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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
FOR ANNUAL OR TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1651222
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip Code)
(Address of principal executive offices)
(770) 444-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
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. [X] Yes [ ] No
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 25 was approximately $2,485,031,190 calculated using
the closing price on such date of $47.75. The number of shares outstanding of
the Registrant's Common Stock as of March 25 was 56,048,997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1995 are incorporated herein by reference in Part II, Item 5.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 1, 1996 are incorporated herein by reference in Part 111, Items
10, 11, 12 and 13.
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MEDAPHIS CORPORATION
FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 1995
PAGE
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PART II
Item 6. Selected Financial Data (As Restated)........................................ 1
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 3
Item 8. Consolidated Financial Statements and Supplementary Data (As Restated)....... 11
PART IV
Item 14. Exhibits, Financial Statement Schedule (As Restated) and Reports on Form
8-K........................................................................ 31
THIS ANNUAL REPORT ON FORM 10-K/A IS BEING FILED AS A RESULT OF THE
COMPANY'S RESTATEMENT OF ITS CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
MONTHS AND YEAR ENDED DECEMBER 31, 1995 AND AS OF MARCH 31, 1996 AND JUNE 30,
1996. TO THE EXTENT THIS AMENDED FILING IS INCONSISTENT WITH THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 (THE
"ORIGINAL FILING"), THE ORIGINAL FILING IS HEREBY SUPERSEDED AND AMENDED. TO THE
EXTENT THE ORIGINAL FILING IS UNAFFECTED BY THE RESTATEMENT, THE ORIGINAL FILING
HAS NOT BEEN UPDATED OR CORRECTED TO REFLECT EVENTS OCCURRING SUBSEQUENT TO THE
DATE OF THE ORIGINAL FILING.
This Form 10-K/A contains statements which may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those statements include statements regarding the intent, belief or current
expectations of Medaphis Corporation and members of its management team.
Prospective investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management that
could cause actual results to differ materially from those in forward-looking
statements are set forth in the Safe Harbor Compliance Statement included as
Exhibit 99 to the Form 10-Q filed on November 14, 1996, and are hereby
incorporated herein by reference. The Company undertakes no obligation to update
or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1995. The selected consolidated financial information of Medaphis
for each of the four fiscal years in the period ended December 31, 1995 and as
of December 31, 1995, 1994 and 1993 has been derived from the audited
consolidated financial statements of Medaphis (as restated) which give
retroactive effect to the mergers with Atwork, HRI and MMS, all of which have
been accounted for as poolings of interests. The selected consolidated financial
data of Medaphis for the fiscal year ended December 31, 1991 and as of December
31, 1992 and 1991 has been derived from the unaudited consolidated financial
statements of Medaphis, which give retroactive effect to the mergers with
Atwork, HRI and MMS. Management of Medaphis believes that the unaudited
consolidated financial statements referred to above include all adjustments
(consisting only of normal recurring adjustments) that are necessary for a fair
presentation of the financial position and results of operations for such
periods.
The Company has restated its consolidated financial statements for the
three months and year ended December 31, 1995. The restatement results primarily
from a software licensing agreement entered into by Imonics Corporation, a
wholly owned subsidiary of the Company ("Imonics"), in December 1995 for which
the Company recognized associated license fee revenue in 1995. Subsequent to the
issuance of the Company's 1995 consolidated financial statements, management
discovered unauthorized correspondence which created a contingency for the
license fee payable under this agreement. Such contingency precluded recognition
of license fee revenue in 1995 associated with the agreement. The previously
recognized license fee revenue and certain other adjustments, previously
considered immaterial and not recorded, are included as part of the restatement
adjustments to the Company's previously reported results of operations and
financial position. The significant effects of the restatement are included in
"Note 18. Restatement of 1995 Consolidated Financial Statements" of the
Company's "Consolidated Financial Statements" appearing on pages 11 through 30
of Item 8, Part II of this document.
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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(AS RESTATED)
Statement of Operations Data
Revenue........................ $ 463,321 $319,138 $228,745 $142,703 $86,630
Salaries and wages............. 253,033 178,442 130,778 86,532 53,652
Other operating expenses....... 117,659 80,096 59,017 41,432 26,225
Depreciation................... 12,055 7,844 6,086 3,933 2,973
Amortization................... 13,894 7,199 5,279 2,159 532
Interest expense, net.......... 10,812 6,251 6,556 1,532 1,733
Restructuring and other
charges..................... 54,950 1,905 -- -- --
Income (loss) before
extraordinary item and
cumulative effect of
accounting change........... (2,375) 24,384 13,980 4,545 1,255
Net income (loss).............. (2,375) 24,384 13,980 8,021(1) 1,255
Pro forma net income
(loss)(2)................... (4,680) 22,935 13,069 8,784 --
Weighted average shares
outstanding................. 49,412 45,550 38,057 35,677 29,163
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YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
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(AS RESTATED)
Per Share Data(2)
Pro forma income (loss) before
extraordinary item and
cumulative effect of
accounting change........... $ (.09) $ 0.50 $ 0.34 $ 0.15 --
Pro forma net income (loss).... $ (.09) $ 0.50 $ 0.34 $ 0.25 --
Balance Sheet Data
Working capital................ $ 59,706 $ 61,041 $ 52,602 $ 26,594 $40,389
Intangible assets.............. 446,640 367,677 175,368 109,478 22,158
Total assets................... 712,178 556,401 318,925 197,571 96,816
Long-term debt................. 144,264 148,261 9,803 16,059 22,570
Convertible subordinated
debentures.................. 63,375 63,375 63,375 60,000 --
Stockholders' equity........... 362,626 221,448 165,109 67,716 41,042
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(1) Reflects the extraordinary loss of $2.1 million relating to the prepayment
of certain indebtedness net of income tax benefit and the cumulative
benefit for the change in accounting for income taxes arising from the
adoption of Statement of Financial Accounting Standards No. 109 of $5.6
million.
