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TABLE OF CONTENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 0-27444

SOURCECORP, Incorporated
(Exact name of Registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)

(Former name or former address if changed since last report)

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ý    No o

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

        The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 28, 2002 (the last business day of the Company's most recently completed second fiscal quarter) was $458,568,561 based on the last sale price of $26.50 of the Registrant's Common Stock, $.01 par value per share, on the Nasdaq National Market on June 28, 2002.

        As of March 24, 2003, 16,600,684 shares of the Registrant's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

        Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than 120 days after the end of our fiscal year ended December 31, 2002 are incorporated by reference into Part III of this Form 10-K.

SOURCECORP, Incorporated
2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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PART I

        This Report contains certain forward-looking statements such as our intentions, beliefs, expectations, strategies, predictions or any other variation thereof or comparable phraseology of our future activities or other future events or conditions within the meaning of Section 27A of the Securities Act of 1993, as amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including, without limitation, the risk of integrating our operating companies, of the timing and magnitude of technological advances, of the occurrences of future events that could diminish our customers' needs for our services, of a change in the degree to which companies continue to outsource business processes, as well as such other risks set forth under the heading Risk Factors included in this report. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

ITEM 1. Business

General

        SOURCECORP, Incorporated is a national provider of business process outsourcing solutions specializing in document management and information management. We offer clients in information-intensive industries—such as financial services, government, legal, healthcare and transportation—the solutions to manage their information and document intensive business processes, enabling these organizations to concentrate on their core competencies.

        As a national business process outsourcing provider, we operate approximately 123 facilities in 24 states, Washington, D.C. and Mexico, with over 8,400 employees.

        We serve a diverse client base, including customers in the financial services, health insurance, health provider, legal and transportation/logistics industries as well as public sector agencies and non-profit organizations. Organizations can outsource many of their information management, distribution and specific information-intensive processes to us due to the breadth of our outsourcing capabilities.

        We believe that the business process outsourcing solutions market is growing due to several factors, including: (i) government regulations that require lengthy document retention periods and rapid accessibility for many types of records; (ii) continuing advancements in computer, networking, facsimile, printing and other technologies that have greatly facilitated the production and wide distribution of documents; (iii) the increasing litigiousness of society, necessitating access to relevant documents and records for extended periods of time; and (iv) increased customer expectations of low cost access to records on short notice.

        Our customer profile includes enterprises, both commercial and public-sector, which have information-intensive business processes involving large volumes of documents, forms, case files and other types of information that require specialized processing and storage, with frequent access and distribution. We believe that these clients will continue to increase their outsourcing of document and information management needs in order to further focus on their core operating competencies and revenue generating activities; reduce fixed costs, including labor and equipment costs; and gain access to new technologies without incurring the investments and risks of obsolescence associated with the technologies required to effectively meet these needs.

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Business Strategy

        Our goal is to become a leading provider in the U.S. of business process outsourcing solutions with information and document intensive services, including financial services, government, legal, healthcare and transportation. This will involve extending our involvement in key business processes that we serve today with additional processing services. In order to achieve this goal, we have implemented the following focused business strategy, which we believe will attract and retain clients:

        Economies and Efficiencies.    We intend to deliver better, faster and more cost effective services than our customers can provide for themselves.

        Scope and Scale.    We plan to continue to establish a range of business processing outsourcing operations to meet the diverse needs of customers by expanding existing businesses and making selected strategic acquisitions. We intend to continue to handle large volume engagements associated with information-intensive processes.

        Flexible Service Delivery.    We intend to continue to provide outsourced service facilities, on-site facility management and dedicated customer operations.

        Information and Technology Lifecycles.    We intend to continue to be involved during the stages of the information lifecycle from data capture, conversion and storage to analysis and output processing. In addition, we intend to further develop processing capabilities and expect to continue to be involved in the technology lifecycles from paper to electronic, making use of web-based and other technologies.

        Increase National Account Selling Resources.    We intend to expand investments in sales and sales support personnel and resources to expand our pursuit of large enterprises within our key markets. We intend to increase the number of large accounts we can pursue at a given time and, through additional reference-able client relationships over time, increase our win rates.

        Emphasize Account Penetration.    We intend to emphasize account penetration in two primary ways. First, we intend to continue to sell our existing clients additional business process outsourcing solutions provided by our other businesses. Second, we intend to use our knowledge with respect to specific industry segments to sell such services to new clients.

        Increase Investments in Technology.    We intend to increase our investments in technology in order to facilitate the integration of our service platforms, reduce labor costs relative to our growth, and provide our services in more efficient ways. These investments include the acquisition of new-generation high speed scanning equipment, optical character recognition software and systems, communication systems and other infrastructure related to our service platforms.

        Achieve Cost Savings through Consolidation and Economies of Scale.    We believe that we will continue to achieve savings by continuing to combine a number of general and administrative functions at the corporate level, such as accounting, tax, human resources and legal, by reducing or eliminating redundant functions and facilities, and by implementing national purchasing programs.

        Internet.    We intend to continue to utilize web-based technologies. Our plans include business-to-business e-commerce enabler products to provide critical back office functions. Our e-business strategy revolves around three areas: (i) order entry and status; (ii) web conversion services; and (iii) web storage and retrieval.

        Operate With Business Segments and Local Management.    We have placed all of our operations into two reportable segments. These segments are comprised of operating units, each of which is focused on providing common services to common customer bases and achieving synergies. At the same time, we have made and are continuing to make, a significant effort toward integrating our operating units into a national operating company platform that has the capability of penetrating larger accounts.

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We believe that the experienced local management teams of our operating units have a valuable understanding of their respective markets and businesses and can capitalize on existing client relationships. Multiple operating units are led by Division Presidents, each of which has broad based management experience.

Acquisition and Divestiture Strategy

        We have transitioned to an operating company supported by a strategic acquisition program. Since our inception, we have acquired 72 companies and divested 17 operating units as of December 31, 2002. Of these acquisitions, 85% were completed in the first four years following our initial public offering, in January 1996, as we established a geographic footprint to enable us to provide services nationally. Periodically, we evaluate candidates for acquisition, as well as our operating units for possible divestiture, as a part of our strategic plan. Accordingly, we screen companies in conjunction with our operating management team in order to acquire those candidates that meet certain strategic requirements. These criteria include service expansion to broaden service offerings, additional technology, added management strength, industry expertise, expansion of our customer base and geographic need.

        We believe that we will continue to be a successful acquirer of other business process outsourcing solution companies, nevertheless, there are numerous risks associated with our acquisition program. See "Risk Factors."

        During the second and third quarters of 2001, we completed a strategic realignment plan to better position the Company to pursue business process outsourcing. As part of this plan, we identified certain non-strategic service offerings for divestiture or closure, and accordingly, developed and committed to a divestiture plan. The non-strategic service offerings were evaluated based on criteria such as market growth potential, current operating performance, revenue and earnings growth potential, and expected sources and uses of capital. Pursuant to this plan, we completed the sale or closure of 15 operating units during 2001. These units related to the following services: (i) automated litigation support services; (ii) high-speed, multiple-set reproduction of documents; (iii) records acquisition in the form of subpoena of business documents and service of process; (iv) commercial system integration services; and (v) investor services. These divested units collectively accounted for approximately 22% of 2000 revenues and 4% of 2000 operating income.

Services Offered

        We provide a variety of business process outsourcing solutions and draw upon our available services to develop solutions for our clients based on their specific needs. As a result of the 2001 strategic realignment plan discussed above, we realigned our operating units into the following segments: Information Management and Distribution; and Healthcare, Regulatory and Legal Compliance. See Note 16, Segment Reporting, of Notes to Consolidated Financial Statements of SOURCECORP, Incorporated and subsidiaries for the last three years' financial results under these segments.

        Information Management and Distribution.    We offer business process solutions including electronic conversion services, analog services, data capture and database management services, internet repository services, print and mail services, including statement processing, direct mail, fulfillment services and in-bound mail room services.

        Electronic Conversion Services involve the conversion of paper or microfilm documents into digitized information through optical scanners. Information can be stored as a digitized image or converted to code through optical character recognition (OCR). Conversion to code provides additional processing capabilities, such as manipulation of data. In both cases, the digitized information can be stored on magnetic medium, such as a computer diskette, optical laser discs, or compact discs.

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Electronic imaging is generally used because of the storage media's high speed of retrieval, its multiple indexing and text search formatting capabilities and its ability to be used to distribute output to multiple locations. Additionally, images may be stored and accessed via web-based repositories. Electronic conversion services are typically billed on a job-by-job basis, based on the number of images and complexity of the storage retrieval applications.

        Data Capture and Database Management Services involve data capture (manually or through scanning or other electronic media), data consolidation and elimination, storage, maintenance, formatting and report creation. Data capture includes the conversion of text and handwritten paper media as well as images into digital files. An advantage of digital files is the ability to manipulate large amounts of data quickly and efficiently. In some cases, database services include statistical analysis of data. Additionally, services are offered to governmental agencies to generate digital images of medical record information and facilitate image processing for several state and local government agencies.

        Internet Repository Services adds electronic object storage and internet-based retrieval capabilities to complement our document capture and conversion services. Through this combination of technology and services, customers can look to us for secure and timely access to digital documents.

        Full-Service Printing and Statement Processing Services provide customers with rapid, reliable and cost-effective methods for making large-scale distributions of items such as corporate advertising, political campaign literature, consumer notices, bills, statements and annual reports for its customers. Our service also includes the ability to deliver efficient postal routing to fulfill consumer requests for specific information. In addition, we have the ability to send blast e-mail services, including high-level graphics and sound, to supplement our existing services.

        Healthcare, Regulatory and Legal Compliance.    Our services include medical records release, off-site active storage of a healthcare institutions' medical records, online delivery of images of selected medical records, temporary staffing services, providing managed care compliance reviews, legal claims administration, and professional economic research and litigation services.

        Our services include medical records release services (i.e., processing a request for a patient's medical records from a physician, insurance company, attorney, healthcare institution or individual). The medical records release service provider initially verifies that the release is properly authorized, coordinates the retrieval of the record, determines the relevant parts of the record to be copied and delivers the copied records (or portions thereof) to the requesting party. Medical records release services are provided on-site and off-site pursuant to contracts with hospitals, other large healthcare institutions and insurance companies. The medical records release service provider bills the recipient directly and sometimes pays a fee to the hospital.

