**UNITED STATES**

**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  March 31, 2003.**                                                                                                                                               |
|       |                                                                                                                                                                                              |
| **Or**     |
|       |                                                                                                                                                                                              |
| **o**      | **Transition report pursuant to  Section 13 or 15(d) of the Securities and Exchange Act of 1934**                                                                                                 |
|       |                                                                                                                                                                                              |
|       | **for the transition period  from             to             ** |

 

**Commission file number 0-27444**

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes                            ý                                    No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

 

Yes                            ý                                    No  o

 

As of May 8, 2003, 16,340,652 shares of the registrant’s Common Stock, $.01 par value pershare, were outstanding.

 

 

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**SOURCECORP, INCORPORATED AND SUBSIDIARIES**

**FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                             |
|--------------|-------------------------------------------------------------------------------------------------------|
|         |                                                                                                  |
| Item 1       | Financial Statements                                                                                  |
|         |                                                                                                  |
|         | Consolidated Balance  Sheets — December 31, 2002 and March 31, 2003 (unaudited)                  |
|         |                                                                                                  |
|         | Consolidated  Statements of Operations — Three months ended March 31, 2002 and 2003  (unaudited) |
|         |                                                                                                  |
|         | Consolidated  Statements of Cash Flows — Three months ended March 31, 2002 and 2003  (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,  2002** |       | **March 31,********2003** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------------------|------------|
|                                                                                                                                                                                                   |   |                   |       | **(Unaudited)**           |       |
| **ASSETS**                                                                                                                                                                                             |   |                   | ** ** |                      | ** ** |
| **CURRENT ASSETS:**                                                                                                                                                                                    |   |                   |       |                      |       |
| Cash and cash equivalents                                                                                                                                                                              |   | $                      | 3,217      |                      | $          | 2,542 |   |
| Accounts and notes  receivable, less allowance for doubtful accounts of $12,441 and $12,022,  respectively                                                                                             |   | 78,834                 |       | 84,074                    |       |
| Inventories                                                                                                                                                                                            |   | 2,360                  |       | 2,684                     |       |
| Deferred income taxes                                                                                                                                                                                  |   | 9,012                  |       | 8,384                     |       |
| Prepaid expenses and other  current assets                                                                                                                                                             |   | 3,887                  |       | 4,234                     |       |
| Total current assets                                                                                                                                                                                   |   | 97,310                 |       | 101,918                   |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| **PROPERTY, PLANT AND EQUIPMENT**, net of accumulated depreciation of $53,471 and $56,688, respectively                                                                                                |   | 40,575                 |       | 40,019                    |       |
| **GOODWILL,**net of amortization of  $22,356                                                                                                                                                           |   | 317,256                |       | 321,825                   |       |
| **INTANGIBLES,**net of amortization of  $356 and $443, respectively                                                                                                                                    |   | 4,084                  |       | 3,997                     |       |
| **OTHER NONCURRENT ASSETS**                                                                                                                                                                            |   | 8,382                  |       | 9,198                     |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| Total assets                                                                                                                                                                                           |   | $                      | 467,607    |                      | $          | 476,957 |   |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                          |   |                   |       |                      |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| **CURRENT LIABILITIES:**                                                                                                                                                                               |   |                   |       |                      |       |
| Accounts payable and accrued  liabilities                                                                                                                                                              |   | $                      | 58,029     |                      | $          | 59,213 |   |
| Current maturities of  long-term obligations                                                                                                                                                           |   | 113                    |       | 189                       |       |
| Income tax payable                                                                                                                                                                                     |   | 180                    |       | 6,144                     |       |
| Total current liabilities                                                                                                                                                                              |   | 58,322                 |       | 65,546                    |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| **LONG-TERM OBLIGATIONS**, net of current  maturities                                                                                                                                                  |   | 89,640                 |       | 94,256                    |       |
| **DEFERRED INCOME TAX**                                                                                                                                                                                |   | 11,679                 |       | 12,632                    |       |
| **OTHER LONG-TERM OBLIGATIONS**                                                                                                                                                                        |   | 5,290                  |       | 6,183                     |       |
| Total liabilities                                                                                                                                                                                      |   | 164,931                |       | 178,617                   |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                                      |   |                   |       |                      |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                                         |   |                   |       |                      |       |
| Preferred stock, $.01 par  value, 1,000,000 shares authorized, no shares issued and outstanding                                                                                                        |   | —                 |       | —                    |       |
| Common stock, $.01 par value,  26,000,000 shares authorized, 17,420,595 and 16,526,462 shares issued and  17,364,567 and 16,470,434 outstanding at December 31, 2002 and March 31,  2003, respectively |   | 175                    |       | 166                       |       |
| Additional paid-in-capital                                                                                                                                                                             |   | 206,843                |       | 196,090                   |       |
| Accumulated other  comprehensive loss                                                                                                                                                                  |   | (329                   | )          | —                    |       |
| Retained earnings                                                                                                                                                                                      |   | 96,969                 |       | 103,066                   |       |
|                                                                                                                                                                                                   |   | 303,658                |       | 299,322                   |       |
| Less – Treasury stock, at  cost, 56,028 shares                                                                                                                                                    |   | (982                   | )          | (982                      | )          |
| Total stockholders’ equity                                                                                                                                                                        |   | 302,676                |       | 298,340                   |       |
|                                                                                                                                                                                                   |   |                   |       |                      |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                       |   | $                      | 467,607    |                      | $          | 476,957 |   |

 

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 March 31,** |    |
|--------------------------------------------------|--------|-----------------------------------|---------|
|                                             |   | **2002**                          |    | **2003** |   |
|                                             |   | **(Unaudited)**                   |    |
| **REVENUE**                                      |   | $                                 | 103,284 |   | $ | 109,525 |   |
|                                             |   |                              |    |   |   |
| **COST OF SERVICES**                             |   | 62,201                            |    | 64,512 |   |
| **DEPRECIATION**                                 |   | 3,450                             |    | 3,536 |   |
| Gross profit                                     |   | 37,633                            |    | 41,477 |   |
| **SELLING, GENERAL AND ADMINISTRATIVE EXPENSES** |   | 26,274                            |    | 26,433 |   |
| **AMORTIZATION**                                 |   | 89                                |    | 89 |   |
| Operating income                                 |   | 11,270                            |    | 14,955 |   |
|                                             |   |                              |    |   |   |
| **OTHER (INCOME) EXPENSE:**                      |   |                              |    |   |   |
| Interest expense                                 |   | 1,496                             |    | 1,410 |   |
| Interest income                                  |   | (28                               | )       | (261 | ) |
| Other (income) expense, net                      |   | 119                               |    | 175 |   |
| Income before income taxes                       |   | 9,683                             |    | 13,631 |   |
|                                             |   |                              |    |   |   |
| **PROVISION FOR INCOME TAXES**                   |   | 3,680                             |    | 5,452 |   |
| **NET INCOME**                                   |   | $                                 | 6,003   |   | $ | 8,179 |   |
|                                             |   |                              |    |   |   |
| **NET INCOME PER COMMON SHARE:**                 |   |                              |    |   |   |
| **BASIC**                                        |   | $                                 | 0.35    |   | $ | 0.48 |   |
| **DILUTED**                                      |   | $                                 | 0.34    |   | $ | 0.47 |   |
|                                             |   |                              |    |   |   |
| **WEIGHTED AVERAGE COMMON SHARES  OUTSTANDING:** |   |                              |    |   |   |
| **BASIC**                                        |   | 17,296                            |    | 17,205 |   |
| **DILUTED**                                      |   | 17,817                            |    | 17,226 |   |

