree towhich companies continue to outsource business processes, of an adverse outcomein any given legal proceeding or claim, of the denial of insurance on aparticular claim or of a party obligated to provide indemnification beingfinancially unable to do so, as well as such other risks set forth under theheading Risk Factors included in our most recent annual report on Form 10-K.

 

Although we believe that theassumptions underlying the forward-looking statements contained herein arereasonable, any of the assumptions could be inaccurate, and, therefore, therecan be no assurance that the forward-looking statements included in this Reportwill prove to be accurate. In light of the significant uncertainties inherentin the forward-looking statements included herein, the inclusion of suchinformation should not be regarded as a representation by us or any otherperson that our objectives and plans will be achieved.  Further, we disclaim any obligation toupdate any such forward-looking statements, except as required by law.

 

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**Item 3.****                                  ****Quantitativeand Qualitative Disclosures about Market Risk**

 

TheCompany is subject to interest rate risk on its term loans and revolving creditfacility.  Interest rates are fixed onthe indenture and capital lease obligations. The Company has entered into an interest rate swap for a notional amountof $50 million to hedge, through March 31, 2003, its exposure to fluctuationsin interest rates on $50 million of its revolving credit facility.  This swap has the effect of fixing theinterest rate on $50 million of the Company’s debt at 5.775% plus theapplicable floating spread.  The swaphas been designated by the Company as a cash flow hedge.  As of September 30, 2002, the fair value ofthe interest rate swap was a liability of $1.0 million ($0.6 million, net oftax), which was recorded in the accompanying consolidated balance sheet inother long-term obligations with an offset recorded in equity as othercomprehensive loss.

 

**Item 4.****                                  ****Controls andProcedures**

 

(a)           Evaluation of disclosure controls andprocedures.

 

Within the 90 days prior tothe filing date of this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic SEC Filings.

 

(b)           Changes in internal controls.

 

There were no significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

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**PART II.****                       ****OTHER INFORMATION**

 

**Item 1.            Legal Proceedings**

 

We are, from time to time, a party tolitigation arising in the normal course of business.  While we do not believe that we are currently a party to anylitigation required to be disclosed under Item 103 of Regulation S-K of theSecurities Exchange Act of 1934, as amended, and the instructions thereto, thefollowing is a brief description of three of the legal matters that we are involved in.  We do not believe that these actions, norany other actions that we are a party to, will have a material adverse effecton our business or financial condition, however in the event of an adverseoutcome in one or more of our legal proceedings, operating results for a givenquarter may be negatively impacted.

 

*DeBariLitigation*

 

In March 1999, we filed alawsuit styled *DeBari Associates AcquisitionCorp. v. Robert Burnham, Mark Walch, Nortec, LLC, Spencer McElhannon and PengLin*in the Supreme Court of the State of New York (“Nortec Action”).In the Nortec Action, we were seeking a declaratory judgment that RobertBurnham, Mark Walch, Nortec, LLC, Spencer McElhannon and Peng Lin (the “NortecDefendants”) have no interest in Net Data, Inc., a subsidiary of a companyacquired by us in February 1998.  Wedivested the operating assets of Net Data, Inc. as part of our 2001 strategicrealignment plan.  The Nortec Defendantscounterclaimed alleging breach of contract, fraud, breach of fiduciary duty asa joint venturer and unjust enrichment. The trial for the above matter concluded mid-October 2002, with the juryfinding in our favor (i.e. that the Nortec Defendants did not have a right toany part of Net Data, Inc. or any portion of the proceeds from its purchase).  The Nortec Defendants deadline for filing amotion for a judgement notwithstanding the verdict is November 18, 2002.  Following the ruling on any such motion, theparties would have further opportunity to appeal.

 

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

 

On February 24, 1992,MAVRICC Management Systems, Inc. (one of our wholly-owned subsidiaries, theoperating assets of which were divested by us as part of our 2001 strategicrealignment plan) entered into an agreement with Franklin Bank, N.A. wherebyMAVRICC agreed to maintain records for individual IRAs and Keogh Plans and toperform certain activities (specifically described in the contract) necessaryto assist Franklin Bank, N.A. in serving as a custodian for specific IRAs.  On August 6, 2001, Plaintiffs RoyWeatherford, Lois Weatherford, James L. Loper and Alma D. Oweninitiated a class action lawsuit against Franklin Bank, N.A. in Tennessee’sSumner County Circuit Court, Chancellory Division, alleging breach of fiduciaryduty, breach of contract, negligence and violation of the Consumer ProtectionAct.  The Weatherford complaint seekscompensatory and punitive damages from Franklin Bank, N.A.  On September 28, 2001, Franklin Bank,N.A. filed its Third-Party Complaint against MAVRICC for indemnification,alleging that MAVRICC breached the agreement. A hearing on whether a class should be certified is currentlyanticipated to take place sometime in or about December 2002.  We believe we have meritorious defenses andintend to continue to vigorously defend any claims made against us in thismatter.

 

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

 

On February 9, 1995, ManagedCare Professionals, Inc. (one of our wholly-owned subsidiaries) (“MCP”) enteredinto an “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 Sates for which MCP agreed to pay HMA a percentageof gross revenues paid to MCP by the provider (customer).  The duration of the Agreement was for aperiod of five (5) years and expired on February 9, 2000 (“TerminationDate”).  On April 27, 2001, HMA filed alawsuit against MCP in the Circuit Court of the County of St. Louis, State ofMissouri, alleging entitlement to commissions on revenues generated fromproviders after the Termination Date who were initially brought to MCP prior tothe Termination Date.  On August 26,2002, our motion for summary judgement was denied.  The lawsuit is currently scheduled for trial in March 2003.  We believe we have meritorious defenses andintend to continue to vigorously defend any claims made against us in thismatter.