        Additional services include archival records storage and management, document and data conversion, archiving and imaging services to hospital radiology departments, imaging and electronic storage of medical records for hosptials, temporary staffing services for hospital information management departments, coding and abstracting of medical records, and managed care payment compliance reviews.

        Our record management services consist primarily of active or open shelf storage. Active or open shelf storage services involve the storage, processing (i.e., indexing and formatting), retrieval, delivery and return to storage of documents in a rapid time frame. Many of these services are provided electronically. Service fees generally include a monthly fee based on activity levels and volumes stored, with extra billing for specialized requests. To a smaller extent, we store inactive documents.

        Legal Claims Administration Services provide turn-key services to administer legal settlements. Services include compiling and managing claims databases, conducting mail campaigns for settlement communications and providing communications support for settlements through our in-bound call centers. We identify and notify members of class action lawsuits or other groups, answer questions,

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track and record contact with class action or other group members, process claims and distribute settlement funds.

        Professional Economic Research and Litigation Services include high level consulting services ranging from fair lending, labor discrimination and forensic analysis to trial support for law firms and corporations.

Sales and Marketing

        We have a broad customer base. No customer accounted for more than 5% of revenue or 7% of gross profit for the year ended December 31, 2002. Historically, our sales efforts have been implemented on a location-by-location basis and typically have been coordinated through sales personnel as part of the local management's responsibilities. Our existing local sales efforts are carried out through local sales representatives. We continue to strive to increase our client base by attracting clients away from small, single business operators as a result of our ability to offer a broader range of solutions for our clients' needs. In addition, we intend to continue to focus on increasing revenue from our existing clients by selling additional services and broadening our product offerings. We will continue to augment local sales and marketing efforts through the continued implementation of a regional and national sales/account program.

Competition

        The business process outsourcing solution markets in which we compete and expect to compete are highly competitive. A significant source of competition is the in-house document handling capability of our target client base. There can be no assurance that these businesses will outsource more of their document management needs or that they will not bring in-house, services that they currently outsource. In addition, certain of our competitors are larger businesses and have greater financial resources than we do. Certain of these competitors operate in broader geographic areas than we do, and others may choose to enter our areas of operation in the future. We intend to continue to enter new geographic areas through internal growth and potentially through acquisitions and expect to encounter significant competition from established competitors in each of such areas. As a result of this highly competitive environment, we may lose clients or have difficulty in acquiring new customers and new companies and our results of operations may be adversely affected.

        We believe that the principal competitive factors in business process outsourcing solution services include accuracy, reliability and security of service, client segment specific knowledge and price. We compete primarily on the basis of quality of service and client segment specific knowledge as well as our ability to handle large volumes and projects, and believe that we compete favorably with respect to these factors. We continue to consolidate and integrate our service-delivery capabilities to increase our operational efficiencies. We are also increasing our use of offshore personnel and technology to provide our services, where applicable, in order to increase our pricing competitiveness.

Employees

        As of December 31, 2002, we had over 6,500 full-time and over 1,900 part-time employees. As of such date, we had 97 employees represented by labor unions. We consider our relations with our employees to be good.

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Our Executive Officers

        The following table sets forth certain information concerning each of our executive officers as of March 24, 2003:

        Thomas C. Walker has been our Chairman of the Board since our inception in September 1994 and has been our Chief Development Officer since November 1995. From September 1994 until November 1995, Mr. Walker held the positions of President and Chief Executive Officer. From August 1991 to December 1994, Mr. Walker was Vice President, Corporate Development, of Laidlaw Waste Systems, Inc., a subsidiary of Laidlaw, Inc., a waste management company, where he was responsible for its acquisition and divestiture program in the United States and Mexico. Mr. Walker has been responsible for the acquisition or divestiture of several hundred businesses over a 30-year period. Mr. Walker holds a B.S. degree in Industrial Engineering from Lafayette College.

        Ed H. Bowman, Jr. has been our President and Chief Executive Officer and a Director since November 1995. From 1993 to 1995, Mr. Bowman was Executive Vice President and Chief Operating Officer of the Health Systems Group for First Data Corporation, a financial services company. Mr. Bowman was responsible for the day-to-day operations of research and development, marketing and customer service. From 1983 to 1993, Mr. Bowman served in a number of executive positions with a leading healthcare information systems company; responsibilities included VP—International, VP—Marketing, Senior VP—Customer Services, Group Senior VP—Research and Development, and last serving as Executive Vice President and Chief Operating Officer with responsibility for domestic operations. Prior to 1983, Mr. Bowman was with Andersen Consulting (currently known as Accenture), where he was elected a Partner. Mr. Bowman became a C.P.A. in 1973 and holds an M.S. degree from Georgia Institute of Technology and a B.B.A. from Georgia State University. Mr. Bowman is an investor and former board member of several early-stage, privately held high technology companies and has served on the Board of the Advanced Technology Development Center at Georgia Tech. Mr. Bowman currently serves on the Advisory Board to the President of Georgia Tech and on the Advisory Board of the Robinson School of Business at Georgia State University.

        Barry L. Edwards has been an Executive Vice President and our Chief Financial Officer since August 2000. From November 1994 to March 2000, Mr. Edwards was Executive Vice President and Chief Financial Officer for AMRESCO, a nationwide financial services company. From December 1978 to November 1994, Mr. Edwards was Vice President and Treasurer of Liberty Corporation, an insurance and broadcasting holding company. Mr. Edwards received a B.S. degree in Finance and

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Economics from Lehigh University in 1969, and an M.B.A degree from the University of Virginia Darden School of Business in 1972. Mr. Edwards is a board member for Ryan's Family Steakhouses and Robert Harris Homes.

        Joe A. Rose has been our Chief Operating Officer since January 2000 and a Director since March 2000. From August 1999 through December 1999, Mr. Rose was an Executive Vice President. From June 1997 through August 1999, Mr. Rose was a Senior Vice President. From May 1995 through January 1997, Mr. Rose was President and CEO of FormMaker Software, Inc., a document technology company which merged with Image Sciences Corp. to form DocuCorp International. From May 1993 through May 1995, Mr. Rose was Corporate Vice President of John H. Harland Company, a financial services company, and President and CEO of its subsidiary, Formation Technology, Inc. From July 1988 through May 1993, Mr. Rose served as Executive Vice President of National Data Corporation, where he was responsible for the credit card and cash management divisions. Mr. Rose began his information services career at EDS in sales. Mr. Rose holds a B.A. degree from Texas Tech University.

        Charles S. Gilbert has been a Senior Vice President, Secretary and General Counsel since January 2001, a Vice President, Secretary and General Counsel since August 2000, our Secretary and acting General Counsel since July 2000 and corporate counsel since April 2000. From 1991 until joining us he practiced law in the corporate securities section of Jackson Walker LLP, Dallas, where he was elected partner. Mr. Gilbert holds a B.S. degree in Physics from The University of Texas and a J.D. from The University of Texas School of Law.

        Michael S. Rupe has been a Division President since September 2000. From March 1998 through August 2000, Mr. Rupe served as President and Chief Executive Officer of Solomon Software, Inc., an accounting and business software company that was sold to Great Plains Software in June 2000. From March 1997 to February 1998, Mr. Rupe served as Executive Vice President and Chief Financial Officer of Solomon Software, Inc. From August 1995 through February 1997, Mr. Rupe was Senior Vice President of Finance and Administration at FormMaker Software, Inc., a document technology company, which merged with Image Sciences Corp. to form DocuCorp International. Mr. Rupe holds a B.S. degree in Accounting from the University of Kentucky.

        Kerry Walbridge has been a Division President since March 2001. From April 2000 to December 2000, Mr. Walbridge was President and CEO of eMake Corporation, a first-to-market provider of web hosted ERP software solutions and electronic supply chain services to the manufacturing market. From August 1998 to April 2000, Mr. Walbridge was Senior Vice President Sales and Marketing for Outsourcing Solutions, Inc. the nations largest provider of accounts receivable management services. From November 1991 to June 1993 and from June 1996 to August 1998, Mr. Walbridge was a Division Vice President for EDS and from April 1988 to November 1991 Mr. Walbridge was a Division Vice President for McDonnell Douglas Systems Integration. Mr. Walbridge holds a B.S. degree in Business from St. Louis University.

        Ronald Zazworsky has been a Division President since November 2000. From October 1997 until November 2000, Mr. Zazworsky was our Senior Vice President—HealthSERVE. From February 1994 until July 1997, Mr. Zazworsky was Senior Vice President at Medaphis Corporation, an outsourcer of financial and business management services for hospitals and physician groups. From April 1992 to February 1994, Mr. Zazworsky was President and CEO at Habersham Banking Solutions, Inc., a private check imaging software firm, where he also served on its board of directors. Prior to 1992, Mr. Zazworsky was employed at HBOC, a healthcare systems and services organization, as Regional Vice President for eight years. Previously, Mr. Zazworsky held various sales, marketing, and management positions at IBM. Mr. Zazworsky holds a B.A. degree from Gettysburg College and a M.B.A. degree from Emory University.

        W. Bryan Hill has been a Vice President and our Chief Accounting Officer since November 2001. From August 2000 to October 2001, Mr. Hill served with us as a Director of Accounting. From

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July 1996 until joining us, Mr. Hill was Senior Vice President of Accounting and Finance with FirstPlus Consumer Finance. Previously, Mr. Hill held various accounting and finance positions with Associates First Capital for over seven years with Director of Corporate Finance being his last position. Mr. Hill holds a B.B.A. degree in Accounting from Texas Christian University and has been a C.P.A and a C.M.A from 1996 and 2000, respectively.

RISK FACTORS

        YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE MAKING AN INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE HURT, THE PRICE OF OUR SECURITIES COULD DECLINE, WE MAY NOT BE ABLE TO REPAY OUR DEBT SECURITIES, IF ANY, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND INCORPORATED IN THIS REPORT BY REFERENCE, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.