 

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)**

 
|                                                                                      |   | **Three Months  Ended  March 31,** |   |
|-------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                      |   | **2002**                           |   | **2003** |   |
|                                                                                      |   | **(Unaudited)**                    |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 |   |                               |   |   |   |
| Net income                                                                                |   | $                                  | 6,003  |   | $ | 8,179 |   |
| Adjustments to reconcile net  income to net cash provided by operating activities:        |   |                               |   |   |   |
| Depreciation and amortization                                                             |   | 3,539                              |   | 3,625 |   |
| Deferred tax provision                                                                    |   | 2,040                              |   | 1,581 |   |
| Change in operating assets  and liabilities:                                              |   |                               |   |   |   |
| Accounts and notes receivable                                                             |   | 538                                |   | (5,240 | ) |
| Inventories, prepaid expenses  and other assets                                           |   | (121                               | )      | (537 | ) |
| Accounts payable and accrued  liabilities                                                 |   | (1,258                             | )      | 3,274 |   |
| Net cash provided by  operating activities                                                |   | 10,741                             |   | 10,882 |   |
|                                                                                      |   |                               |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 |   |                               |   |   |   |
| Purchase of property, plant  and equipment                                                |   | (2,990                             | )      | (2,939 | ) |
| Net proceeds received from  the sale of operating units in 2001                           |   | 10                                 |   | — |   |
| Cash paid for acquisitions,  net of cash acquired                                         |   | (11,115                            | )      | (445 | ) |
| Net cash used for investing  activities                                                   |   | (14,095                            | )      | (3,384 | ) |
|                                                                                      |   |                               |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |   |                               |   |   |   |
| Proceeds from exercise of  common stock options                                           |   | 61                                 |   | — |   |
| Cash paid for common stock  repurchased                                                   |   | —                             |   | (12,750 | ) |
| Proceeds from long-term  obligations                                                      |   | 97,750                             |   | 73,335 |   |
| Principal payments on  long-term obligations                                              |   | (101,198                           | )      | (68,683 | ) |
| Cash paid for debt issuance  costs                                                        |   | —                             |   | (75 | ) |
| Net cash used for financing  activities                                                   |   | (3,387                             | )      | (8,173 | ) |
|                                                                                      |   |                               |   |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                             |   | (6,741                             | )      | (675 | ) |
|                                                                                      |   |                               |   |   |   |
| **CASH AND CASH EQUIVALENTS,**beginning of period                                         |   | 7,182                              |   | 3,217 |   |
|                                                                                      |   |                               |   |   |   |
| **CASH AND CASH EQUIVALENTS,**end of period                                               |   | $                                  | 441    |   | $ | 2,542 |   |
|                                                                                      |   |                               |   |   |   |
| **SUPPLEMENTAL DATA:**                                                                    |   |                               |   |   |   |
| Cash paid for:                                                                            |   |                               |   |   |   |
| Income taxes, net of income  tax refunds                                                  |   | $                                  | 3,568  |   | $ | (2,148 | ) |
| Interest                                                                                  |   | $                                  | 1,485  |   | $ | 1,369 |   |
|                                                                                      |   |                               |   |   |   |
| **NONCASH FINANCING TRANSACTIONS:**                                                       |   |                               |   |   |   |
| Common stock issued related to  business combinations (14,368 and 0 shares, respectively) |   | $                                  | 445    |   | $ | — |   |
| Short-term obligations  refinanced under line of credit                                   |   | $                                  | 4,781  |   | $ | — |   |
| Assets acquired through  financing and capital lease arrangements                         |   | $                                  | 76     |   | $ | 41 |   |

 

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 ofPresentation**

 

Theaccompanying consolidated financial statements and related notes toconsolidated financial statements include the accounts of SOURCECORP, Incorporatedand subsidiaries (collectively, the “Company”).

 

Inthe opinion of management, the accompanying consolidated financial statementsinclude all accounts and the adjustments necessary to present fairly theCompany’s financial position at March 31, 2003, results of operations for thethree months ended March 31, 2002 and 2003, and cash flows for the three monthsended March 31, 2002 and 2003. All significant intercompany transactions havebeen eliminated. Although management believes that the disclosures are adequateto make the information presented not misleading, certain information andfootnote disclosures normally included in annual financial statements preparedin accordance with generally accepted accounting principles have been condensedor omitted 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 March 31, 2003.  Theresults of operations for the three-months ended March 31, 2002 and 2003 maynot be indicative of the results for the full year.

 

The Company usesestimates and assumptions required for preparation of the financialstatements.  The estimates are primarilybased on historical experience and business knowledge and are revised ascircumstances change.  However, actualresults could differ from the estimates.

 

**2.  New AccountingStandards**

 

*Recent Accounting Pronouncements*

 

InJune 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*. SFAS No. 146 addresses financialaccounting and reporting for costs associated with exit or disposal activities.This statement supersedes FASB Emerging Issues Task Force (“EITF”) IssueNo. 94-3,*Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity*.  The adoption of SFAS No. 146 by the Companyon January 1, 2003, did not have an effect on the Company’s financialstatements.

 

InNovember 2002, the FASB issued Interpretation No. 45 (“FIN 45”),*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees and Indebtedness of Others*.This interpretation elaborates on the disclosures to be made by a guarantor inits interim and annual financial statements about its obligations under certainguarantees that it has issued. It also requires that a guarantor recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and measurementprovisions of this interpretation are applicable on a prospective basis toguarantees issued or modified after December 31, 2002; while theprovisions of the disclosure requirements are effective for financialstatements of interim or annual reports ending after December 15, 2002.The Company adopted the disclosure provisions of FIN 45 during the fourthquarter of fiscal 2002 and such adoption did not have a material impact on itsconsolidated financial statements. The Company adopted the recognition andmeasurement requirements of FIN 45 on January 1, 2003 and such adoption did nothave a material impact on its consolidated financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148,*Accounting for Stock-Based Compensation—Transitionand Disclosure*. SFAS No. 148 provides alternative methods oftransition for companies that voluntarily adopt the fair value based method ofaccounting for stock-based employee compensation in accordance with SFASNo. 123,*Accounting for Stock-BasedCompensation*. SFAS No. 148 also amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults. The Company adopted the disclosure-only provisions of SFASNo. 148 on December 31, 2002 and currently intends to account forstock-based employee compensation expense under Accounting Principles BoardOpinion (“APB”) No. 25, *Accounting forStock Issued to Employees*.