(2) In 1995, the Company acquired Atwork and MMS in merger transactions which
were recorded as poolings of interests. Prior to the mergers, Atwork and
MMS had elected "S" Corporation status under the Code for income tax
purposes. Pro forma net income and pro forma net income per common share
are presented as if Atwork and MMS had been "C" Corporations during the
years ended December 31, 1995, 1994, 1993 and 1992. Pro forma net income
per common share is not presented for the year ended December 31, 1991.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Medaphis is a leading provider of business management systems and services
to the healthcare industry. Medaphis' systems and services are designed to
assist its clients with the business management functions associated with the
delivery of healthcare services, thereby permitting physicians and hospitals to
focus on providing quality medical services to their patients. The Company also
provides subrogation and related recovery services primarily to healthcare
payors, scheduling and information management systems to hospitals and emerging
integrated healthcare delivery systems and systems integration and work flow
engineering systems and services. The Company's scheduling and information
systems are designed to improve efficiency by automating certain scheduling and
related management functions within a healthcare facility and its systems
integration and work flow engineering systems and services are designed to
increase flexibility, improve end-user access to information and increase
decision making through the strategic use and development of client/server,
imaging and other advanced technologies. The Company currently provides business
management systems and services to approximately 19,100 physicians and over
2,000 hospitals in all 50 states, subrogation and recovery services to
healthcare plans covering in excess of 23 million people throughout the United
States and systems integration and work flow engineering systems and services in
the United States and abroad.
Medaphis' business is impacted by trends in the U.S. healthcare industry.
As healthcare expenditures have grown as a percentage the of U.S. gross national
product, public and private healthcare cost containment measures have applied
pressure to the margins of healthcare providers. Historically, some payors have
willingly paid the prices established by providers while other payors, notably
the government and managed care companies, have paid far less than established
prices (in many cases less than the average cost of providing the services). As
a consequence, prices charged to payors willing to pay established prices have
increased in order to recover the cost of services purchased by the government
and others but not paid by them (i.e., "cost shifting"). Increasing complexity
in the reimbursement system and assumption of greater payment responsibility by
individuals have caused healthcare providers to experience increased receivables
and bad debt levels and higher business office costs. Providers historically
have addressed these pressures on profitability by increasing their prices, by
relying on demographic changes to support increases in the volume and intensity
of medical procedures, and by cost shifting. Notwithstanding the foregoing,
management of the Company believes that the revenue growth rate experienced by
the Company's clients continues to be adversely affected by increased managed
care and other industry factors impacting healthcare providers in the United
States. At the same time, the process of submitting healthcare claims for
reimbursement to third party payors in accordance with applicable industry and
regulatory standards continues to grow in complexity and become more costly.
Management of the Company believes that the decline in revenue growth
experienced by the Company's clients, the increasing complexity and costs
associated with providing billing and accounts receivable management services to
healthcare providers and the Company's on-going re-engineering and consolidation
project have placed pressure on the rate of revenue growth and margins in the
Company's physician and hospital billing operations which are the subject of
such re-engineering and consolidation project. Due to these revenue and margin
pressures, Medaphis Physician Services Corporation did not significantly
contribute to the Company's operating profit for the second half of 1995 and
this trend is not expected to improve until further progress is made in the
Company's re-engineering and consolidation project. To date, the Company has
been able to offset such revenue and margin pressures through expanded growth in
its information management and systems integration services operations. To
address the revenue and margin pressures in its billing and accounts receivable
management services operations going forward, the Company has commenced a
comprehensive re-engineering and consolidation project which is intended to
reduce the Company's operating costs, increase the consistency and quality of
services and enhance operating margins.
The U.S. healthcare industry continues to experience tremendous change as
both federal and state governments, as well as private industry, work to bring
more efficiency and effectiveness to the healthcare system. Medaphis continues
to evaluate governmental and industry reform initiatives in an effort to
position itself to take advantage of the opportunities created thereby.
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RESULTS OF OPERATIONS
The following table shows the percentage of certain items reflected in the
Company's statements of income to revenue.
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
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(AS RESTATED)
Revenue......................................................... 100.0% 100.0% 100.0%
Salaries and wages.............................................. 54.6 55.9 57.2
Other operating expenses........................................ 25.4 25.1 25.8
Depreciation.................................................... 2.6 2.4 2.6
Amortization.................................................... 3.0 2.3 2.3
Interest expense, net........................................... 2.3 2.0 2.9
Restructuring and other charges................................. 11.9 0.6 0.0
----- ----- -----
Income before income taxes...................................... 0.2 11.7 9.2
Income taxes.................................................... (0.7) (4.1) (3.1)
----- ----- -----
Net income (loss)............................................... (0.5) 7.6 6.1
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REVENUE
Revenue increased 45.2% to $463.3 million in 1995 as compared with $319.1
million in 1994 and increased 39.5% in 1994, as compared with 1993. Revenue
growth results from (i) acquisitions; (ii) increases in the number of business
management services clients; and (iii) increases in sales to information
management and systems integration clients. The Company has consummated 25
business combinations during the period from January 1, 1993 through December
31, 1995.
The Company's selling activities generated new business management services
client relationships with estimated annualized revenue of approximately $54.5
million and $42.9 million in 1995 and 1994, respectively. An increasing
proportion of the Company's revenue growth has resulted from revenues
attributable to information management and systems integration services which
contributed $34.8 million and $7.8 million in revenue growth in 1995 and 1994,
respectively, primarily from sales to new clients.
SALARIES AND WAGES
Salaries and wages represented 54.6% of revenue in 1995 as compared with
55.9% and 57.2% in 1994 and 1993, respectively. These decreases resulted
primarily from changes in compensation to the former owners of Atwork in 1995
and MMS in 1994 and the continued growth in the Company's information management
and systems integration services which are less labor intensive.
OTHER OPERATING EXPENSES
Other operating expenses increased to 25.4% of revenue in 1995 from 25.1%
in 1994 and decreased from 25.8% in 1993. The increase in 1995 from 1994 is
primarily attributable to increased telecommunications, equipment maintenance
and outside services expense incurred to support the Company's expanding
technological infrastructure and re-engineering project. The decrease in 1994
from 1993 resulted primarily from the benefits of economies of scale realized as
a result of the overall growth in the Company's business and continued growth in
the Company's information management and systems integration services, which
historically incur less operating expenses as a percentage of revenue. Other
operating expenses are primarily comprised of postage, facility and equipment
rental, telecommunications, travel, outside consulting services and office
supplies.
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DEPRECIATION
Depreciation expense was $12.1 million in 1995, $7.8 million in 1994 and
$6.1 million in 1993. These increases reflect the Company's investment in
property and equipment to support growth in its business, including
acquisitions.
In 1994, the Company began a comprehensive re-engineering and consolidation
project. As part of this project, management anticipates consolidating the
processing function currently being performed in approximately 300 local
business offices into approximately 10 regional processing centers. In addition,
new computer equipment and proprietary software will be installed in the
Company's transaction processing operations. The project did not result in
significant increases in depreciation expense and amortization expense in 1995.
Management anticipates increases in depreciation expense in 1996 and thereafter
in anticipation of the scheduled completion of the project during 1997.