 

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**Item 6.****                                  ****Exhibits andReports on Form 8-K**

 
| (a)    | Exhibits |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 2.1      | Stock Purchase Agreement  dated as of March 31, 2001 by and among F.Y.I. Incorporated, Image Entry  Acquisition Corp. Image Entry Inc., Image Entry of Owsley County Inc., Image  Entry of Indianapolis Inc., Image Entry Federal Systems Inc., Image Entry of  Arkansas Inc. and Image Entry of Alabama Inc. and the Shareholders of Image  Entry Inc., Image Entry of Owsley County Inc., Image Entry of Indianapolis  Inc., Image Entry Federal Systems Inc., Image Entry of Arkansas Inc. and  Image Entry of Alabama Inc. (Incorporated by reference to Exhibit 2.20 to the  Company’s Current Report Form 8-K filed April 12, 2001) |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 2.2      | Certificate of Ownership  and Merger filed with the Secretary of State of Delaware effective February  14, 2002 merging SOURCECORP, Incorporated with and into the Registrant and  changing the name of the Registrant to SOURCECORP, Incorporated (incorporated  by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K  filed February 15, 2002)                                                                                                                                                                                                                                                                   |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 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     | Second  Amendment to Credit Agreement, dated as of September 27, 2002 between  SOURCECORP, Incorporated, Bank of America, N.A., and the other signatories  thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 99.1     | Certification  Pursuant to section 906 of Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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(b)                                Reports on Form 8-K

 

On August 8, 2002, the Company filed a Current Report onForm 8-K with the Commission dated August 7, 2002, reporting under Item 5thereto, the filing of a press release relating to the 2002 second quarter results.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report on Form 10-Q to besigned on its behalf by the undersigned thereunto duly authorized.

 
|                           | SOURCECORP, Incorporated |
|--------------------------------|--------------------------|
|                           |                     |   |
| Date:  November  14, 2002 | By:                      | /s/  Ed H. Bowman, Jr. |
|                           |                     | Ed  H. Bowman, Jr. |
|                           |                     | Chief Executive Officer and  President |
|                           |                     |   |
| Date:  November  14, 2002 | By:                      | /s/  Barry L. Edwards |
|                           |                     | Barry L. Edwards |
|                           |                     | Executive Vice President and Chief  Financial Officer (Principal Financial  and Accounting Officer) |

 

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**CERTIFICATIONS**

 

 

I, Ed H. Bowman, Jr., certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of *SOURCECORP*, Incorporated;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules13a-14 and 15d-14) for theregistrant and we have

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weakness in internal controls;and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officers andI have indicated in this quarterly report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weakness.

 

 
|                           | SOURCECORP, Incorporated |
|--------------------------------|--------------------------|
|                           |                     |   |
| Date:  November  14, 2002 | By:                      | /s/  Ed H. Bowman, Jr. |
|                           |                     | Ed  H. Bowman, Jr. |
|                           |                     | Chief Executive Officer and  President |

 

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**CERTIFICATIONS**

 

 

I, Barry L. Edwards, certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of *SOURCECORP*, Incorporated;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’s other certifying officers andI are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules13a-14 and 15d-14) for theregistrant and we have

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers andI have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent function):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weakness in internalcontrols; and

 

b)             any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officers andI have indicated in this quarterly report whether there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weakness.

 

 
|                           | SOURCECORP, Incorporated |
|--------------------------------|--------------------------|
|                           |                     |   |
| Date:  November  14, 2002 | By:                      | /s/  Barry L. Edwards |
|                           |                     | Barry L. Edwards |
|                           |                     | Executive Vice President and Chief  Financial Officer |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1                 |   | Stock Purchase Agreement  dated as of March 31, 2001 by and among F.Y.I. Incorporated, Image Entry  Acquisition Corp. Image Entry Inc., Image Entry of Owsley County Inc., Image  Entry of Indianapolis Inc., Image Entry Federal Systems Inc., Image Entry of  Arkansas Inc. and Image Entry of Alabama Inc. and the Shareholders of Image  Entry Inc., Image Entry of Owsley County Inc., Image Entry of Indianapolis  Inc., Image Entry Federal Systems Inc., Image Entry of Arkansas Inc. and  Image Entry of Alabama Inc. (Incorporated by reference to Exhibit 2.20 to the  Company’s Current Report Form 8-K filed April 12, 2001) |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2                 |   | Certificate of Ownership  and Merger filed with the Secretary of State of Delaware effective February  14, 2002 merging SOURCECORP, Incorporated with and into the Registrant and  changing the name of the Registrant to SOURCECORP, Incorporated (incorporated  by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K  filed February 15, 2002)                                                                                                                                                                                                                                                                   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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                |   | Second  Amendment to Credit Agreement, dated as of September 27, 2002 between  SOURCECORP, Incorporated, Bank of America, N.A., and the other signatories  thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
|                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
| 99.1                |   | Certification  Pursuant to section 906 of Sarbanes-Oxley Act                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |

 

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