We may not be able to continue to effectively integrate all of our operating companies

        Our growth and future financial performance depend on our ability to continue to integrate our operating companies. A number of our operating companies offer different services, use different capabilities, technologies and information systems and target different geographic markets and client segments. These differences increase the risk in successfully completing the integration of our operating companies. Any difficulties we encounter in the integration process could adversely affect us and we can not assure you that our operating results will match or exceed the combined individual operating results achieved by our operating companies prior to their acquisition.

Any future acquisitions will require financing

        We currently intend to finance any future acquisitions by using cash and in some cases our common stock for all or a portion of the consideration to be paid. In the event that our common stock is not at a sufficient value at the time of an acquisition, or potential acquisition candidates are unwilling to accept our common stock as consideration for the sale of their businesses, we may be required to use more cash, if available, in order to consummate acquisitions. If we do not have sufficient cash, our growth through acquisitions could be limited unless we are able to obtain capital through additional debt or equity financings. Under our line of credit with a group of banks led by Bank of America, SunTrust and Wells Fargo, we and our subsidiaries could borrow, on a revolving credit basis, loans in an aggregate outstanding principal amount of $297.5 million for working capital, general corporate purposes and acquisitions, subject to certain restrictions in our line of credit. As of December 31, 2002, the availability under the line of credit was approximately $62.1 million. We cannot assure you, however, that funds available under our line of credit will be sufficient for our needs.

The price of our common stock may be volatile

        The price of our common stock may be volatile. Our quarterly results of operations may vary materially as a result of the gain or loss of material client relationships and variations in the prices charged by us for our services. In addition, since a significant portion of our revenue is generated on a project-by-project basis, the timing or completion of material projects could result in fluctuations in our results of operations for particular quarterly periods. Fluctuations in operating results may adversely affect the market price of our common stock. The market price for our common stock may also fluctuate in response to material announcements by us or our significant clients or competitors, changes in economic or other conditions impacting our targeted client segments or changes in general economic conditions. Further, the securities markets have experienced significant price and volume fluctuations

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from time to time that have often been unrelated or disproportionate to the operating performance of particular companies. These broad fluctuations may adversely affect the market price of our common stock.

We depend on certain client industries

        We derive our revenue primarily from document and information intensive industries. Fundamental changes in the business practices of any of these client industries, whether due to regulatory, technological, the internet or other developments, could cause a material reduction in demand by our clients for the services offered by us. Any reduction in demand could have a material adverse effect on our results of operations. The business process outsourcing service industry is characterized by technological change, evolving client needs and emerging technical standards. Although we believe that we will be able to continue to offer services based on new technologies, we cannot assure you that we will be able to obtain any of these technologies, that we will be able to effectively implement these technologies on a cost-effective or timely basis or that such technologies will not render obsolete our role as a third party provider of business process outsourcing services.

        Our success depends substantially upon retaining our significant clients. Generally, we may lose clients due to a merger or acquisition, business failure, contract expiration, conversion to a competitor or conversion to an in-house system. We cannot guarantee that we will be able to retain long-term relationships or secure renewals of short-term relationships with our significant clients in the future.

        We incur a high level of fixed costs related to certain of our business process outsourcing clients. These fixed costs result from significant investments, including computer hardware platforms, computer software, facilities, and client service infrastructure. The loss of any one of our significant clients could leave us with a significantly higher level of fixed costs than is necessary to serve our remaining clients, thereby reducing our profitability.

We face intense competition

        The business process outsourcing services industry is highly competitive. We cannot guarantee that we will be able to compete successfully in the future. A significant source of competition is the in-house document handling capability of our targeted client base. We cannot assure you that these businesses will outsource more of their document and information management needs or that such businesses will not bring in-house, services that they currently outsource. In addition, certain of our competitors are larger businesses and have greater financial resources than we do. Certain of these competitors operate in broader geographic areas than we do, and others may choose to enter our areas of operation in the future. In addition, we intend to enter new geographic areas through internal growth and acquisitions and expect to encounter significant competition from established competitors in each new area. Some of our competitors have a greater international presence than us and offer a broader range of services in certain segments. In such an increasingly competitive environment, we may lose clients or have difficulty in acquiring new clients and new companies, and our results of operations may be adversely affected. In addition, we may be forced to lower our pricing, or, if demand for our services decreases our business, financial condition and results of operations could be materially and adversely affected.

We have significant investments in some client contracts, which expose us to the risk of these clients' financial conditions

        We must make capital investments in order to attract and retain large outsourcing agreements. We sometimes must purchase assets such as computing equipment and software, assume financial obligations such as computer lease and software maintenance obligations or property leases, incur capital expenditures or incur expenses necessary to provide outsourcing services to a client. If any of

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these agreements were to terminate, we might not be able to realize a return on the assets and investments acquired or financial obligations assumed.

Meeting changes in technology could be costly and, if we do not keep up with these changes, we could lose existing clients and be unable to attract new clients

        The markets for our business process outsourcing services are subject to rapid technological changes and rapid changes in client requirements. To compete, we commit substantial resources to operating multiple hardware platforms, to customizing third-party software programs and to training client personnel and our personnel in the use of new technologies. Future hardware, software and other products may be able to manipulate large amounts of documents and information more cost effectively than existing products that we use. Information processing is shifting toward client-server and web-based systems, in which individual computers or groups of personal computers and mid-range systems replace older systems. This trend could adversely affect our business and financial results and result in us losing clients and being unable to attract new clients. We have committed substantial resources to developing outsourcing solutions for these distributed computing environments. We cannot guarantee that we will be successful in customizing products and services that incorporate new technology on a timely basis. We also cannot guarantee that we will continue to be able to deliver the services and products demanded by the marketplace. Technology costs have also dropped significantly in recent years due in large part to hardware technology advances.

Intellectual property infringement claims could require us to incur substantial costs to defend the claims, change our services, purchase new licenses or redesign our use of challenged technology

        We do not own the majority of the software that we use to run our business; instead we license this software from a number of vendors. If these vendors assert claims that we or our clients are infringing on their software or related intellectual property, we could incur substantial costs to defend these claims. In addition, if any vendors' infringement claims are ultimately successful, our vendors could require us: (i) to cease selling or using products or services that incorporate the challenged software or technology; (ii) to obtain a license or additional licenses from our vendors; or (iii) to redesign our products and services which rely on the challenged software or technology. We are not currently involved in any material intellectual property litigation, but could be in the future to protect our trade secrets, trademarks or know-how, or to defend ourselves or our clients against alleged infringement claims.

We depend on our personnel

        Our operations depend on the continued efforts of our executive officers and on senior management of our operating companies. Also, we will likely depend on the senior management of businesses acquired in the future. If any of these people are unable or unwilling to continue in their present role, or if we are unable to attract and retain additional managers and skilled employees, our business could be adversely affected. We do not currently have key person life insurance covering any of our executive officers.

        Our success depends, to a significant extent, upon our ability to attract, retain and motivate highly skilled and qualified personnel. If we fail to attract, train, and retain sufficient numbers of these technically-skilled people, our business, financial condition, and results of operations could be materially and adversely affected. Competition for personnel is intense in the document and information services industry, and recruiting and training personnel require substantial resources. We must continue to grow internally by hiring and training technically-skilled people in order to perform services under our existing and future contracts. Our business also experiences significant turnover of technically-skilled people.

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We may be liable for breach of confidentiality

        A substantial portion of our business involves the handling of documents containing confidential and other sensitive information. Although we have established procedures intended to prevent any unauthorized disclosure of confidential information and, in some cases, have contractually limited our potential liability for unauthorized disclosure of such information, we cannot assure you that unauthorized disclosures will not result in material liability to us.

We may have business interruptions

        Certain of our operations are performed at a single location and are dependent on continuous computer, electrical, and telephone service. As a result, any disruption of our day-to-day operations could have a material adverse effect upon us. We cannot assure you that a fire, flood, earthquake, terrorist activities, power loss, telephone service loss, problems caused by computer or technology issues or other events affecting one or more of our facilities would not disable these services. Any significant damage to any facility or other failure that causes significant interruptions in our operations may not be covered by insurance. Any uninsured or underinsured loss could have a material adverse effect on our business, financial condition or results of operations.

Government regulations may hinder our ability to change prices

        In our medical records release of information business, there is state legislation from time to time aimed at fixing the price that can be charged for copying and distributing medical records information. Depending on the severity of such pricing legislation, there can be significant pressure on the profit margins associated with providing medical records release services. Today, some form of pricing legislation exists in many states in the United States. Further, such pricing legislation from time to time results in putative class action lawsuits alleging that the charge for reproducing certain medical records is not in conformity with such plaintiffs' reading of the applicable regulated charge. The defense of such suits can exert further pressure on related profit margins.

Revenue mix may impact margins

        Project revenue includes one-time projects in which the customer relationship is not expected to continue after project completion. Conversely, recurring revenue is characterized by customer relationships that are generally for one year and may continue for longer. Recurring revenue is typically based on transaction volumes sent to us by our customers and these volumes are typically not contractual or otherwise guaranteed. Project revenue margins are usually higher than our average margins and the workload can be highly volatile. Recurring revenue typically has lower margins than project revenue but is usually more predictable. To the extent our business mix shifts from project-oriented to recurring service offerings, our gross margins may decline.

Our clients' ability to terminate contracts creates an uncertain revenue stream and could decrease our revenues and profitability

        Some of our government and other clients can terminate their contracts for any reason, provided the notification procedures stated in the contract are followed, even though our performance is consistent with the service levels specified in the contract. In addition, public sector contracts are subject to detailed regulatory requirements and public policies, as well as to funding priorities. Some of our contracts with clients permit termination in the event our performance is not consistent with the service levels specified in those contracts. If we fail to achieve specific contract standards, many of our document and information outsourcing contracts provide for credits for our clients or, in some cases, re-pricing provisions that can result in reductions of our fees for performing our services. In these situations, we could incur unforeseen costs or financial penalties in performing the contract.