AMORTIZATION
Amortization of intangible assets, which are primarily associated with the
Company's acquisitions, was $13.9 million in 1995, $7.2 million in 1994 and $5.3
million in 1993. The increases are primarily due to increased amortization of
goodwill and client lists resulting from acquisitions. Management estimates that
intangible assets acquired in connection with 1995 acquisitions accounted for
under the purchase method of accounting will increase amortization expense by
approximately $1.3 million in 1996. As noted above, Management anticipates that
amortization expense in 1996 and thereafter will increase upon the completion of
its re-engineering and consolidation project. The Company intends to amortize
the software developed in connection with this project over its estimated useful
life of seven years.
INTEREST
Net interest expense was $10.8 million in 1995, $6.3 million in 1994 and
$6.6 million in 1993. The increase in 1995 is primarily due to increased
borrowings under the Senior Credit Facility to finance acquisitions and the
Company's investment in its re-engineering and consolidation project. Management
anticipates interest expense will be impacted by interest rate fluctuations,
increased borrowings under the Senior Credit Facility to finance future
acquisitions and continued investment in the Company's re-engineering and
consolidation project.
RESTRUCTURING AND OTHER CHARGES
During 1994, the Company began a comprehensive re-engineering and
consolidation project in order to enhance its ability to provide more effective
and efficient business management services to its physician and hospital
clients. This project is designed to further enhance the Company's long-term
operating efficiency and client service capability. The Company will consolidate
its billing and accounts receivable processing function, which is currently
operated out of approximately 300 local business offices, into approximately ten
regional processing centers. It is currently anticipated that the project will
be substantially completed during 1997. As a result of this project, the Company
recorded restructuring and other charges of approximately $25 million during
1995, consisting primarily of exit costs ($15.0 million), involuntary severance
benefits ($5.0 million) and impairment losses associated with the disposition of
property and equipment ($5.0 million).
In connection with the Atwork, HRI, Consort and MMS mergers, the Company
incurred transaction fees, costs and expenses of approximately $6.0 million,
$2.0 million, $1.2 million and $2.5 million, respectively. In accordance with
the requirements of pooling of interests accounting, the costs associated with
these mergers have been reflected in the operating results of the Company for
1995.
The Company recorded a charge of $12 million in 1995, for the
administrative fees, costs and expenses it anticipates incurring in connection
with the Federal Investigation (see Other Matters) and various putative class
action lawsuits which have been filed against the Company, certain of its
officers and directors and its lead underwriters from its April 1995 public
offering.
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In connection with the Halley acquisition, the Company recorded a $1.8
million charge during 1995 related to the cost of purchased research and
development activities related to acquired technology for which technological
feasibility had not yet been established and which had no alternative future
uses.
Prior to the Company's merger with MMS, MMS terminated a merger agreement
with an unrelated third party. In connection with the termination of this
agreement, MMS agreed to pay costs associated with the terminated merger and
potential initial public offering of the combined entity. Such costs amounted to
approximately $3.7 million and were recorded as a charge in 1995.
INCOME BEFORE INCOME TAXES
The Company's income before income taxes was 0.2% of revenues in 1995 as
compared with 11.7% in 1994 and 9.2% in 1993. The primary reasons for the
decrease in 1995 were the restructuring and other charges recorded in 1995
associated with (i) the Company's re-engineering and consolidation project; (ii)
four pooling-of-interests transactions consummated in 1995; (iii) the Federal
Investigation; and (iv) purchased research and development activities. Excluding
restructuring and other charges from all years presented, income before income
taxes as a percentage of revenue would have been 12.1%, 12.3% and 9.2%,
respectively for 1995, 1994 and 1993.
INCOME TAXES
The Company's historical effective income tax rates were 358.7%, 34.8% and
33.5% for 1995, 1994 and 1993, respectively. The increase in the effective tax
rate for 1995 was primarily attributable to non-deductible merger costs incurred
in connection with pooling-of-interest transactions consummated in 1995. On a
pro forma basis, assuming Atwork and MMS were "C" corporations for all periods
presented, the Company's pro forma effective tax rates were 664.9%, 38.7% and
37.9%, respectively, for 1995, 1994 and 1993. The increase in the Company's pro
forma effective tax rate in 1995 resulted primarily from the previously noted
non-deductible merger costs.
PRO FORMA NET INCOME (LOSS)
The Company's pro forma net loss was $4.7 million in 1995 as compared with
pro forma net income of $22.9 million and $13.1 million, respectively, in 1994
and 1993. As a percentage of revenue, pro forma net income (loss) was (10.1)% in
1995 as compared with 7.2% and 5.7% in 1994 and 1993, respectively. The decrease
in 1995 was primarily attributable to the restructuring and other charges
previously discussed. The increase in 1994 as compared with 1993 resulted
primarily from economies of scale realized in other operating expenses, changes
in compensation paid to the former owners of Atwork as compared to revenue and
lower interest expense as a percentage of revenue.
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
The weighted average shares outstanding were 49,412,000 in 1995, 45,550,000
in 1994 and 38,057,000 in 1993. The increase in 1995 was primarily caused by the
public offering of 4.0 million shares in April 1995. The increase in 1994 as
compared with 1993 was primarily the result of the public offering of
approximately 6.4 million shares in December 1993. Pro forma net income (loss)
per common share was $(0.09) in 1995 as compared with $0.50 and $0.34 in 1994
and 1993, respectively.
COMPLETED ACQUISITIONS
On January 23, 1995, the Company acquired substantially all of the assets
and assumed certain of the related liabilities of Decision Support Group, a
healthcare decisions support company located in Burlington, Vermont. Decision
Support Group is involved primarily in the development of healthcare decision
support systems.
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On March 6, 1995, the Company acquired the outstanding capital stock of
Medical Management, Inc. ("MMI") for $8.0 million in cash. MMI provides billing
and accounts receivable management services to anesthesiologists.
On April 28, 1995, the Company acquired the outstanding capital stock of
Medical Billing Service ("MBS") and purchased certain assets and assumed the
related liabilities of Computers Diversified, Inc. ("CDI") for approximately
$15.5 million in cash. MBS and CDI provide integrated claims data processing
systems and services to physicians, hospitals and clinics, and had revenue of
approximately $12.1 million in 1994.
On May 19, 1995, the Company acquired the outstanding capital stock of
Medical Office Consultants, Inc. ("MOC"). MOC provides billing and accounts
receivable management services primarily to urologists.
On October 23, 1995, the Company acquired the outstanding capital stock of
Billing and Professional Services, Inc. ("BAPS"). BAPS provides billing and
accounts receivable management services to pathologists.
On December 20, 1995, the Company acquired the outstanding capital stock of
the Halley Exchange, Inc. ("Halley"). Halley is an electronic medical claims
clearing house.