 

7

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TheCompany applies APB No. 25 and related interpretations in accounting forawards. Stock option and warrant awards are granted at the market price of thecommon stock on the date of grant. Accordingly, no compensation expense hasbeen recognized for stock options and warrants. Had compensation expense beendetermined based upon the fair value at grant dates for stock options andwarrants consistent with the method of SFAS No. 123, the Company's net incomeand earnings per share would have been as follows (in thousands, except pershare data):

 

|                                                                                                                         |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                         |   | **2002**                          |   | **2003** |   |
|                                                                                                                         |   |                              |   |   |   |
| Net  income as reported                                                                                                      |   | $                                 | 6,003  |   | $ | 8,179 |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of tax effect |   | (905                              | )      | (829 | ) |
| Proforma  net income                                                                                                         |   | $                                 | 5,098  |   | $ | 7,350 |   |
|                                                                                                                         |   |                              |   |   |   |
| Earnings  per share:                                                                                                         |   |                              |   |   |   |
|                                                                                                                         |   |                              |   |   |   |
| Reported  basic earnings per share                                                                                           |   | $                                 | 0.35   |   | $ | 0.48 |   |
| Proforma  basic earnings per share                                                                                           |   | $                                 | 0.29   |   | $ | 0.43 |   |
|                                                                                                                         |   |                              |   |   |   |
| Reported  diluted earnings per share                                                                                         |   | $                                 | 0.34   |   | $ | 0.47 |   |
| Proforma  diluted earnings per share                                                                                         |   | $                                 | 0.29   |   | $ | 0.43 |   |

 

Thefair value of stock options and warrants was estimated on the date of grantusing the Black-Scholes option pricing model with the following assumptions forthree months ended March 31, 2002: weighted-average risk free interest rate of 4.5%, no dividend yield,weighted-average expected life of 3.0 years and weighted-average volatility of40.0%.  The following assumptions wereused for the three months ended March 31, 2003:  weighted-average risk free interest rate of 2.6%, no dividendyield, weighted-average expected life of 3.0 years and weighted-averagevolatility of 44.5%.

 

**3.  Strategic Realignment Plan**

 

During the second and third quarters of 2001, the Company completed astrategic realignment plan, in which the Company identified certainnon-strategic service offerings for divestiture or closure.  During the three months ended March 31,2003, the activity related to the realignment plan consisted of settlements oflegal claims, lease payments, and various disposal expenses.  The following table reflects the realignmentactivity for the three months ended March 31, 2003 (in millions):

 
|                        |   | **January 1, 2003** |   | **Settlements** |   | **March 31, 2003** |   |
|-----------------------------|--------|---------------------|--------|-----------------|--------|--------------------|--------|
| Realignment Costs Liability |   | $                   | 1.5    |            | $      | 0.2                |   | $ | 1.3 |   |
|                             |        |                     |        |                 |        |                    |        |  |  |  |

 

The March 31, 2003realignment costs liability balance consists of accrued litigation, leasepayments and various disposal expenses.

 

8

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**4.  Business Combinations**

 

*Goodwill and Intangibles*

 

The changes in thecarrying value of goodwill and intangibles are as follows (in thousands):

 

Goodwill:

 
|                                              |   | **Information  Management and   Distribution** |    | **Healthcare, Regulatory  and Legal Compliance** |   | **Total** |   |
|---------------------------------------------------|--------|------------------------------------------------|---------|--------------------------------------------------|--------|-----------|--------|
| Net  balance as of January 1, 2003                |   | $                                              | 186,378 |                                             | $      | 130,878   |   | $ | 317,256 |   |
| Additional  accrued consideration and adjustments |   | 4,663                                          |    | (94                                              | )      | 4,569     |   |
| Net  balance as of March 31, 2003                 |   | $                                              | 191,041 |                                             | $      | 130,784   |   | $ | 321,825 |   |

 

Intangibles:

 
|                    |   | **March 31, 2003**       |   |
|-------------------------|--------|--------------------------|--------|
|                    |   | **Gross Carrying Value** |   | **Accumulated  Amortization** |   | **Net Intangibles** |   |
| Customer  Relationships |   | $                        | 4,000  |   | $ | (333 | ) | $ | 3,667 |   |
| Non  Compete Agreements |   | 440                      |   | (110 | ) | 330 |   |
| Total                   |   | $                        | 4,440  |   | $ | (443 | ) | $ | 3,997 |   |

 

Aggregate amortizationexpense related to intangibles for the three months ended March 31, 2003 was$0.1 million.  Estimated amortizationexpense for the periods ending December 31, 2003 through December 31, 2006 is$0.4 million annually.  Thereafter,annual amortization expense is estimated to be $0.3 million through December31, 2016.

 

*ContingentConsideration*

 

Certain of the Company’s acquisitions are subject toadjustments in overall consideration and recorded goodwill based upon theachievement of specified revenue and/or earnings targets generally over one tothree year periods. During the first three months of 2003, the Company paidconsideration of $0.4 million in cash in relation to contingent considerationagreements that have been finalized.

 

Incertain agreements, the Company has the option of changing the payment mix touse common stock versus cash in satisfying the liability. Upon review ofcurrent market conditions, the Company finds it favorable to satisfy itscurrently recorded earnout liabilities in cash rather than common stock.Management’s evaluation of the cumulative earnings of acquired companiesthrough March 31, 2003 indicates that certain acquired companies have metspecified earnings targets beyond a reasonable doubt; therefore the Company hasaccrued aggregate additional consideration of approximately $11.9 million,of which $11.6 million is classified as accounts payable and accruedliabilities and is expected to be settled in cash and $0.3 million isclassified as additional paid-in-capital and is expected to be settled incommon stock.

 

Notall of the periods applicable for the earnout targets have been completed andadditional amounts may be payable in future periods under the terms of theagreements. If all earnout targets under the current agreements were achieved,the maximum contingent consideration to be paid would be $19.0 million. Inaccordance with the agreements, the Company has the option to satisfy$18.5 million of the $19.0 million potential liability in commonstock. The earnout payments would be made as outlined in the agreements andpaid over the next three years, with the final payment being made in 2005.

 

9

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**5.  Weighted Average Shares Outstanding**

 

Basic and diluted netincome per common share were computed 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  March 31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2002**                          |   | **2003** |   |
| Basic weighted average common shares             |   | 17,296                            |   | 17,205 |   |
| Weighted average effect of  options and warrants |   | 85                                |   | 1 |   |
| Other contingent  consideration                  |   | 436                               |   | 20 |   |
| Diluted weighted average  common shares          |   | 17,817                            |   | 17,226 |   |

 

At March 31, 2002 and2003, approximately 1.8 million and 3.6 million, respectively, of common stockequivalents were not included in the diluted earnings per share calculationbecause they were anti-dilutive. These common stock equivalents may be dilutiveto future earnings per share calculations.

 

**6.  Segment Reporting**

 

TheCompany aggregates its service offerings and operations into two reportablesegments: (i) Information Management and Distribution, and(ii) Healthcare, Regulatory, and Legal Compliance. The Company’sreportable segments are organized around customer types and service offeringspossessing similar economic characteristics. Management evaluates segmentperformance based on revenue and income before income taxes. All centrallyincurred corporate costs are allocated to the segments based principally onoperating income. The reporting segments follow the same accounting policiesused for the Company’s consolidated financial statements as described in thesummary of significant accounting policies.