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HIPAA regulations

        As a result of statutory authority granted pursuant to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the United States Department of Health and Human Services has recently issued regulations regarding the use and disclosure of personal health information by health care providers, health plans, and certain other "covered entities" operating in the health care industry. The HIPAA regulations require covered entities to take steps to maintain the privacy and security of personal health information. While we are not a "covered entity" directly governed by these regulations (though in some cases the Company's group health plans may be "covered entities"), many of our customers are covered entities under the HIPAA regulations, and these customers are required to adjust their business arrangements to comply with HIPAA. These customers will be required to enter into "business associate arrangements" with us that conform to the requirements of HIPAA. The requirements of HIPAA, and the costs of complying with HIPAA, may adversely affect the business operations of these customers, which could have a negative impact on our business operations. Furthermore, the requirements of the "business associate arrangements," and the changes we will have to make in our operations to comply with such agreements, will increase our costs of operations. To the extent we are unable to comply with the provisions of such agreements, we could lose the business generated by those clients or could be subject to damages for violation of its "business associate agreements" with those clients.

We may have future goodwill impairments

        Due to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, goodwill and other intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. The impairment test consists of determining the fair value of goodwill and other intangible assets and comparing the fair value to current book values. The impairment test includes our estimates and assumptions regarding business trends and growth. If economic events occur that cause us to revise our estimates and assumptions used in determining the fair value of our goodwill and other intangible assets, such revisions could result in an impairment charge that could have a material adverse impact on our financial statements during the period incurred. As of December 31, 2002, there was no impairment of goodwill and no events existed that required evaluation of impairment for other intangible assets.

Our financial covenants become more restrictive in the future

        Under our line of credit agreement, we are subject to certain reporting requirements and financial covenants, including requirements that we maintain minimum levels of net worth, a maximum ratio of funded debt to EBITDA and other financial ratios. Certain of these covenants become more restrictive over time. While we are currently in compliance with such covenants, an erosion of our business could place the Company out of compliance in the future. Potential remedies for the lenders include declaring all outstanding amounts immediately payable, terminating commitments and enforcing any liens; however, in the event of any future noncompliance the Company may seek a waiver from such lenders. See Note 8, Long-term Obligations and Credit Facilities, of Notes to Consolidated Financial Statements.

Future sales of our shares may adversely affect our stock price

        The market price of our common stock could be adversely affected by the sale of substantial amounts of our common stock in the public market. In addition, many shares are subject to contractual restrictions on resale over some period of time. If a significant number of shares of our common stock become freely tradable at approximately the same time and a large number of shares are sold by stockholders in the market as soon as their shares became freely transferable, the price of our common stock could be adversely affected.

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We may have environmental liabilities in the future

        We are subject to regulations and ordinances that govern activities or operations that may have adverse environmental effects, such as discharges to air and water in connection with some of our facilities. We are not aware of any environmental conditions relating to present or past waste generation at or from these facilities that would be likely to have a material adverse effect on our business, financial condition or results of operations. However, we cannot assure you that environmental liabilities in the future will not have a material adverse effect on our business, financial condition or results of operations.

Our Board of Directors may be able to delay or prevent takeovers

        Our Board of Directors is empowered to issue preferred stock without stockholder action. The existence of this "blank-check" preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a tender offer, merger, proxy contest or otherwise.

Other risks, unknown or immaterial today, may become known or material in the future

        We have attempted to identify certain material risk factors currently affecting us. However, additional risks that we do not yet know of, that are not described herein, or that we currently think are immaterial, may occur or become material. These risks could impair our business operations or adversely affect our results of operations.

ITEM 2. Properties

        As of December 31, 2002, we operated approximately 123 facilities in 24 states. Except for the three facilities we own, (which are located in Maryland, Florida and Alabama) all of these facilities were leased and were principally used for operations and general administrative functions. As of December 31, 2002, such leased facilities consisted of approximately 1.9 million square feet. In addition, our employees are in numerous client locations where we neither own nor lease the occupied space, primarily in connection with our Healthcare, Regulatory and Legal Compliance segment. See Note 9, Lease Commitments, of Notes to Consolidated Financial Statements for further information relating to leases.

        In order to secure our obligations under our current line of credit, we granted to Bank of America, SunTrust Bank and Wells Fargo Bank, as co-agents for our lenders, a security interest in the capital stock of our material subsidiaries and, in the event we exceed a designated leverage ratio, a lien on substantially all of our properties and other assets. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources." See Note 8, Long-term Obligations and Credit Facilities, of the Notes to the Consolidated Financial Statements.

        We believe that our properties are generally well maintained, in good condition and adequate for our present needs. Furthermore, we believe that suitable additional or replacement space will be available when required.

ITEM 3. Legal Proceedings

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

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DeBari Litigation

        In March 1999, we filed a lawsuit styled DeBari Associates Acquisition Corp. v. Robert Burnham, Mark Walch, Nortec, LLC, Spencer McElhannon and Peng Lin in the Supreme Court of the State of New York ("Nortec Action"). In the Nortec Action, we were seeking a declaratory judgment that Robert Burnham, Mark Walch, Nortec, LLC, Spencer McElhannon and Peng Lin (the "Nortec Defendants") have no interest in Net Data, Inc., a subsidiary of a company acquired by us in February 1998. We divested the operating assets of Net Data, Inc. as part of our 2001 strategic realignment plan. The Nortec Defendants counterclaimed alleging breach of contract, fraud, breach of fiduciary duty as a joint venturer and unjust enrichment. The trial for the above matter concluded mid-October 2002, with the jury finding in our favor (i.e. that the Nortec Defendants did not have a right to any part of Net Data, Inc. or any portion of the proceeds from its purchase). On February 7, 2003, the judge entered its order, reflecting the jury's finding in our favor. The Nortec Defendants deadline for filing 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 an extended period of time in which to file an appeal.

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

        On February 24, 1992, MAVRICC Management Systems, Inc. (one of our wholly-owned subsidiaries, the operating assets of which were divested by us as part of our 2001 strategic realignment plan) ("MAVRICC") entered into an agreement with Franklin Bank, N.A. whereby MAVRICC agreed to maintain records for 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. Owen initiated a class action lawsuit against Franklin Bank, N.A. in Tennessee's Sumner County Circuit Court, Chancellory Division, alleging breach of fiduciary duty, breach of contract, negligence and violation of the Consumer Protection Act. The Weatherford complaint seeks compensatory and punitive damages from Franklin Bank, N.A. On September 28, 2001, Franklin Bank, N.A. filed its Third-Party Complaint against MAVRICC for indemnification, alleging that MAVRICC breached the agreement. A hearing on whether a class should be certified has not been set. On February 27, 2003, the parties to this action filed an agreed order of dismissal without prejudice, which, upon entry by the court, would dismiss both the complaint against Franklin Bank and Franklin Bank's Third Party Complaint against MAVRICC; however, as the complaints will be dismissed without prejudice, it is possible for such parties to later reassert such claims. We believe that if such claims were reasserted, we would have meritorious defenses and would vigorously defend any such claims made against us in this matter.

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

        On February 9, 1995, prior to the acquisition by the Company, Managed Care Professionals, Inc. (one of our wholly-owned subsidiaries) ("MCP") entered into an "Exclusive Marketing Agreement" with Healthcare Marketing Associates, Inc. ("HMA") whereby MCP granted to HMA the exclusive right to market, and HMA agreed to market exclusively for MCP, the MCP products and services to health care providers in the United States for which MCP agreed to pay HMA a percentage (30%) of gross revenues paid to MCP by the provider (customer). The duration of the Agreement was for a period of five (5) years and expired on February 9, 2000 ("Termination Date"). On April 27, 2001, HMA filed a lawsuit against MCP in the Circuit Court of the County of St. Louis, State of Missouri, alleging entitlement to commissions on revenues generated from providers after the Termination Date who were initially brought to MCP prior to the Termination Date. On August 26, 2002, our motion for summary judgment was denied. In March 2003, this lawsuit was tried before a judge and at the conclusion of the trial, the judge ruled in the plaintiff's favor in the amount of $1.782 million plus prejudgment interest, which equates to approximately $2.2 million in total as of March 5, 2003. The judgment amount plus prejudgment interest costs have been included in our 2002 results. We intend to

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appeal this ruling. We believe we have meritorious points of error for appeal and intend to continue to vigorously defend the claims made against us in this matter. See Note 15, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements.

Various ROI Copy Charge Matters

        From time to time, various of our subsidiaries that perform release of information ("ROI") services become defendants to putative class action lawsuits generally alleging that the charge for reproducing certain medical records is not in conformity with such plaintiffs' reading of the applicable regulated charge. Such suits typically include multiple ROI companies and hospitals as defendants and demand reimbursement for prior charges as well as for prospective pricing adjustments. We are currently a party to several such suits in various stages of development. We believe we have meritorious defenses and intend to continue to vigorously defend any claims made against us in these matters.

Mattel v. SOURCECORP

        On February 18, 2003, Mattel, Inc. filed suit against the Company in the Los Angeles County California Superior Court. In the suit, the plaintiff alleges that one of our subsidiaries is liable for the loss of various products and prototypes allegedly stored at one of our subsidiary's box storage facilities under 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. The Company has not included any significant amounts related to this matter in its result of operations for 2002. We believe we have meritorious defenses and intend to vigorously defend any claims made against us in this matter.

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

        In June 2000, the Company filed an action styled F.Y.I. Incorporated v. Spohr, et. al. in Dallas, Texas, in which we asserted claims for breach of contract, fraud, and negligent misrepresentation against the sellers of two related companies that we acquired in December 1998 (the "Texas Action"). The Texas Action was later removed to federal court and ultimately dismissed on jurisdictional grounds. We reasserted these claims in two actions that were later consolidated; one styled F.Y.I. Incorporated v. Spohr, et. al. in Superior Court of the State of California in the County of Sacramento, Case No. 01-AS-00721 (the "Sacramento Action") and one styled Spohr, et. al. v. F.Y.I. Incorporated, et. al. in the Superior Court of the State of California in the County of San Francisco, Case No. 318703 (the "San Francisco Action"). In the consolidated action, we additionally filed claims against the sellers' accountants and the two sellers filed claims against us. Specifically, the sellers allege that our former subsidiary wrongfully failed and refused to execute and deliver a requested estoppel certificate, and that the failure to provide such estoppel certificate harmed the landlord in that they were allegedly denied favorable terms on a refinancing of the property and were allegedly prevented from completing a timely sale of the property. Sellers' allege damages of approximately $1.5 million. We have asserted damages in excess of $8 million. We believe we have meritorious defenses to sellers' claims and intend to vigorously defend any claims made against us in this matter.