On December 31, 1995, the Company acquired the Receivables Management
Division and related consulting services of MedQuist, Inc. ("RMD") for
approximately $17.3 million in cash. RMD provides bad debt collection and
patient entitlement services to healthcare providers.
Each of the foregoing acquisitions was recorded using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based on their estimated fair market
value at the date of the acquisitions. The allocations are preliminary and will
be adjusted when the necessary information is available.
On March 17, 1995, the Company acquired Atwork by exchanging eight million
shares of common stock for all of the outstanding common stock of Atwork. Atwork
provides scheduling and management systems and services to hospitals and
emerging integrated healthcare delivery systems and had revenues of
approximately $28.3 million in 1994. This transaction has been accounted for
using the pooling-of-interests method of accounting and, accordingly, the
financial statements of the Company have been restated to reflect the operations
of Atwork.
On August 28, 1995, the Company exchanged approximately 3.3 million shares
of its common stock for all of the outstanding shares of common stock of
Healthcare Recoveries, Inc. ("HRI"). HRI is a leading provider of subrogation
and related recovery services primarily for healthcare payors. Its clients
include health maintenance organizations, indemnity insurers, Blue Cross and
Blue Shield organizations, third party administrators, self-funded employee
health welfare benefit plans, and a multi-specialty physicians group. This
transaction has been accounted for as a pooling-of-interests and, accordingly,
the financial statements of the Company have been restated to include the
operations of HRI.
On November 22, 1995, the Company exchanged approximately 825,000 shares of
its common stock for all of the capital stock of Consort. Consort provides
comprehensive radiology information and scheduling systems for hospitals and
imaging centers. This transaction has been accounted for as a
pooling-of-interests. However, due to the immateriality of Consort's operations,
no restatement of historical financial statements has been made.
On December 29, 1995 the Company acquired MMS by exchanging four million
shares of common stock for all of the outstanding common stock of MMS. MMS
provides business management services to approximately 1,700 radiologists and
radiation oncologists. In addition, MMS owns Managed Imaging, Inc., a management
services organization specializing in network formation, administration,
marketing, contracting, management and information services to physicians and
physician networks in connection with managed care and alternative reimbursement
systems. This transaction has been accounted for as a pooling-of-interests and,
accordingly, the financial statements of the Company have been restated to
include the operations of MMS.
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PENDING ACQUISITIONS
On March 13, 1996, the Company signed a definitive agreement to acquire all
of the outstanding capital stock of Rapid Systems Solutions, Inc. ("Rapid
Systems") in exchange for 1,135,000 shares of the Company's common stock. Rapid
Systems is a client server/systems integration company whose core competencies
include: network design, integration and management; database design and
development; graphical user interface application design, development and
implementation; and strategic systems engineering and computer security. During
1995, Rapid Systems had revenue of $14.7 million. This acquisition, which is to
be expected to be accounted for as a pooling of interests, is subject to, among
other things, Rapid Systems shareholder approval, and is expected to close in
April.
On March 15, 1996, the Company signed a definitive agreement to acquire all
of the outstanding capital stock of BSG Corporation ("BSG") in exchange for
approximately 7.5 million shares of the Company's common stock and assumption by
the Company of BSG stock options and rights representing approximately 2.7
million additional shares of the Company's common stock. BSG provides
information technology and change management services to organizations seeking
to transform their operations through the strategic use of client/server and
other advanced technologies. During 1995, BSG had revenue of $69.7 million. This
acquisition, which is expected to be accounted for as a pooling of interests, is
subject to, among other things, BSG shareholder and regulatory approvals, and is
expected to close by the end of June.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $59.7 million at December 31, 1995,
including $4.1 million of cash and cash equivalents.
Management believes additional working capital is not required to meet its
current liquidity needs before acquisitions, internal growth of the business and
investments in the Company's re-engineering and consolidation project. The
Company produced $29.0 million of operating cash flow ($50.5 million before
restructuring and other charges) in 1995. If current operating levels are
maintained, management believes that the Company should produce cash flow from
operations adequate to meet its liquidity requirements before acquisitions,
internal growth of the business and investments in the Company's re-engineering
and consolidation project. Any excess will be available to help fund the working
capital requirements of internal growth and the Company's re-engineering and
consolidation project.
At December 31, 1995, $128 million of borrowings were outstanding under the
$250 million Senior Credit Facility. Borrowings under the Senior Credit Facility
bear interest at rates ranging from 7.1% to 7.2% and are due in March 1997, and
can be extended under certain circumstances with the approval of the banks.
Amounts available for borrowing under the Senior Credit Facility may be used for
future acquisitions, expansion of the Company's business, and general corporate
purposes.
The Company estimates that each one million dollars of internal revenue
growth requires no more than $500,000 of additional capital. The increase in
this estimate from prior periods reflects the evolution of the Company's
business and operations. If the current rate of internal growth continues at
historical operating margins, the Company estimates that its cash flow from
operations will be adequate to meet its capital requirements for internal
growth. Internal growth may also be funded by the Company's Senior Credit
Facility. Management estimates that, at historical operating margins, any
borrowings that are incurred for internal growth purposes can be repaid within
two years by operating cash flow. Management also believes the Senior Credit
Facility will be sufficient to meet any seasonal cash requirements.
During 1994, the Company began a comprehensive re-engineering and
consolidation project. As part of this project, the Company anticipates
consolidating the processing function currently being performed in approximately
300 local business offices into approximately ten regional processing centers.
The Company purchased computer equipment for approximately $23.5 million in
1995, the majority of which was obtained through a capital lease arrangement,
and anticipates purchasing approximately $16 million of additional computer
equipment in 1996 and 1997. The Company also incurred software development costs
of approximately $29 million in 1995 related to this project and anticipates
incurring an additional $17 million in
8
11
1996. Additionally, the Company anticipates incurring lease buyout and
termination payments, involuntary severance benefits and other cash expenditures
of approximately $12 to $17 million during 1996 and 1997 relating to this
project. The remaining costs related to the project are expected to be financed
through the Company's Senior Credit Facility, future operating cash flows and
capital lease financing. During 1995, the Company capitalized approximately
$33.3 of software development costs associated with the development or
enhancement of software to be used in the processing function of the Company's
business management services or otherwise sold externally by the Company.
Substantially all of the Company's capital expenditures have related either
to acquisitions of healthcare business management service companies and
technology companies or to the expansion, improvement, or maintenance of
existing facilities. The Company has financed its growth through cash flows from
operations, the issuance of debt and equity securities and borrowings.