 

Theidentified segments are as follows:

 

**Information Management and Distribution.**  Thissegment includes operations that provide the following services: electronicimaging; analog services; data capture and database management; internetrepository services; and print and mail services, including statementprocessing, direct mail and fulfillment services and in-bound mail roomservices. During the three months ended March 31, 2002 and 2003, revenue in theInformation Management and Distribution segment consisted of approximately$56.9 million and $57.2 million of recurring revenue, respectively, andapproximately $7.4 million and $7.6 million of project revenue,respectively.

 

**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 managed care compliance reviews; legal claimsadministration; and professional economic research services and litigationsupport. During the three months ended March 31, 2002 and 2003, revenue in theHealthcare, Regulatory and Legal Compliance segment consisted of approximately$15.6 million and $15.7 million of recurring revenue, respectively, andapproximately $23.4 million and $29.0 million of project revenue,respectively.

 

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

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

 
|                       |   | **THREE MONTHS ENDED MARCH 31, 2002**          |   |
|----------------------------|--------|------------------------------------------------|--------|
|                       |   | **Information  Management  and  Distribution** |   | **Healthcare,  Regulatory  and  Legal Compliance** |   | **Consolidated** |   |
| Revenue                    |   | $                                              | 64,318 |   | $ | 38,966 |   | $ | 103,284 |   |
| Incomebefore  income taxes |   | 6,945                                          |   | 2,738 |   | 9,683 |   |
|                            |        |                                                |        |  |  |  |  |  |  |  |

 

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**7.  Interest Rate Swapand Other Comprehensive Income (Loss)**

 

OnDecember 22, 2000, the Company entered into an interest rate swap for anotional amount of $50.0 million to hedge, through March 31, 2003,its exposure to fluctuations in interest rates on $50 million of its debt.The interest rate swap had the effect of fixing the interest rate on$50 million of the Company’s debt at 5.775%. In accordance with SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, the Company concluded the interestrate swap qualified as a cash flow hedge bearing no ineffectiveness atinception.  The hedge remained perfectlyeffective because the critical terms (i.e. notional amount, payment dates, andunderlying index) of the interest rate swap and the hedged debt obligationcoincided throughout the term of the interest rate swap.  The interest rate swap expired on March 31,2003 and was not replaced.

 

SFAS No. 130, *ReportingComprehensive Income,* establishes standards for reporting anddisplay of comprehensive income and its components in the financialstatements.  The objective of SFAS No.130 is to report a measure of all changes in equity of an enterprise thatresult from transactions and other economic events of the period other thantransactions with owners.  Comprehensiveincome is the total of net income and all other non-owner changes within acompany’s equity.

 

Comprehensive income(loss) is defined as the change in equity during a period from transactions andother events, except those resulting from investments by and distributions tostockholders.  The components ofcomprehensive income (loss) for the three months ended March 31, 2002 and 2003are as follows (in thousands):

 

|                                                                                        |   | **Three Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                        |   | **2002**                          |   | **2003** |   |
| Net income                                                                                  |   | $                                 | 6,003  |   | $ | 8,179 |   |
| Other comprehensive income  (loss):                                                         |   |                              |   |   |   |
| Change in fair value of  interest rate swap, net of tax effect of $129 and $0, respectively |   | (294                              | )      | — |   |
| Total comprehensive income                                                                  |   | $                                 | 5,709  |   | $ | 8,179 |   |

 

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

 

The following discussionshould be read in conjunction with our financial statements and the relatednotes thereto appearing elsewhere in this Report on Form 10-Q.

 

**Introduction**

 

Wewere founded in September 1994, to create a national, single sourceprovider of document and information outsourcing solutions to document andinformation intensive industries, including: financial services, government,legal, healthcare and transportation. We acquired the seven Founding Companies(the “Founding Companies”) simultaneously with the closing of our initialpublic offering (the “IPO”) on January 26, 1996, and effectively beganoperations at that time. The consideration for the Founding Companies consistedof a combination of cash and common stock of our Company.

 

Since the IPO, we haveacquired 65 companies and divested 17 operating units by sales or closures. Weevaluate candidates for acquisition and periodically for divestiture as a partof our strategic plan of providing customers a single solution for businessprocess outsourcing. The criteria for evaluation include geographic need,additional technology, market growth potential, industry expertise, serviceexpansion to broaden service offerings, expansion of our customer base, revenueand earnings growth potential, and expected sources and uses of capital.

 

**Business Segments**

 

Weaggregate our service offerings and operations into two reportable segments:(i) Information Management and Distribution, and (ii) Healthcare,Regulatory, and Legal Compliance. Our reportable segments are organized aroundcustomer types and service offerings possessing similar economiccharacteristics. Management evaluates segment performance based on revenue andincome before income taxes. All centrally incurred corporate costs areallocated to the segments based principally on operating income. The reportingsegments follow the same accounting policies used for our consolidatedfinancial statements as described in the summary of significant accountingpolicies.

 

Theidentified segments are as follows:

 

**Information Management and Distribution.**  Thissegment includes operations that provide the following services: electronicimaging; analog services; data capture and database management; internetrepository services; and print and mail services, including statementprocessing, direct mail and fulfillment services and in-bound mail roomservices. During the three months ended March 31, 2002 and 2003, revenue in theInformation Management and Distribution segment consisted of approximately$56.9 million and $57.2 million of recurring revenue, respectively, andapproximately $7.4 million and $7.6 million of project revenue,respectively.

 

**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 managed care compliance reviews; legal claimsadministration; and professional economic research services and litigationsupport. During the three months ended March 31, 2002 and 2003, revenue in theHealthcare, Regulatory and Legal Compliance segment consisted of approximately$15.6 million and $15.7 million of recurring revenue, respectively, andapproximately $23.4 million and $29.0 million of project revenue,respectively.

 

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**Basis for Management Discussion and Analysis**

 

Revenue is characterized as both project andrecurring.  Project revenue consists ofone-time projects in which the customer relationship is not guaranteed tocontinue after project completion.  Projectrevenue margins are usually higher than our average margins and the volumes ofproject business can be highly volatile from period to period.  Recurring revenue is characterized bycustomer relationships that are generally for one year and may continue forlonger.  Recurring revenue is typicallybased on transaction volumes sent to us by our customers and these volumes aregenerally not contractually guaranteed. Recurring revenue generally has lower margins than project revenue andis usually more predictable.  Thedifference between project and recurring revenue is relevant to the discussionof profitability and margins.