ITEM 4. Submission of Matters to a Vote of Security Holders

        During the fourth quarter of the year ended December 31, 2002, no matters were submitted to a vote of the security holders.

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PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

        Our common stock trades on The Nasdaq Stock Market under the symbol "SRCP" (formerly "FYII"). The following table sets forth, for our fiscal periods indicated, the range of high and low reported sale prices for our common stock.

Holders

        On March 24, 2003, the last reported sale price of our common stock on the Nasdaq Stock Market was $13.89 per share. At March 24, 2003, there were 85 holders of record of our common stock and 16,600,684 shares outstanding.

Dividends

        We have not declared any cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future and intend to retain our earnings, if any, to finance the expansion of our business and for general corporate purposes. Further, our credit facility prohibits payment of cash and similar dividends. Any payment of future dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions and other factors that our Board of Directors deems relevant.

ITEM 6. Selected Financial Data

Selected Financial Data

        We were founded in September 1994, and we effectively began our operations on January 26, 1996, following the completion of our initial public offering ("IPO"). We acquired, simultaneously with and as a condition to the closing of the IPO, seven Founding Companies.

        Since the IPO, and through December 31, 2002, we acquired nine companies in transactions that were accounted for as poolings-of-interests: (i) The Rust Consulting Group, Inc. ("Rust") in December 1996; (ii) MAVRICC Management Systems, Inc. and a related company, MMS Escrow and Transfer Agency, Inc. (collectively, "MAVRICC") in March 1997; (iii) Input of Texas, Inc. ("Input") in March 1997; (iv) Micro Publishing Systems ("MPS") in December 1997; (v) Lifo Systems, Inc. ("Lifo") in February 1998; (vi) Creative Mailings, Inc. ("CMI") in September 1998; (vii) Economic Research Services, Inc. ("ERS") in October 1998; (viii) TCH Mailhouse, Inc. and G&W Enterprise, Inc. (collectively, "TCH") in December 1998; and (ix) Advanced Digital Graphics, Inc. ("ADG") in December 1998 (collectively, the "Pooled Companies"). Our consolidated financial statements for all

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periods presented have been restated to include the accounts of MAVRICC, Input, CMI, and ERS. Our consolidated financial statements were not restated for the Rust, MPS, Lifo, TCH and ADG acquisitions for the periods prior to January 1, 1998 due to their individual financial immateriality. We and the Pooled Companies were not under common control or management during the periods prior to their respective mergers. Our results of operations for the periods presented may not be indicative of the results in the future because of (i) the impact of acquisitions recorded as purchases, whose results are only included subsequent to the purchase date; (ii) the impact of acquisitions recorded as poolings-of-interests, whose predecessor companies were not under common control or management; and (iii) the impact of divestitures.

        Subsequent to the IPO and through December 31, 2002, we acquired 56 additional companies in transactions accounted for as purchases and have divested 17 operating units by sale or closure. Our results of operations include the results of these acquisitions from the date of their respective acquisitions and the results of the divestitures up to the effective date.

        Our Selected Financial Data have been derived from our consolidated financial statements. Arthur Andersen LLP audited our 1998, 1999, 2000, and 2001 consolidated financial statements. Deloitte & Touche LLP audited our 2002 consolidated financial statements.

        Our Selected Financial Data provided below should be read in conjunction with our consolidated financial statements and the related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" that appear elsewhere in this Report.

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Selected Financial Data
(In thousands, except per share data)

(1)

Special charges represent expenses and asset write-downs associated with the 2001 strategic realignment plan. We sold or closed 15 operating units pursuant to this plan. Special charges consist primarily of net loss or gain on sale or closure, other asset write-downs, and accrued contingencies such as legal claims, contract termination costs and various disposal expenses.

(2)

On January 1, 2002, we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated amortization, on a prospective basis, of goodwill and other intangible assets that have indefinite useful lives.

(3)

Interest expense for the year ended December 31, 2001 includes $0.5 million for the write-down of deferred financing costs due to refinancing long-term obligations.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto and "Item 6. Selected Financial Data" appearing elsewhere in this Report. Additional information concerning factors that could cause results to differ materially from those in the forward-looking statements is contained under "Item 1. Business—Risk Factors."

Introduction

        We were founded in September 1994, to create a national, single source provider of document and information outsourcing solutions to document and information intensive industries, including: financial services, government, legal, healthcare and transportation. We acquired the seven Founding Companies

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(the "Founding Companies") simultaneously with the closing of our initial public offering (the "IPO") on January 26, 1996, and effectively began operations at that time. The consideration for the Founding Companies consisted of a combination of cash and common stock of our Company.

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

Significant Developments

Acquisitions

        Effective January 1, 2002, we acquired United Information Services ("UIS"), located in Iowa, and expanded the Company's statement solutions service offering, which had existing locations in Arizona and New York. See Note 7, Business Combinations, of the Notes to the Consolidated Financial Statements.

Legal Proceedings

        On February 9, 1995, prior to the acquisition by the Company, Managed Care Professionals, Inc. (one of our wholly-owned subsidiaries) ("MCP") entered into an "Exclusive Marketing Agreement" with Healthcare Marketing Associates, Inc. ("HMA") whereby MCP granted to HMA the exclusive right to market, and HMA agreed to market exclusively for MCP, the MCP products and services to health care providers in the United States for which MCP agreed to pay HMA a percentage (30%) of gross revenues paid to MCP by the provider (customer). The duration of the Agreement was for a period of five (5) years and expired on February 9, 2000 ("Termination Date"). On April 27, 2001, HMA filed a lawsuit against MCP in the Circuit Court of the County of St. Louis, State of Missouri, alleging entitlement to commissions on revenues generated from providers after the Termination Date who were initially brought to MCP prior to the Termination Date. On August 26, 2002, our motion for summary judgment was denied. In March 2003, this lawsuit was tried before a judge and at the conclusion of the trial, the judge ruled in the plaintiff's favor in the amount of $1.782 million plus prejudgment interest, which equates to approximately $2.2 million in total as of March 5, 2003. The judgment amount plus prejudgment interest costs have been included in the Company's 2002 results. We intend to appeal this ruling. We believe we have meritorious points of error for appeal and intend to continue to vigorously defend the claims made against us in this matter.

Strategic Realignment Plan

        During the second and third quarters of 2001, we completed several steps involved with a strategic realignment plan. We completed a strategic review of our operations and determined markets that we intended to concentrate on for future growth. Additionally, we identified certain non-strategic service offerings for divestiture or closure, and accordingly, developed and committed to a divestiture plan. The divested service offerings were evaluated based on criteria such as market growth potential, current operating performance, revenue and earnings growth potential, and expected sources and uses of capital. This plan resulted in divestitures comprising approximately 22% of 2000 revenues and 4% of 2000 operating income.

        During 2001, we completed the sale or closure of 15 operating units pursuant to the divesture plan. These units related to the following services: (i) automated litigation support; (ii) high-speed, multiple-set reproduction of documents; (iii) records acquisition in the form of subpoena of business documents and service of process; (iv) commercial system integration services; and (v) investor services.

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        We sold these units for $19.7 million of net consideration and collected $18.7 million of this consideration by December 31, 2002. The remaining $1.0 million of net consideration is expected to be settled in 2003.

        These divested units had a net book value of $73.0 million. Additionally, we recorded liabilities of $9.3 million for exiting costs, personnel costs and various selling expenses. As of December 31, 2002, $7.8 million of these costs have been paid, with the remaining $1.5 million to be settled in 2003. See Note 3, Strategic Realignment Plan, of the Notes to the Consolidated Financial Statements.

Business Segments

        We aggregate our service offerings and operations into two reportable segments: (i) Information Management and Distribution, and (ii) Healthcare, Regulatory, and Legal Compliance. Our reportable segments are organized around customer types and service offerings possessing similar economic characteristics. We evaluate segment performance based on revenue, operating income, and income before income taxes. All centrally incurred corporate costs are allocated to the segments based principally on operating income. The reporting segments follow the same accounting policies used for our consolidated financial statements as described in the summary of significant accounting policies in the notes to our consolidated financial statements.

        At January 1, 2002, we transferred four operating units from the Healthcare, Regulatory and Legal Compliance segment to the Information Management and Distribution segment and one operating unit from the Information Management and Distribution segment to the Healthcare, Regulatory and Legal Compliance segment. These transfers were completed to better align these operating units' results with operating units of similar core competencies. The identified segments are as follows:

        Information Management and Distribution.    We offer business process solutions including electronic conversion services, analog services, data capture and database management services, internet repository services, and print and mail services, including statement processing, direct mail and fulfillment services and in-bound mail services. In 2002, project revenue accounted for 11.9% of the segment's revenue with recurring revenue accounting for the remaining 88.1%.

        Healthcare, Regulatory and Legal Compliance.    Our services include medical records release, off-site active storage of a healthcare institutions' medical records, online delivery of images of selected medical records, temporary staffing services, managed care compliance reviews, legal claims administration, and professional economic research services and litigation services. In 2002, project revenue accounted for 63.4% of the segment's revenue with recurring revenue accounting for the remaining 36.6%.

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Results of Operations

        The following table sets forth certain items as shown in "Item 6. Selected Financial Data" expressed as a percentage of total revenue for the periods indicated:

(1)

Cost of services consists primarily of compensation and benefits to employees providing goods and services to our clients; occupancy costs; equipment costs; and supplies. Our cost of services also includes the cost of products sold for micrographics supplies and equipment; computer hardware and software; and business imaging supplies and equipment.

(2)

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

(3)

Special charges represent expenses and asset write-downs associated with the 2001 strategic realignment plan. We sold or closed 15 operating units pursuant to this plan. Special charges consist primarily of net loss or gain on sale or closure, other asset write-downs, and accrued contingencies such as legal claims, contract termination costs and various disposal expenses.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue

        Our revenue possesses both project and recurring characteristics. Project revenue includes one-time projects in which the customer relationship is not expected to continue after project completion. Project revenue margins are usually higher than our average margins and the workload can be highly volatile. Project revenue is typically based on time and material arrangements and predominately occurs within our Healthcare, Regulatory and Legal Compliance segment. Recurring revenue is characterized by customer relationships that are generally for one year and may continue for longer. Recurring revenue is typically based on transaction volumes sent to us by our customers at an agreed upon fixed rate per unit. Our customers' volumes are generally not contractually or otherwise guaranteed. Recurring revenue typically possesses lower margins than project revenue but is usually more predictable.