Management believes anticipated cash flow from operations and borrowing capacity
under the Senior Credit Facility will provide adequate capital resources to
support the Company's anticipated long-term financing needs.
OTHER MATTERS
The United States Attorney's Office for the Central District of California
is conducting an investigation (the "Federal Investigation") of Medaphis'
billing and collection practices in its offices located in Calabasas and
Cypress, California (the "Designated Offices"). Medaphis first became aware of
the Federal Investigation when it received search warrants and grand jury
subpoenas on June 13, 1995. Although the precise scope of the Federal
Investigation is not known at this time, Medaphis believes that the U.S.
Attorney's Office is investigating allegations of billing fraud and that the
inquiry is focused upon Medaphis' billing and collection practices in the
Designated Offices. Numerous federal and state civil and criminal laws govern
medical billing and collection activities. In general, these laws provide for
various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs. Although the Designated Offices
represent less than 2% of Medaphis' annual revenue, there can be no assurance
the Federal Investigation will be resolved promptly, that additional subpoenas
or warrants will not be received by Medaphis or that the Federal Investigation
will not have a material adverse effect upon Medaphis. The Company recorded a
charge of $12 million in 1995 for the administrative fees, costs and expenses it
anticipates incurring in connection with the Federal Investigation and the
putative class action lawsuits described below. The charge is intended to cover
only the anticipated administrative expenses of the Federal Investigation and
the lawsuits and does not include any provision for fines, penalties, damages,
assessments, or sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its officers and directors and the lead underwriters associated with
Medaphis' public offering of common stock in April 1995 were named as defendants
in putative shareholder class action lawsuits filed in the Federal District
Court for the Northern District of Georgia. In general, these lawsuits allege
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts, including the registration statement filed in
connection with Medaphis' public offering of common stock in April 1995. On
October 13, 1995, the named plaintiffs in these lawsuits filed a consolidated
class action complaint (the "Consolidated Complaint"). On January 3, 1996, the
court denied defendants' motion to dismiss the Consolidated Complaint which
argued that the Complaint failed to state a claim upon which relief may be
granted. The Company believes that it has meritorious defenses to this action
and intends to assert them vigorously.
The Company has restated its consolidated financial statements for the
three months and year ended December 31, 1995. The restatement results primarily
from a software licensing agreement entered into by Imonics Corporation, a
wholly owned subsidiary of the Company ("Imonics"), in December 1995 for which
the Company recognized associated license fee revenue in 1995. Subsequent to the
issuance of the Company's 1995 consolidated financial statements, management
discovered unauthorized correspondence which created a contingency for the
license fee payable under this agreement. Such contingency precluded recognition
of license fee revenue in 1995 associated with the agreement. The previously
recognized license fee revenue and certain other adjustments, previously
considered immaterial and not recorded, are included as part of the
9
12
restatement adjustments to the Company's previously reported results of
operations and financial position. The significant effects of the restatement
are as follows:
AS PREVIOUSLY AS
REPORTED RESTATED
------------- --------
FOR THE YEAR ENDED DECEMBER 31, 1995:
Revenue........................................................ $ 467,747 $463,321
Salaries and wages............................................. 250,990 253,033
Other operating expenses....................................... 116,229 117,659
Income before income taxes..................................... 9,458 918
Net income (loss).............................................. 2,749 (2,375)
Pro forma net income (loss).................................... 444 (4,680)
Pro forma net income (loss) per common share................... 0.01 (0.09)
AS OF DECEMBER 31, 1995:
Total current assets........................................... 175,711 170,519
Total assets................................................... 718,441 712,178
Total current liabilities...................................... 108,536 110,813
Total liabilities.............................................. 350,691 349,552
Total stockholders' equity..................................... 367,750 362,626
For additional information, the reader may wish to refer to the Company's
Current Report on Form 8-K/A dated June 29, 1996 filed on November 14, 1996, the
Company's Current Report on Form 8-K/A-2 dated June 29, 1996 filed on January
10, 1997, the Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1996 filed on November 14, 1996, the Company's Current
Report on Form 8-K/A dated February 8, 1996 filed on January 10, 1997, the
Company's Current Report on Form 8-K/A dated March 13, 1996 filed on January 10,
1997, the Company's Current Report on Form 8-K/A dated April 3, 1996 filed on
January 10, 1997, the Company's Current Report on Form 8-K/A dated May 6, 1996
filed on January 10, 1997, the Company's Current Report on Form 8-K/A dated May
29, 1996 filed on January 10, 1997, the Company's Current Report on Form 8-K/A
dated June 29, 1996 filed on January 10, 1997, the Company's Quarterly Report on
Form 10-Q/A for the quarterly period ended March 31, 1996 filed on January 10,
1997 and the Company's Quarterly Report on Form 10-Q/A for the quarterly period
ended June 30, 1996 filed on January 10, 1997.
10
13
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Medaphis Corporation:
We have audited the accompanying consolidated balance sheets of Medaphis
Corporation and subsidiaries as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Medaphis Corporation and
subsidiaries at December 31, 1995 and 1994 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 18, the accompanying 1995 consolidated financial
statements have been restated.
Atlanta, Georgia
March 15, 1996
(October 22, 1996 as to Note 18)
11
14
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
------------- -------- --------
(AS RESTATED,
SEE NOTE 18)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenue....................................................... $ 463,321 $319,138 $228,745
------------- -------- --------
Salaries and wages............................................ 253,033 178,442 130,778
Other operating expenses...................................... 117,659 80,096 59,017
Depreciation.................................................. 12,055 7,844 6,086
Amortization.................................................. 13,894 7,199 5,279
Interest expense, net......................................... 10,812 6,251 6,556
Restructuring and other charges............................... 54,950 1,905 --
------------- -------- --------
Total expenses...................................... 462,403 281,737 207,716
Income before income taxes.................................... 918 37,401 21,029
Income taxes.................................................. 3,293 13,017 7,049
------------- -------- --------
Net income (loss)................................... $ (2,375) $ 24,384 $ 13,980
========= ======== ========
Pro forma adjustments, principally income taxes............... $ (2,305) $ (1,449) $ (911)
------------- -------- --------
Pro forma net income (loss)................................. $ (4,680) $ 22,935 $ 13,069
========= ======== ========
Pro forma net income (loss) per common share.................. $ (0.09) $ 0.50 $ 0.34
========= ======== ========
Weighted average shares outstanding........................... 49,412 45,550 38,057
========= ======== ========
See notes to consolidated financial statements.