 

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

 

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

 

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### **THREE MONTHS ENDED MARCH 31,2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003**

 

|                  |   | **Three Months Ended March 31,** |    |
|-----------------------|--------|----------------------------------|---------|
|                  |   | **2002**                         |    | **2003** |   |
|                  |   | **($000’s)**                |    | **% of  Revenue** |   | **($000’s)** |   | **% of  Revenue** |   |
|                  |   |                             |    |   |   |   |   |   |   |
| **Revenue**           |   | $                                | 103,284 |   | 100.0 | % | $ | 109,525 |   | 100.0 | % |
| **Gross Profit**      |   | 37,633                           |    | 36.4 | % | 41,477 |   | 37.9 | % |
| **SG&A**          |   | 26,274                           |    | 25.4 | % | 26,433 |   | 24.1 | % |
| **Operating income**  |   | 11,270                           |    | 10.9 | % | 14,955 |   | 13.7 | % |
| **Income before tax** |   | 9,683                            |    | 9.4 | % | 13,631 |   | 12.4 | % |
| **Net income**        |   | 6,003                            |    | 5.8 | % | 8,179 |   | 7.5 | % |
|                       |        |                                  |         |  |  |  |  |  |  |  |  |

 

**Revenue**

 

Our operations generated revenues of $109.5 million forthe three months ended March 31, 2003, an increase of 6.0% compared to the sameperiod in 2002.   Project revenueincreased $5.8 million from the prior year, resulting in a revenue mix shiftbetween our project and recurring revenue. Project revenue accounted for 33.4% of total revenue compared to 29.8%in the prior year.

 

Revenuewithin our Information Management and Distribution segment increased 0.8% from$64.3 million for the three months ended March 31, 2002 to $64.8 million forthe three months ended March 31, 2003. Project revenue accounted for 11.7% of segment revenue in the firstquarter of 2003 and 11.5% for the same period of 2002.  Seasonal statement processing volumes wereessentially level with the prior year and processing volumes from our financialservices customers strengthened modestly. These volumes were partially offset by a modest decline in volumes fromour government services customers.  During the third quarter of 2002, the City of New York Human ResourcesAdministration informed us that we did not receive their renewal contractaward.  For the three months ended March31, 2002 and 2003, the contract contributed approximately $3.1 million and $3.3million in revenue, respectively.  Weexpect this contract to be fully transitioned to the new vendor during thesecond quarter of 2003.

 

Revenue within ourHealthcare, Regulatory and Legal Compliance segment increased 14.8% from $39.0million for the three months ended March 31, 2002 to $44.7 million for thethree months ended March 31, 2003. Project revenue accounted for 64.9% of segment revenue in the firstquarter of 2003 compared to 60.0% for the same period in 2002.  The increase in revenue within Healthcare,Regulatory and Legal Compliance was primarily a result of increased volumeswithin our legal consulting service offering due to accelerated customer deadlinesand higher volumes within our claims administration service offering.  Revenue in the Healthcare businesses wasmodestly higher in the current year.

 

**Gross profit**

 

Gross profit increased10.2% from $37.6 million for the three months ended March 31, 2002 to $41.5million for the three months ended March 31, 2003.  The increase in gross profit was primarily the result of anoverall increase in revenue driven largely by the increases in our highermargin project revenue businesses.  Alsocontributing to the higher gross profit was lower bad debt expense of $1.4million compared to the prior year.  Wesuccessfully recovered approximately $1.0 million of previously reservedaccounts receivable due to an increased focus and successful collectionefforts.  Gross profit as a percentageof revenue increased from 36.4% for the three months ended March 31, 2002 to37.9% for the three months ended March 31, 2003.

 

**Selling, general and administrativeexpenses**

 

SG&A increased 0.6%from $26.3 million, or 25.4% of revenue, for the three months ended March 31, 2002to $26.4 million, or 24.1% of revenue, for the three months ended March 31,2003.  Cost cutting initiatives withinthe Healthcare businesses were offset by additional sales and technologypersonnel in Information Management.

 

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**Operatingincome**

 

Operating incomeincreased 32.7% from $11.3 million, or 10.9% of revenue, for the three monthsended March 31, 2002 to $15.0 million, or 13.7% of revenue, for the threemonths ended March 31, 2003.  Theincrease in operating income was largely attributable to increases in ourhigher margin project revenue businesses and lower bad debt expense.

 

**Income beforeincome taxes and net income**

 

Income before income taxes increased 40.8% from $9.7million for the three months ended March 31, 2002 to $13.6 million for thethree months ended March 31, 2003, and net income increased 36.2% from $6.0million for the three months ended March 31, 2002 to $8.2 million for the threemonths ended March 31, 2003, largely attributable to the items discussed above.

 

The effective tax rate of 38.0% and 40.0% for the threemonths ended March 31, 2002 and 2003, respectively, differs from the statutoryfederal rate of 35.0% principally due to state and local taxes.  The effective tax rate has changed betweenthe years principally due to the income mix shifting to higher tax states.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

At March 31, 2003, we had $36.4 million of workingcapital, including $2.5 million of cash. Working capital at December 31, 2002 was $39.0 million, including $3.2million of cash.  For the first threemonths of 2003, cash provided by operating activities was $10.9 millioncompared to $10.7 million for the same period in 2002.  Higher earnings and lower tax paymentscombined with the receipt of $2.3 million of income tax refunds in the currentyear were partially offset by timing issues related to the collection ofcurrent or less than 90 day accounts receivable and annual incentivecompensation payments.

 

For the three months ended March 31, 2003, investingactivities consisted of additions to property, plant and equipment of $2.9million and acquisition related payments of $0.4 million.  Capital expenditures were primarily drivenby technological investments within our information management serviceoffering.  Acquisition related paymentsconsist of cash payments for contingent consideration agreements of pastacquisitions.  It is expected that wewill pay an additional $11.4 million for contingent consideration agreementsduring the remainder of 2003.

 

Net cash used by financing activities was $8.2 millionfor the three months ended March 31, 2003. During the first quarter of 2003, we activated $15.0 million of thestock repurchase program authorized by our Board of Directors in April2001.  During the three months endedMarch 31, 2003, we purchased 894,133 shares of our common stock at a cost of$12.8 million.  These payments wereoffset by $73.3 million in proceeds from our line of credit, net of payments of$68.7 million.  In addition, we paid$0.1 million in fees related to amending the terms of our credit agreement,which is discussed below.

 

In April 2001, we entered into our line of creditagreement with a group of banks led by Bank of America, SunTrust Bank and WellsFargo Bank, as co-agents (the “2001 Credit Agreement”). Under the agreement, wecan borrow up to $297.5 million through April 2, 2004.  In 2002, member banks extended $290.0million of the commitment through April 1, 2005.  Effective April 3, 2003, member banks extended $230.0 million ofthe commitment for an additional year to April 1, 2006.  Our ability to borrow under the agreement issubject to customary borrowing capacity requirements.  Meeting these requirements is highly dependent upon maintaining aminimum level of operating results and the continued demand for our servicesamong other factors.

 

Managementbelieves that it has sufficient liquidity from its cash flow and its revolvingcredit facility to meet ongoing business needs.  However, our ability to borrow is contingent on certain leverageand fixed cost coverage ratios.  Afterapplication of such ratios and our total commercial commitments of $9.8 millionfor standby letters of credit, we had $69.7 million available to borrow underour 2001 Credit Agreement as of March 31, 2003.  In September 2002, an amendment was approved that extended thefixed cost coverage ratio requirement of 1.25 until January 1, 2004.  This ratio was set to become more restrictivein the fourth quarter of 2002 by increasing to 1.50.  Under the amended agreement, the fixed cost ratio will remain at1.25 until January 1, 2004 and will increase to 1.35 at all times thereafter.  Effective March 26, 2003, an amendment wasapproved that allows for a reduction to the minimum net worth requirement forup to $30 million of share repurchases. Additionally, depending on the mix of stock and cash used in ourstrategic acquisition program, if any, we may need to seek further financingthrough the public or private sale of equity or debt securities.  There can be no assurance we could securesuch financing if and when it is needed or on terms we deem acceptable.