        Total revenue decreased 5.6% from $454.7 million for the year ended December 31, 2001 to $429.4 million for the year ended December 31, 2002. Divested operating units and lower project

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revenue contributed $36.3 million and $5.1 million, respectively, to the decline. Recurring revenue increased $16.1 million reflecting a shift in revenue mix between our project and recurring revenue.

        Revenue within our Information Management and Distribution segment increased 7.7% from $236.2 million for the year ended December 31, 2001 to $254.4 million for the year ended December 31, 2002. The increase was primarily due to strong business volumes from our government and mortgage industry customers and the strategic acquisition of United Information Services ("UIS"), a provider of statement processing services, during the first quarter of 2002. Segment revenues were negatively impacted by direct mail volumes that were down $5.0 million or 10.5% compared to the prior year primarily due to the decline in industry spending, especially since September 11, 2001, and to customers' reduced advertising budgets resulting from continued softness in the current economic environment. During the third quarter of 2002, the City of New York Human Resources Administration informed us that we did not receive their renewal contract award. This contract contributed approximately $13 million of revenue in the Information Management and Distribution segment in 2002 and is expected to be transitioned to the new vendor during the second quarter of 2003. Project revenue accounted for 11.3% of the Information Management and Distribution segment's revenue in 2001 compared to 11.9% in 2002.

        Revenue within our Healthcare, Regulatory and Legal Compliance segment decreased 3.9% from $182.2 million for the year ended December 31, 2001 to $175.0 million for the year ended December 31, 2002. The decrease was attributable to lower project revenue within our legal claims administration services, which was down approximately $13.0 million. Several large legal claims administration cases were completed during 2001 while the current year consisted mostly of medium size projects with one large project during the third and fourth quarters of 2002. The lower project revenue in our legal claims administration services was partially offset by increased volumes from our healthcare medical coding services and from our legal consulting and compliance services. Project revenue accounted for 65.7% of the Healthcare, Regulatory and Legal Compliance segment's revenue in 2001 compared to 63.4% in 2002.

Gross profit

        Gross profit decreased 6.9% from $167.2 million for the year ended December 31, 2001 to $155.7 million for the year ended December 31, 2002. Divested operating units contributed $7.3 million or 4.4% to the decline. Gross profit decreased an additional $2.0 million or 1.2% primarily due to lower project revenue, which historically produces higher margins than our recurring business, lower volumes from direct mail services and pricing pressures primarily in the Information Management and Distribution segment. Other significant factors contributing to lower gross profit during the current year include higher employee medical insurance costs of $1.5 million and increased worker's compensation insurance expense of $0.6 million. Consequently, gross profit as a percentage of revenue decreased from 36.8% for the year ended December 31, 2001 to 36.3% for the year ended December 31, 2002.

Selling, general and administrative

        SG&A increased 2.2% from $101.6 million, or 22.4% of revenue for the year ended December 31, 2001 to $103.9 million, or 24.2% of revenue for the year ended December 31, 2002. Overall our SG&A increased from higher medical insurance costs of $1.6 million and higher performance based incentive compensation of $4.4 million, offset by expense control and reduction initiatives implemented during the first quarter of 2002 and $10.2 million of SG&A costs incurred by operating units divested during 2001. Other factors contributing to higher SG&A costs include: (i) an unfavorable court ruling involving an isolated legal matter in our Healthcare, Regulatory and Legal Compliance segment resulting in SG&A expense of $2.2 million related to legal and interest costs, and (ii) higher personnel related costs of $1.0 million in our Information Management and Distribution segment related to sales

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and marketing, operational project management and technology personnel to support the information management growth strategy.

Operating income (loss)

        Operating income (loss) improved from $(6.7) million for the year ended December 31, 2001 to $51.5 million for the year ended December 31, 2002. The year-over-year improvement relates to the $62.6 million of special charges incurred during 2001 from the divestitures and closures, and the elimination of goodwill amortization during 2002 as a result of adopting SFAS No. 142. Offsetting the favorable items were the decline in project revenue in our legal claims administration services, the overall shift in revenue mix from higher margin project revenue to lower margin recurring revenue, pricing pressures primarily in the Information Management and Distribution segment, and the higher SG&A expenses discussed above.

Interest and other expense

        Interest and other expense decreased 29.5% from $9.4 million for the year ended December 31, 2001 to $6.6 million for the year ended December 31, 2002. This decrease was due to lower balances on long-term obligations, lower interest rates and the write-down of $0.5 million of deferred debt costs due to refinancing long-term obligations in 2001. The average interest rate on borrowings decreased from 6.8% in 2001 to 4.5% in 2002. The interest rate on borrowings is predominantly variable in nature with the exception of the interest rate hedge which was placed in effect during December 2000, effectively fixing the interest cost for $50 million of long-term obligations through March 2003 (See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk"). However, interest rate risk exists for the remaining $40 million of long-term obligations at December 31, 2002. Increases in short-term rates would have the effect of increasing interest expense and lowering operating results in future periods.

Income (loss) before income taxes

        Income (loss) before income taxes improved from $(16.0) million for the year ended December 31, 2001 to $44.9 million for the year ended December 31, 2002, largely due to the items discussed above.

Pro-forma results to reflect divestitures and special charges

        The consolidated GAAP results for 2001 include, through the effective date of divestiture, the operating units that were divested in the second and third quarters of 2001. As the strategic realignment plan was completed in 2001, the consolidated GAAP results for 2002 represent our ongoing results that exclude the results from operations of the divested companies and closed facilities through the effective date of divestiture or closure, and the related special charges from the divestitures and closures. In order to provide year over year comparability, the following table presents 2001 pro forma ongoing results. We believe this presentation is meaningful in analyzing trends in our ongoing operations and the best measure for determining future operating performance.

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Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue

        Revenue decreased 3.7%, from $472.2 million for the year ended December 31, 2000 to $454.7 million for the year ended December 31, 2001. Major contributors to the decline were lower revenue from the divested operating units of $67.7 million and lower volumes in our direct mail services of $8.1 million as customers moderated their promotional activities in a sluggish economy. Partially offsetting this decline were higher volumes in our information management services and acquisition related revenues. Revenues in our project-oriented legal claims administration services were negatively impacted in the fourth quarter of 2001 due to delays in new projects as well as reduced volumes on existing projects.

Gross profit

        Gross profit decreased 2.2% from $171.0 million for the year ended December 31, 2000 to $167.2 million for the year ended December 31, 2001. Divested operating units contributed $22.2 million to the decline partially offset by the higher volumes in information management services and the gross profit contribution from acquisitions. Gross profit as a percentage of revenue increased from 36.2% for the year ended December 31, 2000 to 36.8% for the year ended December 31, 2001.

Selling, general and administrative expenses

        SG&A increased 1.2% from $100.5 million, or 21.3% of revenue, for the year ended December 31, 2000 to $101.6 million, or 22.4% of revenue, for the year ended December 31, 2001. This increase was primarily due to: (i) SG&A from acquisitions in 2000 and 2001; (ii) infrastructure investments related to the centralization of certain accounting, management and human resource functions to more effectively manage our businesses; and (iii) additional outside consulting fees, primarily valuation and state tax planning, to minimize the Company's overall tax burden and improve operating cash flow. Offsetting the increase was lower SG&A costs related to operating units divested in 2001.

Operating income (loss)

        Operating income (loss) decreased from $62.0 million for the year ended December 31, 2000 to $(6.7) million for the year ended December 31, 2001. The related special charges from the divestitures and closures in 2001 and declines in direct mail services and in the Healthcare, Regulatory and Legal Compliance segment were the main contributors to the decline. Strong growth from 2000 and 2001 acquisitions and volume improvements in our information management services partially offset the previously discussed declines.

Interest and other expense

        Interest and other expense increased 4.9% from $8.9 million for the year ended December 31, 2000 to $9.4 million for the year ended December 31, 2001. The increase was primarily related to the write-down of $0.5 million of deferred debt costs due to refinancing long-term obligations in 2001. The average interest rate on borrowings decreased from 7.6% in 2000 to 6.8% in 2001.

Income (loss) before income taxes and net income (loss)

        Income (loss) before income taxes decreased from $53.0 million for the year ended December 31, 2000 to $(16.0) million for the year ended December 31, 2001 due to the factors discussed above.

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Fluctuations in Quarterly Results of Operations

        Revenue from our services shows no overall significant seasonal variations; however, some seasonality exists at the operating unit level. Further, service revenue can vary from period to period due to the impact of specific projects and the level of transaction volumes sent to us by our customers. Quarterly results may also vary as a result of the timing of acquisitions and the timing and magnitude of costs related to such acquisitions.

Liquidity and Capital Resources

        At December 31, 2002, we had $39.0 million of working capital, including $3.2 million of cash. Cash flows provided by operating activities for the year ended December 31, 2002 were $67.8 million compared to $54.0 million for the year ended December 31, 2001. The increase in cash provided by operating activities was primarily attributable to our focus on shortening the order-to-cash cycle resulting in improved collections in accounts receivable. Net accounts receivable were $78.8 million at December 31, 2002 compared to $88.5 million at December 31, 2001. Our days sales outstanding improved 8 days to 43 business days at December 31, 2002 compared to 51 business days at December 31, 2001. During the year ended December 31, 2002, $13.7 million of uncollectible trade receivables were written-off against the allowance for doubtful accounts. While these write-offs had no impact on cash flows or operating results during 2002, these write-offs lowered our cash taxes paid during 2002 due to the related tax deduction.

        For the year ended December 31, 2002, investing activities consisted primarily of additions to property, plant and equipment of $12.0 million and acquisition related payments of $33.0 million. Acquisition related payments consist of the purchase of UIS in the first quarter of 2002 and certain other cash payments related to contingent consideration agreements of past acquisitions.

        Net cash used for financing activities was $27.0 million for the year ended December 31, 2002, primarily related to payments of $307.0 million on our line of credit, net of proceeds borrowed from our line of credit of $280.2 million.