12
15
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1995 1994
------------- ----------
(AS RESTATED,
SEE NOTE 18)
(IN THOUSANDS, EXCEPT PAR
VALUE DATA)
ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 4,140 $ 12,417
Restricted cash..................................................... 15,340 8,683
Accounts receivable, billed......................................... 63,996 47,551
Accounts receivable, unbilled....................................... 73,299 61,994
Other............................................................... 13,744 9,665
------------- ----------
Total current assets........................................ 170,519 140,310
Property and equipment................................................ 90,957 44,289
Intangible assets..................................................... 446,640 367,677
Other................................................................. 4,062 4,125
------------- ----------
$ 712,178 $ 556,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 16,447 $ 6,949
Accrued compensation................................................ 20,907 20,985
Accrued expenses.................................................... 64,015 43,583
Current portion of long-term debt................................... 9,444 7,752
------------- ----------
Total current liabilities................................... 110,813 79,269
Long-term debt........................................................ 144,264 148,261
Other obligations..................................................... 18,901 23,876
Deferred income taxes................................................. 12,199 20,172
Convertible subordinated debentures................................... 63,375 63,375
------------- ----------
Total liabilities........................................... 349,552 334,953
------------- ----------
Stockholders' Equity:
Common stock, voting, $.01 par value, 100,000 authorized in 1995 and
30,000 in 1994; issued and outstanding 50,645 in 1995 and 42,870
in 1994.......................................................... 506 429
Common stock, nonvoting, $.01 par value, 600 authorized; none
issued...........................................................
Paid-in capital..................................................... 362,109 214,520
Retained earnings................................................... 11 6,499
------------- ----------
Total stockholders' equity.................................. 362,626 221,448
------------- ----------
$ 712,178 $ 556,401
========= =========
See notes to consolidated financial statements.
13
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------------- --------- ---------
(AS RESTATED,
SEE NOTE 18)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $ (2,375) $ 24,384 $ 13,980
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 25,949 15,043 11,365
Impairment loss on property and equipment................. 5,035 -- --
Deferred income taxes..................................... 3,012 12,239 6,586
Other non-cash charges.................................... -- 1,905 --
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash............................ (3,253) (1,963) (508)
Increase in accounts receivable, billed................ (16,222) (6,542) (5,040)
Increase in accounts receivable, unbilled.............. (12,016) (7,765) (6,875)
Increase (decrease) in accounts payable................ 8,742 1,368 (155)
Increase (decrease) in accrued compensation............ (79) 3,871 2,973
Increase (decrease) in accrued expenses................ 26,709 (5,874) 2,107
Other, net............................................. (6,450) 1,655 155
-------- -------- --------
Net cash provided by operating activities......... 29,052 38,321 24,588
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (75,327) (151,815) (68,563)
Purchases of property and equipment......................... (46,633) (10,754) (4,213)
Software development costs.................................. (32,559) (6,384) --
Other....................................................... -- (382) (920)
-------- -------- --------
Net cash used for investing activities............ (154,519) (169,335) (73,696)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 125,148 1,528 86,772
Proceeds from borrowings.................................... 127,680 121,630 69,819
Payments of long-term debt.................................. (129,419) (5,625) (77,940)
Dividends to shareholders of acquired companies............. (6,219) (8,059) (2,686)
-------- -------- --------
Net cash provided by financing activities......... 117,190 109,474 75,965
-------- -------- --------
CASH AND CASH EQUIVALENTS
Net change.................................................. (8,277) (21,540) 26,857
Balance at beginning of year................................ 12,417 33,957 8,418
-------- -------- --------
Balance at end of year...................................... $ 4,140 $ 12,417 $ 35,275
======== ======== ========
See notes to consolidated financial statements.
14
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
---------------------------------------------------------
RETAINED
COMMON EARNINGS TOTAL
COMMON STOCK PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ -------- ------------ -------------
(IN THOUSANDS)
Balance at December 31, 1992............... 33,212 $332 $ 86,780 $(19,766) $ 67,346
Issuance of common stock................. 6,442 64 85,413 -- 85,477
Exercise of stock options................ 476 5 1,386 -- 1,391
Pre-merger dividends to former owners.... -- -- -- (2,686) (2,686)
Net income............................... -- -- -- 13,980 13,980
Other.................................... -- -- -- (400) (400)
------ ------ -------- ------------ -------------
Balance at December 31, 1993............... 40,130 401 173,579 (8,872) 165,108
Changes in HRI's stockholders' equity in
the six months ended June 30, 1994
(see Note 2).......................... (9) -- (76) (554) (630)
Issuance of common stock in
acquisitions.......................... 2,108 21 38,775 -- 38,796
Exercise of stock options................ 641 7 2,143 -- 2,150
Pre-merger dividends to former owners.... -- -- -- (8,059) (8,059)
Net income............................... -- -- -- 24,384 (24,384)
Other.................................... -- -- 99 (400) (301)
------ ------ -------- ------------ -------------
Balance at December 31, 1994............... 42,870 429 214,520 6,499 221,448
Issuance of common stock................. 4,086 40 120,922 -- 120,962
Conversion of preferred
stock................................. 2,345 23 11,077 -- 11,100
Issuance of common stock in
acquisitions.......................... 20 -- 459 -- 459
Exercise of stock options................ 555 6 12,516 -- 12,522
Pre-merger dividends to former owners.... -- -- -- (4,186) (4,186)
Net loss, as restated.................... -- -- -- (2,375) (2,375)
Other.................................... 769 8 2,615 73 2,696
------ ------ -------- ------------ -------------
Balance at December 31, 1995, as
restated................................. 50,645 $506 $362,109 $ 11 $ 362,626
======== ======== ========== ============ ============
See notes to consolidated financial statements.
15
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Medaphis Corporation and its subsidiaries (the "Company") including
the retroactive effect of all significant mergers which have been accounted for
under the pooling-of-interests method of accounting. All significant
intercompany transactions have been eliminated. Certain amounts in the prior
years' consolidated financial statements have been reclassified to conform to
the current year presentation.
NATURE OF OPERATIONS. The Company provides business management services
and systems primarily to the healthcare industry throughout the United States.
The Company historically has not experienced any significant losses related to
individual customers or groups of customers in any geographical area.
PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and 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.
REVENUE RECOGNITION. Fees for the Company's business management services
are primarily based on a percentage of net collections on clients' patient
accounts, and revenue is recognized as such business management services are
performed. Accounts receivable, billed, principally represents amounts invoiced
to clients. Accounts receivable, unbilled, represents amounts recognized for
services rendered but not yet invoiced and is based on the Company's estimate of
the fees that will be invoiced when collections on patient accounts are
received.
Revenue from software licenses is generally recognized upon shipment of the
products and when no significant contractual obligations remain outstanding.