 

InJanuary 2000, we registered on Form S-4 (Registration No. 333-92981) 3,012,217shares of common stock for issuance in connection with our acquisition program(the “Acquisition Shelf”), of which 1,410,444 shares were available as of March31, 2003.  The shares available have notbeen reduced for any shares that may be issuable in the future to previousowners of acquired companies as contingent consideration liabilities.

 

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**Critical Accounting Policies**

 

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

 

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

 

*Allowance for Doubtful Accounts*

 

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

 

*Goodwill and Intangible Assets*

 

Weadopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 142, *Goodwill and Other IntangibleAssets*, on January 1, 2002. Upon the adoption of SFAS No. 142, goodwill and other intangible assetsthat have indefinite useful lives are not amortized but rather are tested atleast annually for impairment.  AtJanuary 1, 2002, we compared the fair values of the reporting units to theircarrying values.  In determining thefair values of the operating units, we used the discounted cash flow method andthe market value approach method.  Sincethe fair value of each reporting unit exceeded the carrying value, noimpairment was recorded at January 1, 2002. In October 2002, we performed the annual test for impairment using thediscounted cash flow method and the market value approach method.  Since the fair value of each reporting unitexceeded the carrying value, no impairment was recorded.

 

Otherintangible assets with definite lives will continue to be amortized over theiruseful lives.  Impairment will beevaluated when events or changes in circumstances indicate that the carryingvalue may not be recoverable in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*.

 

*Long-Lived Asset Impairment*

 

Weadopted the provisions of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long Lived Assets*, onJanuary 1, 2002. As required by SFAS No. 144, management continuallyevaluates whether events and circumstances indicate that the carrying value oflong-lived assets may not be recoverable. When events require, management makesthe valuation by comparing the estimated undiscounted future cash flows overthe remaining life of the long-lived assets to the carrying amount of the assetbeing evaluated. An impairment loss is recognized to the extent the carryingamount of assets being evaluated exceeds the expected future undiscounted cashflow. Management believes that during the quarter ended March 31, 2003, nofacts or circumstances existed that required evaluation of potentialimpairment.

 

*Revenue Recognition*

 

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

 

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

 

Recurringrevenue is characterized by customer relationships that are generally for oneyear and may continue for longer. Recurring revenue is typically based on thetransaction volumes provided by our customer at an agreed upon fixed rate perunit. Our 

 

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customer’svolumes are typically not contractual or otherwise guaranteed. Revenuerecognition occurs once work is completed and delivery has occurred or serviceshave been rendered. Recurring revenue represented the remaining 67% of total2002 revenues and typically occurs within our Information Management andDistribution segment.

 

As apart of providing services to our customers, we incur incidental expensescommonly referred to as “out-of-pocket” expenses. These expenses include itemssuch as airfare, hotels, and mileage and are often reimbursable by ourcustomers. When reimbursable, we record both revenue and direct cost ofservices in accordance with the provisions of Emerging Issues Task Force(“EITF”) Issue 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred.*

 

Unearnedincome, included in accounts payable and accrued liabilities, representspayments from our customers in advance of services being provided. Advancedpayments are deferred as unearned income when received and recognized asrevenue as services are rendered.

 

*Self-Insurance Liabilities and Reserves*

 

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

 

*Other Loss Contingencies*

 

Werecord liabilities when it is probable that a liability has been incurred andthe amount of the loss is reasonably estimable in accordance with SFASNo. 5,*Accounting for Contingencies*.Disclosure is required when there is a reasonable possibility that the ultimateloss will exceed the recorded provision. Contingent liabilities are oftenresolved over long periods of time. Estimating probable losses requiresanalysis of multiple forecasts that often depend on judgments about potentialactions by third parties such as regulators.

 

*Stock Based Compensation*

 

Wehave elected to follow Accounting Principles Board Opinion (“APB”) No. 25,*Accounting for Stock Issued to Employees*.Under APB No. 25, compensation expense is recorded when the exercise priceof employee stock options is less than the fair value of the underlying stockon the measurement date. We have adopted the disclosure-only provisions of SFASNo. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*.  See Note 2, New Accounting Standards, of the Notes to theConsolidated Financial Statements.

 

*Recent Accounting Pronouncements*

 

InJune 2002, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 146,*Accounting for CostsAssociated with Exit or Disposal Activities*. SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities. This statement supersedes FASB Emerging Issues Task Force(“EITF”) Issue No. 94-3,*LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity*.  The adoption ofSFAS No. 146 by us on January 1, 2003, did not have an effect on our financialstatements.

 

InNovember 2002, the FASB issued Interpretation No. 45 (“FIN 45”),*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees and Indebtedness of Others*.This interpretation elaborates on the disclosures to be made by a guarantor inits interim and annual financial statements about its obligations under certainguarantees that it has issued. It also requires that a guarantor recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and measurementprovisions of this interpretation are applicable on a prospective basis toguarantees issued or modified after December 31, 2002; while theprovisions of the disclosure requirements are effective for financialstatements of interim or annual reports ending after December 15, 2002. Weadopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal2002 and such adoption did not have a material impact on our consolidatedfinancial statements. We adopted the recognition and measurement requirementsof FIN 45 on January 1, 2003 and such adoption did not have a material impacton our consolidated financial statements.

 

InDecember 2002, the FASB issued SFAS No. 148,*Accounting for Stock-Based Compensation—Transitionand Disclosure*. SFAS No. 148 provides alternative methods oftransition for companies that voluntarily adopt the fair value based method of

accountingfor stock-based employee compensation in accordance with SFAS No. 123,*Accounting for Stock-Based Compensation*.SFAS No. 148 also amends the disclosure requirements of SFAS No. 123to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results. We adopted thedisclosure-only provisions of SFAS No. 148 on December 31, 2002 andcurrently intend to continue to account for stock-based employee compensationexpense under Accounting Principles Board Opinion (“APB”) No. 25,*Accounting for Stock Issued to Employees*.

 

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**RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS**

 

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

 

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

 

We are subject to interestrate risk on our term loans, revolving credit facility and Industrial RevenueBonds.  Interest rates are fixed on thecapitalized lease obligations.  Weentered into an interest rate swap for a notional amount of $50 million tohedge, through March 31, 2003, our exposure to fluctuations in interest rateson $50 million of our revolving credit facility.  We designated the swap as a cash flow hedge.  The interest rate swap expired on March 31,2003 and was not replaced.

 

A 100 basis pointincrease in short-term interest rates would result in approximately $0.7million of additional expense in 2003 based on our expected average balanceoutstanding under the credit facility during 2003.

 

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

 

(a)                                  Evaluation of disclosure controls andprocedures.