        At December 31, 2001, we had $58.5 million of working capital and $7.2 million of cash. Cash flows provided by operating activities for the year ended December 31, 2001 were $54.0 million compared to $45.9 million for the year ended December 31, 2000. Net cash provided by operating activities for the year ended December 31, 2001 was primarily impacted by cash savings from tax planning and strong cash flow from recent acquisitions. Net cash used in investing activities was $60.7 million for the year ended December 31, 2001, and consisted primarily of payments of $65.6 million for acquisitions, net of cash acquired, and the purchase of property, plant and equipment. These outflows were offset by the net proceeds received from the sale of operating units. Net proceeds from sale of operating units were used for payment on the credit facility resulting in net cash provided by financing activities of $4.4 million. Net reductions in debt were $8.0 million for the year.

        At December 31, 2000, we had $55.9 million of working capital and $9.5 million of cash. Cash flows provided by operating activities for the year ended December 31, 2000 were $45.9 million. Net cash provided by operating activities for the year ended December 31, 2000 was primarily impacted by an increase in earnings. This increase was offset in part by an increase in accounts receivable and prepaid expenses, which were attributable to the increase in revenue for the year. Net cash used in investing activities was $99.1 million for the year ended December 31, 2000, and consisted primarily of payments of $86.0 million for acquisitions, net of cash acquired, and the purchase of property, plant and equipment. Net cash provided by financing activities was $53.4 million, as we utilized our credit facility to fund our acquisition program. Net proceeds from borrowings were $36.9 million for the year.

        In April 2001, we entered into a line of credit agreement with Bank of America, SunTrust Bank and Wells Fargo Bank, as co-agents (the "2001 Credit Agreement"). Under this agreement, we can

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from time to time borrow up to $297.5 million through April 2, 2004, subject to certain customary borrowing capacity requirements. Meeting these requirements is highly dependent upon maintaining a minimum level of operating results and the continued demand for our services, among other factors. Effective April 3, 2002, we extended $220.0 million of the $297.5 million commitment for an additional year to April 2, 2005. In September 2002, additional extensions were granted by member banks, bringing the total commitment extended to April 2, 2005 to $290.0 million. We paid fees of approximately $0.3 million for extending the commitment.

        Management believes that it has sufficient liquidity from its cash flow and its revolving credit facility to meet ongoing business needs. However, our ability to borrow is contingent on certain leverage and fixed cost coverage ratios. After application of such ratios and our total commercial commitments of $12.2 million for standby letters of credit, we had $62.1 million available to borrow under the 2001 Credit Agreement as of December 31, 2002. In September 2002, an amendment was approved that extends the current fixed cost coverage ratio requirement of 1.25 until January 1, 2004. This ratio was set to become more restrictive in the fourth quarter of 2002 by increasing to 1.50. Under the amended agreement, the fixed cost ratio will remain at 1.25 until January 1, 2004 and will increase to 1.35 at all times thereafter. Additionally, depending on the mix of stock and cash used in our strategic acquisition program, if any, we may need to seek further financing through the public or private sale of equity or debt securities. There can be no assurance we could secure such financing if and when it is needed or on terms we deem acceptable.

        In April 2001, our Board of Directors authorized the repurchase of up to $30 million of our outstanding common stock. Under this program, share repurchases may be made from time to time on the open market as market conditions warrant. Repurchased shares will be retired and restored to the status of authorized but unissued shares of the Company. As of December 31, 2002, no shares had been repurchased by the Company under this program. During the first quarter of 2003, we activated $15 million of such program and between January 1, 2003 and March 24, 2003, 763,883 shares were repurchased at an average cost of $14.28 per share.

        In January 2000, we registered on Form S-4 (Registration No. 333-92981) 3,012,217 shares of common stock for issuance in connection with our acquisition program (the "Acquisition Shelf"), of which 1,410,444 shares were available as of December 31, 2002.

        The following table summarizes our total contractual cash obligations as of December 31, 2002 (in thousands):

        We have total commercial commitments of $12.2 million for standby letters of credit as of December 31, 2002. We have a letter of credit for $2.1 million to serve as a guarantee for periodic principal and interest payments related to debt. We have a $5.0 million letter of credit to serve as a guarantee for performance under a contract with the New York State Workers Compensation Board. Additionally, we have a $5.1 million letter of credit to serve as security for our workmen's compensation program. The $5.0 million letter of credit related to the New York State Workers Compensation Board was reduced to $2.5 million effective January 3, 2003.

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Critical Accounting Policies

        Management's Discussion and Analysis of Financial Condition and Results of Operations are based on the related consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

        We have identified the following critical accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to our financial condition or results of operations under different conditions or using different assumptions. We apply a consistent methodology at the end of each quarter to determine our account balances that require judgmental analysis.

        Revenue Recognition.    We recognize our revenue as it becomes realized or realizable and earned according to 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 fixed or otherwise determinable, and collection is reasonably assured. Our revenue-earnings activities possess both project and recurring customer relationships.

        Project revenue includes one-time projects in which the customer relationship is not expected to continue after project completion. Project revenue is typically based on time and material arrangements. Revenue recognition occurs at the contractual rates as the labor hours and direct expenses are incurred. Project revenue represents approximately 33% of total 2002 revenues and typically occurs within our Healthcare, Regulatory, and Legal Compliance segment.

        Recurring revenue is characterized by customer relationships that are generally for one year and may continue for longer. Recurring revenue is typically based on the transaction volumes provided by our customer at an agreed upon fixed rate per unit. Our customer's volumes are typically not contractual or otherwise guaranteed. Revenue recognition occurs once work is completed and delivery has occurred or services have been rendered. Recurring revenue represents the remaining 67% of total 2002 revenues and typically occurs within our Information Management and Distribution segment.

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

        Unearned income, included in accounts payable and accrued liabilities, represents payments from our customers in advance of services being provided. Advanced payments are deferred as unearned income when received and recognized as revenue as services are rendered.

        Allowance for Doubtful Accounts.    The allowance for doubtful accounts is established and maintained based on our estimate of accounts receivable collectibility. Management estimates collectibility by specifically analyzing accounts receivable and other historical factors that affect collections. Such factors include the historical trends of write-offs and recovery of previously written-off accounts, the financial strength of the customer and projected economic and market conditions. The evaluation of these factors involves subjective judgments and changes in these factors may significantly impact our consolidated financial statements.

        Long-Lived Asset Impairment.    As required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, management continually evaluates whether events and circumstances indicate that the carrying value of long-lived assets may not be recoverable. When events require,

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management performs the valuation by comparing the estimated undiscounted future cash flows over the remaining life of the long-lived assets to the carrying amount of the asset being evaluated. An impairment loss is recognized to the extent the carrying amount of assets being evaluated exceeds the expected future undiscounted cash flow. At December 31, 2002, no events were evident that required valuation for potential impairment.

        Goodwill Impairment.    On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement states that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. The impairment test is based on fair value rather than undiscounted cash flows. Additionally, goodwill and other intangible assets are tested at a reporting unit level rather than the individual operating unit level. Reporting units are defined as one level below the reportable segment level. Management utilizes estimates to determine fair value of the reporting units. These estimates include future cash flows, growth rates, capital needs, and projected earning margins among other factors. Estimates utilized in future calculations could differ from estimates used in the current period. Future years' estimates that are unfavorable compared to current estimates could cause an impairment of goodwill and other intangible assets which could result in an impairment charge that could have a material adverse impact on our financial statements during the period incurred.

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

        Other Loss Contingencies.    We record liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in accordance with SFAS No. 5, Accounting for Contingencies. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long periods of time. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators.

        Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating the pooling-of-interests method of accounting. SFAS No. 141 also addresses the recognition and measurement of goodwill and other intangible assets acquired in a business combination. The adoption of SFAS No. 141 by the Company on July 1, 2001, did not have a significant effect on the Company's financial statements.

        The Company adopted the provisions of SFAS No. 142 on January 1, 2002. Upon the adoption of SFAS No. 142, goodwill and other intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. At January 1, 2002, the Company compared the fair values of the reporting units to their carrying values. In determining the fair values of the reporting units, the Company used the discounted cash flow method and the market value approach method. Since the fair values of all reporting units exceeded the carrying values, no impairment was recorded at January 1, 2002. In October 2002, the Company performed the annual test for impairment using the discounted cash flow method and the market value approach method. Since the fair value of each reporting unit exceeded the carrying value, no impairment was recorded. Other intangible assets with definite lives will continue to be amortized over their useful lives. Impairment will be evaluated when

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events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. See Note 7, Business Combinations, of Notes to the Consolidated Financial Statements.

        In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The provisions of SFAS No. 144, which the Company adopted on January 1, 2002, did not have a material impact on the Company's consolidated financial statements. Long-lived assets will be tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with SFAS No. 144.

        In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. This statement supersedes FASB Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. We do not believe that SFAS No. 146 will have a material impact on our future earnings and financial condition.

        In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of fiscal 2002 and such adoption did not have a material impact on our consolidated financial statements. The Company is assessing, but at this point does not believe the adoption of the recognition and initial measurement requirements of this interpretation will have a material impact on the financial position or results of operations.

        The Company adopted FASB EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred, on January 1, 2002. EITF Issue 01-14 requires that reimbursements for out-of-pocket expenses such as, airfare, hotels, mileage, etc., be characterized as revenue in the income statement. The effect of this reclassification on the year ended December 31, 2000 was $14.6 million increase in revenue, $14.6 million increase in cost of services, no change in selling, general and administrative expenses and no effect on net income. The effect of this reclassification on the year ended December 31, 2001 was $12.7 million increase in revenue, $12.3 million increase in cost of services, $0.4 million increase in selling, general and administrative expenses and no effect on net income. Prior years amounts have been reclassified to conform to the current year presentation in the accompanying consolidated statements of operations.