When the Company receives payment prior to shipment or fulfillment of
significant vendor obligations, such payments are recorded as deferred revenue
and are recognized as revenue upon shipment or fulfillment of significant vendor
obligations. The license agreements typically provide for partial payments
subsequent to shipment; such terms result in an unbilled receivable at the date
the revenue is recognized. Costs related to insignificant vendor obligations are
accrued upon recognition of the license revenue. Software maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically one year.
Revenues from systems integration contracts are recorded on the percentage
of completion method of accounting.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
RESTRICTED CASH. Restricted cash represents amounts collected on behalf of
certain clients, a portion of which is held in trust until remitted to such
clients.
PROPERTY AND EQUIPMENT. Property and equipment, including equipment under
capital leases, is stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets, generally four to ten
years for furniture and fixtures, five to seven years for equipment, and 20
years for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
clients lists and software development costs.
Goodwill and Clients Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized using the straight line method,
generally over 25 to 40 years. Client lists are amortized using the straight
line method over their estimated useful lives, generally seven to 20 years.
16
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through undiscounted expected future
cash flows after related interest charges. It is reasonably possible that those
estimates of future cash flows will be reduced significantly in the future based
on the results of the Company's re-engineering and consolidation plan. As a
result, the carrying amount of intangible assets may be reduced materially in
the near future. In 1994, a charge of approximately $1.9 million associated with
the write-off of a non-compete agreement was recorded by one of the Company's
subsidiaries prior to that subsidiary's merger with the Company because the
non-compete agreement was deemed to have no value. No impairment losses were
recorded by the Company in 1995 or 1993.
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software utilized in
providing the Company's business management systems and services. Software
development costs are capitalized upon the establishment of technological
feasibility for each product or process and capitalization ceases when the
product or process is available for general release to customers or is put into
service. Capitalized software development costs which were primarily associated
with the Company's re-engineering and consolidation project were approximately
$33.3 million and $6.4 million in 1995 and 1994, respectively. The Company
recorded research and development expenses of approximately $1.0 million, $2.8
million and $1.9 million in 1995, 1994 and 1993, respectively.
Software development costs are amortized using the straight line method
over the remaining estimated economic life of the assets, which is generally
four to seven years. Amortization expense related to the Company's capitalized
software costs totaled $1.9 million for 1995 and $0 for 1994 and 1993,
respectively.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws and changes to such laws. Management includes the consideration of
future events to assess the likelihood that tax benefits will be realized in the
future.
PRO FORMA PROVISION FOR INCOME TAXES. The Company has acquired certain
entities in merger transactions accounted for as poolings of interests, which
prior to the mergers had elected "S" corporation status for income tax purposes.
As a result of the mergers, these acquired entities terminated their "S"
corporation elections. Pro forma provision for income taxes, taken together with
reported income tax expense, presents the combined pro forma tax expense of such
entities as if they had been "C" corporations during the periods presented.
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE. Pro forma net income (loss)
per common share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding, as applicable, during the
period. Common stock equivalents include the dilutive effect of the assumed
exercise of certain outstanding stock options and conversion of the Redeemable
Convertible Preferred Stock of HRI which was converted into common stock in the
Company's merger with HRI. Fully diluted pro forma net income (loss) per common
share is not presented as it is not materially different from primary pro forma
net income (loss) per common share. The Company's convertible subordinated
debentures were not considered common stock equivalents at issuance and are
included in the computation of fully diluted pro forma net income per common
share.
17
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS
From January 1, 1993 through December 31, 1995, the Company acquired either
substantially all of the assets or all of the outstanding capital stock of each
of the following businesses which were accounted for using the purchase method
of accounting:
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
--------------------------------------------------------- ------------- ----------------
(IN THOUSANDS)
Receivables Management Division of MedQuist, Inc......... $ 17,300 December 1995
The Halley Exchange, Inc................................. * December 1995
Billing and Professional Services, Inc................... * October 1995
Medical Office Consultants, Inc.......................... * May 1995
Computers Diversified, Inc............................... 15,500 April 1995
Medical Management, Inc.................................. 8,000 March 1995
Decision Support Group................................... * January 1995
Imonics Corporation...................................... 32,200 December 1994
John Rex, Inc. ("Anescor")............................... 6,000 December 1994
AdvaCare, Inc............................................ 101,600 November 1994
Marmac Management, Inc................................... * September 1994
Central Billing Services, Inc............................ 19,700 September 1994
Omni Medical Systems, Inc................................ * August 1994
Physician Billing, Inc................................... 13,000 July 1994
Medical Management Resources, Inc........................ 11,000 July 1994
Consolidated Medical Services, Inc....................... * June 1994
Northwest Creditors Service, Inc......................... 6,600 June 1994
Managed Practice Division of Datamedic Corporation....... 5,000 April 1994
Practice Management Division of CyCare Systems, Inc...... 24,000 November 1993
Gottlieb's Financial Services, Inc....................... 31,000 September 1993
Medical Management of New England, Inc................... 14,200 July 1993
- ---------------
* Consideration not material
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The allocation of the purchase price of the 1995
acquisitions is preliminary and will be adjusted when the necessary information
is available. The operating results of the acquired businesses are included in
the Company's consolidated statements of income from the respective dates of
acquisition.
In addition to the foregoing acquisitions, the Company acquired four
businesses in 1995 which were accounted for using the pooling-of-interests
method of accounting. Following is a list of the businesses acquired and the
shares exchanged:
SHARES
COMPANY ACQUIRED EXCHANGED ACQUISITION DATE
---------------------------------------------------------- --------- ----------------
Medical Management Sciences, Inc. ("MMS")................. 4,000,000 December 1995
Consort Technologies, Inc. ("Consort").................... 825,000 November 1995
Healthcare Recoveries, Inc. ("HRI")....................... 3,265,000 August 1995
Automation Atwork Companies ("Atwork").................... 8,000,000 March 1995
Since these acquisitions have been recorded using the pooling-of-interests
method of accounting, no adjustment has been made to the historical carrying
amounts of assets acquired and liabilities assumed. The accompanying
consolidated financial statements have been restated to include the financial
position and operating results of Atwork, HRI and MMS for all periods prior to
the mergers. No restatement has been made for the financial position and
operating results of Consort prior to January 1, 1995, the beginning of the
fiscal year in which the acquisition was consummated, due to their
immateriality.