 

Withinthe 90 days prior to the filing date of this report, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls 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**

 

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

 

*DeBari Litigation*

 

InMarch 1999, we filed a lawsuit styled *DeBariAssociates Acquisition Corp. v. Robert Burnham, Mark Walch, Nortec, LLC,Spencer McElhannon and Peng Lin* in the Supreme Court of the State ofNew York (“Nortec Action”). In the Nortec Action, we were seeking a declaratoryjudgment that Robert Burnham, Mark Walch, Nortec, LLC, Spencer McElhannon andPeng Lin (the “Nortec Defendants”) have no interest in Net Data, Inc., asubsidiary of a company acquired by us in February 1998. We divested theoperating assets of Net Data, Inc. as part of our 2001 strategicrealignment plan. The Nortec Defendants counterclaimed alleging breach ofcontract, fraud, breach of fiduciary duty as a joint venturer and unjustenrichment. The trial for the above matter concluded mid-October 2002,with the jury finding in our favor (i.e. that the Nortec Defendants did nothave a right to any part of Net Data, Inc. or any portion of the proceedsfrom its purchase). On February 7, 2003, the judge entered its order,reflecting the jury’s finding in our favor. The Nortec Defendants deadline forfiling a notice of appeal is 90 days from such order, being May 8,2003; if such a notice of appeal is filed, the Nortec Defendants would have anextended period of time in which to file an appeal.  As of May 13, 2003, we have not received any notice of appealrelated to this matter.

 

*Roy Weatherford, et al vs. FranklinBank and Franklin Bank vs. MAVRICC Management Systems, Inc.*

 

OnFebruary 24, 1992, MAVRICC Management Systems, Inc. (one of ourwholly-owned subsidiaries, the operating assets of which were divested by us aspart of our 2001 strategic realignment plan) (“MAVRICC”) entered into anagreement with Franklin Bank, N.A. whereby MAVRICC agreed to maintain recordsfor individual IRAs and Keogh Plans and to perform certain activities(specifically described in the contract) necessary to assist Franklin Bank,N.A. in serving as a custodian for specific IRAs. On August 6, 2001,Plaintiffs Roy Weatherford, 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 seeks compensatory and punitive damages fromFranklin Bank, N.A. On September 28, 2001, Franklin Bank, N.A. filed itsThird-Party Complaint against MAVRICC for indemnification, alleging that MAVRICCbreached the agreement.  OnFebruary 27, 2003, the parties to this action filed an agreed order ofdismissal without prejudice, which the court entered on March 10, 2003.  The order dismisses both the complaintagainst Franklin Bank and Franklin Bank’s Third Party Complaint againstMAVRICC; however, as the complaints are dismissed without prejudice, it ispossible for such parties to later reassert such claims. We believe that ifsuch claims were reasserted, we would have meritorious defenses and wouldvigorously defend any such claims made against us in this matter.

 

*Healthcare MarketingAssociates, Inc. vs. Managed Care Professionals, Inc.*

 

OnFebruary 9, 1995, prior to the acquisition by the Company, Managed CareProfessionals, Inc. (one of our wholly-owned subsidiaries) (“MCP”) enteredinto an “Exclusive Marketing Agreement” with Healthcare MarketingAssociates, Inc. (“HMA”) whereby MCP granted to HMA the exclusive right tomarket, and HMA agreed to market exclusively for MCP, the MCP products andservices to health care providers in the United States for which MCP agreed topay HMA a percentage (30%) of gross revenues paid to MCP by the provider(customer). The duration of the Agreement was for a period of five(5) years and expired on February 9, 2000 (“Termination Date”). OnApril 27, 2001, HMA filed a lawsuit against MCP in the Circuit Court ofthe County of St. Louis, State of Missouri, alleging entitlement to commissionson revenues generated from providers after the Termination Date who were initiallybrought to MCP prior to the Termination Date. On August 26, 2002, ourmotion for summary judgment was denied. In March 2003, this lawsuit wastried before a judge and at the conclusion of the trial, the judge ruled in theplaintiff’s favor in the amount of $1.782 million plus prejudgmentinterest, which equates to approximately $2.2 million in total as ofMarch 5, 2003. The judgment amount plus prejudgment interest costs wereincluded in our 2002 results. We intend to appeal this ruling and have filed anotice of appeal in this matter.  Webelieve we have meritorious points of error for appeal and intend to continueto vigorously defend the claims made against us in this matter.

 

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*Various ROI Copy Charge Matters*

 

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

 

*Mattel v. SOURCECORP*

 

OnFebruary 18, 2003, Mattel, Inc. filed suit against the Company in theLos Angeles County California Superior Court. In the suit, the plaintiffalleges that one of our subsidiaries is liable for the loss of various productsand prototypes allegedly stored at one of our subsidiary’s box storage facilitiesunder theories of breach of contract, breach of fiduciary duty, negligence,breach of implied covenants of good faith and fair dealing and/or conversion.The plaintiff has not stated their damages, but alleges they are in excess of$2.5 million. We believe we have meritorious defenses and intend tovigorously defend any claims made against us in this matter.

 

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

 

InJune 2000, the Company filed an action styled *F.Y.I.Incorporated v. Spohr, et. al.* in Dallas, Texas, in which weasserted claims for  breach of contract,fraud, and negligent misrepresentation against the sellers of two relatedcompanies that we acquired in December 1998 (the “Texas Action”). The Texas Actionwas later removed to federal court and ultimately dismissed on jurisdictionalgrounds.  We reasserted these claims intwo actions that were later consolidated; one styled *F.Y.I. Incorporated v. Spohr, et. al.* in Superior Court ofthe State of California in the County of Sacramento, Case No. 01-AS-00721 (the“Sacramento Action”) and one styled *Spohr,et. al. v. F.Y.I. Incorporated, et. al.* in the Superior Court of theState of California in the County of San Francisco, Case No. 318703 (the “SanFrancisco Action”). In the consolidated action, we additionally filed claimsagainst the sellers’ accountants and the two sellers filed claims againstus.  Specifically, the sellers allegethat our former subsidiary wrongfully failed and refused to execute and delivera requested estoppel certificate, and that the failure to provide such estoppelcertificate harmed the landlord in that they were allegedly denied favorableterms on a refinancing of the property and were allegedly prevented fromcompleting a timely sale of the property. Sellers’ allege damages ofapproximately $1.5 million.  We haveasserted damages in excess of $8 million. We believe we have meritorious defenses to sellers’ claims and intend tovigorously defend any claims made against us in this matter.