        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for companies that voluntarily adopt the fair value based method of accounting for stock-based employee compensation in

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accordance with SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending after December 15, 2002 and for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure-only provisions of SFAS No. 148 on December 31, 2002 and will continue to account for stock-based employee compensation expense under Accounting Principles Board Opinion ("APB") No. 25. See Note 11, Stockholders' Equity, of the Notes to the Consolidated Financial Statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

        We are subject to interest rate risk on our term loans, revolving credit facility and Industrial Revenue Bonds. Interest rates are fixed on the capitalized lease obligations. We entered into an interest rate swap for a notional amount of $50 million to hedge, through March 31, 2003, our exposure to fluctuations in interest rates on $50 million of our revolving credit facility. This swap has been designated by us as a cash flow hedge. As of December 31, 2002, the fair value of the interest rate swap was a liability of $0.5 million ($0.3 million, net of tax), which was recorded in the accompanying consolidated balance sheet in accounts payable and accrued liabilities with an offset recorded in equity as other comprehensive loss. We do not currently expect to extend this hedge at this time. Upon expiration of the hedge, a 100 basis point increase in short-term interest rates would result in approximately $0.8 million of additional expense in 2003 based on our expected average balance outstanding under the credit facility during 2003.

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ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
SOURCECORP, Incorporated
Dallas, Texas

        We have audited the accompanying consolidated balance sheet of SOURCECORP, Incorporated and subsidiaries (the "Company") as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of SOURCECORP, Incorporated and subsidiaries as of December 31, 2001, and for the years ended December 31, 2001 and 2000, before the reclassifications, adjustments, and inclusion of the disclosures discussed in Notes 2 and 16 to the financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 18, 2002.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the 2002 consolidated financial statements present fairly, in all material respects, the financial position of SOURCECORP, Incorporated and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill to conform to Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets.

        As discussed above, the Company's consolidated financial statements as of December 31, 2001, and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. As described in Note 16 to the consolidated financial statements, the Company changed the composition of its reportable segments in 2002, and the amounts disclosed in the 2001 and 2000 financial statements relating to reportable segments have been restated to conform to the 2002 composition of reportable segments. Our audit procedures that were applied to the restated disclosures for reportable segments reflected in the 2001 and 2000 financial statements included (1) comparing the adjustment amounts of segment revenues, operating income, and assets to the Company's underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements.

        As discussed in Note 2, these consolidated financial statements include the transitional disclosures required by SFAS No. 142, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2 with respect to 2001 and 2000 included (1) comparing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill to the Company's underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income and the related earnings-per-share amounts.

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        As discussed in Note 2, these consolidated financial statements include reclassifications to give effect to Emerging Issues Task Force (EITF) Issue No. 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket Expenses" Incurred, which was adopted by the Company on January 1, 2002. Our audit procedures that were applied to the reclassifications described in Note 2 that were applied to conform the 2001 and 2000 financial statements to the comparative presentation required by EITF Issue 01-14 included (1) comparing the amounts shown as revenue; cost of services; and selling, general and administrative expenses in 2001; and revenue and cost of services in 2000 in the Company's consolidated statements of operations to the Company's underlying accounting analysis obtained from management, and (2) on a test basis, comparing the amounts comprising revenue; cost of services; and selling, general and administrative expenses in 2001; and revenue and cost of services in 2000 obtained from management to independent supporting documentation, and (3) testing the mathematical accuracy of the underlying analysis.

        In our opinion, the adjustments to the reportable segments, the disclosure in Note 2 regarding the adoption of SFAS No. 142, and the reclassifications resulting from the adoption of EITF Issue 01-14 are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company other than with respect to such adjustments, disclosures, and reclassifications and, accordingly, we do not express an opinion or any form of assurance on the 2001 and 2000 financial statements taken as a whole.

DELOITTE & TOUCHE LLP
Dallas, Texas
March 31, 2003

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THIS REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP, NOR HAS ARTHUR ANDERSEN LLP PROVIDED A CONSENT TO THE INCLUSION OF ITS REPORT IN THIS FORM 10-K. AS SUCH, AND FURTHER AS A RESULT OF THE CIRCUMSTANCES AFFECTING ARTHUR ANDERSEN LLP, AS A PRACTICAL MATTER, ARTHUR ANDERSEN LLP MAY NOT BE ABLE TO SATISFY ANY CLAIMS ARISING FROM THE PROVISION OF AUDITING SERVICES TO US OR FROM THE INCLUSION OF THIS REPORT.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of SOURCECORP, Incorporated:

        We have audited the accompanying consolidated balance sheets of SOURCECORP, Incorporated (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SOURCECORP, Incorporated and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Dallas, Texas,
February 18, 2002

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SOURCECORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

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

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SOURCECORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

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

38

SOURCECORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

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

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SOURCECORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

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SOURCECORP, INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

        SOURCECORP, Incorporated (the "Company") was founded in September 1994, to create a national provider of document and information outsourcing solutions for document and information intensive industries, including: financial services, government, legal, healthcare and transportation. The Company acquired seven document management services businesses (the "Founding Companies") simultaneously with the closing of the initial public offering ("IPO") on January 26, 1996, and effectively began operations at that time. The consideration for the Founding Companies consisted of a combination of cash and common stock of the Company.

        Since the IPO, the Company has acquired nine companies in transactions that were accounted for as poolings-of-interests: (i) The Rust Consulting Group, Inc. in December 1996; (ii) MAVRICC Management Systems, Inc. and a related company, MMS Escrow and Transfer Agency, Inc. in March 1997; (iii) Input of Texas, Inc. in March 1997; (iv) Micro Publishing Systems, Inc. in December 1997; (v) Lifo Systems, Inc. in February 1998; (vi) Creative Mailings, Inc. in September 1998; (vii) Economic Research Services in October 1998; (viii) TCH Mailhouse, Inc. and G&W Enterprise, Inc.; in December 1998; and (ix) Advanced Digital Graphics, Inc. in December 1998 (collectively, the "Pooled Companies"). The Pooled Companies and the Company were not under common control or management during the periods prior to their respective mergers.

        Subsequent to the IPO and through December 31, 2002, the Company has acquired 56 additional companies in transactions accounted for as purchases and has divested of 17 operating units by sale or closure. The results of operations include the results of these acquisitions from the date of their respective acquisitions and the results of the divestitures up to the effective date of divestiture.

2. Summary of Significant Accounting Policies

Cash and Cash Equivalents

        The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates market value.

Allowance for Doubtful Accounts

        The allowance for doubtful accounts is established and maintained based on our estimate of accounts receivable collectibility. Management estimates collectibility by specifically analyzing accounts receivable and other historical factors that affect collections. Such factors include the historical trends of write-offs and recovery of previously written-off accounts, the financial strength of the customer and projected economic and market conditions. The evaluation of these factors involves subjective judgments and changes in these factors may significantly impact the Consolidated Financial Statements.

Property, Plant and Equipment

        Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the estimated useful life or the lease term. Repair and maintenance costs are expensed as incurred.

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Goodwill and Intangible Assets

        The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Upon the adoption of SFAS No. 142, goodwill and other intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. At January 1, 2002, the Company compared the fair values of the reporting units to their carrying values. In determining the fair values of the reporting units, the Company used the discounted cash flow method and the market value approach method. Since the fair value of each reporting unit exceeded the carrying value, no impairment was recorded at January 1, 2002. In October 2002, the Company performed the annual test for impairment using the discounted cash flow method and the market value approach method. Since the fair value of each reporting unit exceeded the carrying value, no impairment was recorded.

        Other intangible assets with definite lives will continue to be amortized over their useful lives. Impairment will be evaluated when events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets. See Note 7, Business Combinations.

Long-Lived Asset Impairment

        The Company adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets, on January 1, 2002. As required by SFAS No. 144, management continually evaluates whether events and circumstances indicate that the carrying value of long-lived assets may not be recoverable. When events require, management makes the valuation by comparing the estimated undiscounted future cash flows over the remaining life of the long-lived assets to the carrying amount of the asset being evaluated. An impairment loss is recognized to the extent the carrying amount of assets being evaluated exceeds the expected future undiscounted cash flow. Management believes at December 31, 2002, no events existed that required evaluation of potential impairment.

Revenue Recognition

        Revenue is recognized as it becomes realized or realizable and earned according to 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 fixed or otherwise determinable, and collection is reasonably assured. The Company's revenue-earnings activities possess project and recurring customer relationships.

        Project revenue includes one-time projects in which the customer relationship is not expected to continue after project completion. Project revenue is typically based on time and material arrangements. Revenue recognition occurs at the contractual rates as the labor hours and direct expenses are incurred. Project revenue represents approximately 33% of total 2002 revenues and typically occurs within the Company's Healthcare, Regulatory, and Legal Compliance segment.

        Recurring revenue is characterized by customer relationships that are generally for one year or longer. Recurring revenue is typically based on the transaction volumes provided by the Company's customer at an agreed upon fixed rate per unit. The Company's customer volumes are typically not contractual or otherwise guaranteed. Revenue recognition occurs once work is completed and delivery

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has occurred or services have been rendered. Recurring revenue represents the remaining 67% of total 2002 revenues and typically occurs within the Company's Information Management and Distribution segment.

        As a part of providing services to its customers, the Company incurs incidental expenses commonly referred to as "out-of-pocket" expenses. These expenses include items such as airfare, hotels, mileage, etc. and are often reimbursable by the Company's customers. When reimbursable, the Company records both revenue and direct cost of services in accordance with the provisions of Emerging Issues Task Force ("EITF") Issue 01-14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket' Expenses Incurred.

        Unearned income, included in accounts payable and accrued liabilities, represents payments from the Company's customers in advance of the services being provided. Advanced payments are deferred as unearned income when received and recognized as revenue as services are rendered.

Income Taxes

        Income taxes are accounted for using the asset and liability method pursuant to SFAS No. 109, Accounting for Income Taxes. Deferred taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates applicable in future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

Net Income (Loss) Per Share

        Earnings per share is calculated pursuant to SFAS No. 128, Earnings Per Share. Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period.

Use of Estimates in Financial Statements

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Consolidation

        The accompanying consolidated financial statements and related notes to consolidated financial statements include the accounts of SOURCECORP, Incorporated and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

Fair Value of Financial Instruments

        The carrying amounts of cash and cash equivalents approximate fair value due to the short maturities of these instruments. The carrying amount of long-term debt approximates fair value due to interest rates that approximate current market rates for instruments of similar size and duration. The

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interest rate swap is reflected at management's best estimate of its fair value at December 31, 2002 determined using a net present value model based on specified prevailing interest rates.