 

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

 
| (a)    | Exhibits |                                                                                                                                                                                                                                          |
|--------|----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                          |
|   | 3.1      | Restated  Certificate of Incorporation of SOURCECORP, Incorporated (Incorporated by  reference to Exhibit 99.3 to Amendment No. 1 to the Company’s Registration  Statement on Form 8-A  filed on  February 15, 2002)                |
|   |     |                                                                                                                                                                                                                                          |
|   | 3.2      | Amended  and Restated By-Laws of SOURCECORP, Incorporated (Incorporated by reference  to Exhibit 99.4 to Amendment No. 1 to the Company’s Registration Statement on  Form 8-A filed on February 15, 2002)                                |
|   |     |                                                                                                                                                                                                                                          |
|   | 4        | Specimen  certificate for the Common Stock, par value $.01 per share, of the  Registrant. (Incorporated by reference to Exhibit 99.1 to Amendment No. 1 to  the Company’s Registration Statement on Form 8-A filed on February 15, 2002) |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.1     | Third  Amendment to Credit Agreement, dated as of March 26, 2003 by and among  SOURCECORP, Incorporated, Bank of America, N.A., and the other Agents and  Lenders party hereto.                                                               |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.2     | Amended and Restated Employment Agreement dated April  1, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management, L.P.,  and Ed H. Bowman, Jr.                                                                                   |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.3     | Amended and Restated Employment Agreement dated March  31, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management,  L.P., and Barry L. Edwards                                                                                   |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.4     | Amended and Restated Employment Agreement dated March  31, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management,  L.P., and Charles S. Gilbert                                                                                 |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.5     | Amended and Restated Employment Agreement dated April  1, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management, L.P.,  and Thomas C. Walker                                                                                    |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.6     | Consulting Agreement Addendum dated March 6, 2003 by  and between SOURCECORP, Incorporated and David Lowenstein                                                                                                                               |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.7     | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Bank of  America, N.A.                      |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.8     | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of The Bank of  Nova Scotia                    |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.9     | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Bank One, N.A.                              |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.10    | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of BNP Paribas                                 |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.11    | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of JPMorgan Chase  Bank                        |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.12    | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Suntrust Bank                               |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.13    | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Washington  Mutual Bank                     |
|   |     |                                                                                                                                                                                                                                          |
|   | 10.14    | Extension Agreement, effective April 3, 2003 among SOURCECORP,  Incorporated, each of the Lenders party thereto, Bank of America, N.A. and  Bank of America Securities LLC, executed on behalf of Wells Fargo Bank, N.A.                      |
|   |     |                                                                                                                                                                                                                                          |
|   | 99.1     | Certification  Pursuant to section 906 of Sarbanes-Oxley Act                                                                                                                                                                                  |
|   |     |                                                                                                                                                                                                                                          |
|   | 99.2     | Certification  Pursuant to section 906 of Sarbanes-Oxley Act.                                                                                                                                                                                 |

 

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(b)                                Reports on Form 8-K

 

On February 20, 2003, the Company filed a Current Reporton Form 8-K with the Commission dated February 20, 2003 under Item 5 thereto,the filing of a press release to announce its financial results for the forthquarter and fiscal year ended December 31, 2003.

 

On March 11, 2003, the Company filed a Current Report onForm 8-K with the Commission dated March 10, 2003 reporting under Item 5thereto, the filing of a press release announcing an unfavorable $2.2 millioncourt ruling.

 

24

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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:  May 13,  2003 | By:                      | /s/  Ed H. Bowman, Jr. |
|                      |                     | Ed  H. Bowman, Jr. |
|                      |                     | Chief  Executive Officer and President |
|                      |                     |   |
| Date:  May 13,  2003 | By:                      | /s/  Barry L. Edwards |
|                      |                     | Barry L. Edwards |
|                      |                     | Executive Vice President and Chief  Financial Officer (Principal Financial  and Accounting Officer) |

 

25

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**CERTIFICATIONS**

 

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

 

1.               Ihave reviewed this quarterly report on Form 10-Q of *SOURCECORP*, Incorporated;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules13a-14 and 15d-14) for the registrant and we have

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weakness.

 
|                      |   |                                   |
|---------------------------|--------|----------------------------------------|
|                      |   |                                   |
| Date:  May 13,  2003 | By:    | /s/  Ed H. Bowman, Jr.            |
|                      |   | Ed  H. Bowman, Jr.                     |
|                      |   | Chief  Executive Officer and President |

 

26

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**CERTIFICATIONS**

 

I,Barry L. Edwards, certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of *SOURCECORP*, Incorporated;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules13a-14 and 15d-14) for the registrant and we have

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weakness in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weakness.

 
|                      |   |                                                  |
|---------------------------|--------|-------------------------------------------------------|
|                      |   |                                                  |
| Date:  May 13,  2003 | By:    | /s/  Barry L. Edwards                            |
|                      |   | Barry L. Edwards                                      |
|                      |   | Executive Vice President and Chief  Financial Officer |

 

27

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**INDEX TO EXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                               |   |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                |   |                                                                                                                                                                                                                                          |
| 3.1                 |   | Restated  Certificate of Incorporation of SOURCECORP, Incorporated (Incorporated by  reference to Exhibit 99.3 to Amendment No. 1 to the Company’s Registration  Statement on Form 8-A  filed on  February 15, 2002)                |
|                |   |                                                                                                                                                                                                                                          |
| 3.2                 |   | Amended  and Restated By-Laws of SOURCECORP, Incorporated (Incorporated by reference  to Exhibit 99.4 to Amendment No. 1 to the Company’s Registration Statement on  Form 8-A filed on February 15, 2002)                                |
|                |   |                                                                                                                                                                                                                                          |
| 4                   |   | Specimen  certificate for the Common Stock, par value $.01 per share, of the  Registrant. (Incorporated by reference to Exhibit 99.1 to Amendment No. 1 to  the Company’s Registration Statement on Form 8-A filed on February 15, 2002) |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.1                |   | Third  Amendment to Credit Agreement, dated as of March 26, 2003 by and among  SOURCECORP, Incorporated, Bank of America, N.A., and the other Agents and  Lenders party hereto.                                                               |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.2                |   | Amended and Restated Employment Agreement dated April  1, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management, L.P.,  and Ed H. Bowman, Jr.                                                                                   |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.3                |   | Amended and Restated Employment Agreement dated March  31, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management,  L.P., and Barry L. Edwards                                                                                   |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.4                |   | Amended and Restated Employment Agreement dated March  31, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management,  L.P., and Charles S. Gilbert                                                                                 |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.5                |   | Amended and Restated Employment Agreement dated April  1, 2003 by and between SOURCECORP, Incorporated, SOURCECORP Management, L.P.,  and Thomas C. Walker                                                                                    |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.6                |   | Consulting Agreement Addendum dated March 6, 2003 by  and between SOURCECORP, Incorporated and David Lowenstein                                                                                                                               |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.7                |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Bank of  America, N.A.                      |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.8                |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of The Bank of  Nova Scotia                    |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.9                |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Bank One, N.A.                              |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.10               |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of BNP Paribas                                 |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.11               |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of JPMorgan Chase  Bank                        |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.12               |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Suntrust Bank                               |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.13               |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Washington  Mutual Bank                     |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 10.14               |   | Extension Agreement, effective April 3, 2003 among  SOURCECORP, Incorporated, each of the Lenders party thereto, Bank of America,  N.A. and Bank of America Securities LLC, executed on behalf of Wells Fargo  Bank, N.A.                     |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 99.1                |   | Certification Pursuant to section 906 of Sarbanes-Oxley  Act                                                                                                                                                                                  |   |
|                |   |                                                                                                                                                                                                                                          |   |
| 99.2                |   | Certification Pursuant to section 906 of Sarbanes-Oxley  Act                                                                                                                                                                                  |   |

 

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