18
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to its merger with the Company, HRI reported on a fiscal period
ending June 30. HRI's operating results for the period ended June 30, 1994 were
combined with the Company's financial operating results of the year ended
December 31, 1993. HRI's financial position and operating results for 1995 and
1994, which were restated to a calendar year basis, were combined with the
Company's financial position and operating results as of and for the years ended
December 31, 1995 and 1994. Accordingly, HRI's operating results for the six
months ended June 30, 1994 were duplicated in each of the years ended December
31, 1994 and 1993. HRI's revenues and net income for that six-month period were
$7,822,000 and $755,000, respectively. Consolidated retained earnings has been
reduced by $554,000 which represents HRI's net income applicable to common
stockholders for the six months ended June 30, 1994 in order to eliminate the
duplication of income applicable to common stockholders for that period in the
retained earnings balance.
A reconciliation of revenue, pro forma net income (loss) and pro forma net
income (loss) per common share of the Company, as previously reported, Atwork,
HRI, MMS and combined, including the pro forma provision for Atwork and MMS
income taxes, is as follows (in thousands, except per share data):
1994 1993
-------- --------
Revenue:
Medaphis, as previously reported......................... $253,490 $169,518
Atwork................................................... 28,323 20,574
HRI...................................................... 16,604 14,840
MMS...................................................... 20,721 23,813
-------- --------
Combined................................................. $319,138 $228,745
======== ========
Pro forma net income:
Medaphis, as previously reported......................... $ 17,429 $ 9,153
Atwork................................................... 4,248 72
HRI...................................................... 1,698 1,455
MMS...................................................... 1,009 3,300
Pro forma provision for Atwork and MMS income taxes...... (1,449) (911)
-------- --------
Combined................................................. $ 22,935 $ 13,069
======== ========
Pro forma net income per common share:
Medaphis, as previously reported......................... $ .58 $ .40
======== ========
Combined................................................. $ .50 $ .34
======== ========
The following unaudited pro forma financial information presents the
results of the Company for the years ended December 31, 1995 and 1994, as if the
above referenced acquisitions recorded using the purchase and the
pooling-of-interest methods of accounting had occurred on January 1, 1994. The
pro forma information does not purport to be indicative of the results that
would have been obtained if the operations had actually been combined during the
period presented and is not necessarily indicative of operating results to be
expected in future periods.
1995 1994
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Revenue........................................................ $486,000 $449,279
Net income (loss).............................................. (1,526) 18,725
Net income (loss) per common share............................. (0.04) 0.38
On March 13, 1996, the Company announced that it had signed a definitive
agreement to acquire all of the outstanding capital stock of Rapid Systems
Solutions, Inc. ("Rapid Systems") in exchange for 1,135,000
19
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of the Company's common stock. Rapid Systems is a client/server systems
integration company whose core competencies include: network design, integration
and management; database design and development; graphical user interface
application design, development and implementation; and strategic systems
engineering and computer security. During 1995, Rapid Systems had revenue of
$14.7 million. This acquisition, which is expected to be accounted for as a
pooling of interests, is subject to, among other things, Rapid Systems
shareholder approval, and is expected to close in early April.
On March 15, 1996, the Company signed a definitive agreement to acquire all
of the outstanding capital stock of BSG Corporation ("BSG") in exchange for
approximately 7.5 million shares of the Company's common stock and assumption by
the Company of BSG stock options and rights representing approximately 2.7
million additional shares of the Company's common stock. BSG provides
information technology and change management services to organizations seeking
to transform their operations through the strategic use of client/server and
other advanced technologies. During 1995, BSG had revenue of $69.7 million. This
acquisition, which is expected to be accounted for as a pooling of interests, is
subject to, among other things, BSG shareholder and regulatory approvals, and is
expected to close by the end of June.
The following unaudited pro forma financial information presents the
results of the Company for the years ended December 31, 1995 and 1994, as if the
above referenced acquisitions recorded using the purchase and the
pooling-of-interest methods of accounting had occurred (including the two
pending mergers) January 1, 1994. The pro forma information does not purport to
be indicative of the results that would have been obtained if the operations had
actually been combined during the period presented and is not necessarily
indicative of operating results to be expected in future periods (in thousands,
except per share data).
1995 1994
-------- --------
Revenue................................................................ $570,385 $503,744
Net income (loss)...................................................... (1,883) 20,519
Net income (loss) per common share..................................... $ (0.03) $ 0.36
A reconciliation of revenue and pro forma net income of the Company, as
previously reported, HRI, MMS and Consort for the period from January 1, 1995
through the end of the quarter immediately preceding the date of acquisition is
as follows:
6 MONTHS 9 MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
1995 1995
-------- -------------
(IN THOUSANDS)
Revenue
Medaphis, as previously reported............................ $205,339 $ 327,866
HRI......................................................... 10,183 --
MMS......................................................... 10,204 14,625
Consort..................................................... 1,781 2,805
-------- --------
Combined.................................................... $227,507 $ 345,296
======== ========
Pro forma net income (loss)
Medaphis, as previously reported............................ $ (4,686) $ (2,601)
HRI......................................................... 1,012 --
MMS......................................................... 1,170 185
Consort..................................................... 320 455
-------- --------
Combined.................................................... $ (2,184) $ 1,961
======== ========
20
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1995 1994
-------- --------
(IN THOUSANDS)
Land................................................................... $ 2,873 $ 2,873
Buildings.............................................................. 9,839 7,841
Furniture and fixtures................................................. 16,144 13,187
Equipment.............................................................. 88,705 39,290
Other.................................................................. 5,228 2,838
-------- --------
122,789 66,029
Less accumulated depreciation.......................................... 31,832 21,740
-------- --------
$ 90,957 $ 44,289
======== ========
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
1995 1994
-------- --------
(IN THOUSANDS)
Goodwill......................................................... $360,544 $302,955
Client lists..................................................... 51,658 51,942
Software development costs....................................... 61,651 26,041
Other............................................................ 1,280 1,280
-------- --------
475,133 382,218
Less accumulated amortization.................................... 28,493 14,541
-------- --------
$446,640 $367,677
======== ========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
1995 1994
------- -------
(IN THOUSANDS)
Accrued costs of businesses acquired............................... $13,582 $17,151
Funds due clients.................................................. 12,757 6,893
Deferred revenue................................................... 10,873 9,709
Accrued legal costs................................................ 8,152 1,051
Accrued restructuring and severance costs.......................... 7,801 --
Interest........................................................... 2,914 2,317
Other.............................................................. 7,936 6,461
------- -------
$64,015 $43,582
======= =======
21
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
1995 1994
-------- --------
(IN THOUSANDS)
Borrowings under Senior Credit Facility.......................... $128,000 $120,714
Capital lease obligations, weighted average effective interest
rates of 8.4% and 9.1%......................................... 23,407 14,232
Deferred purchase price relating to acquisitions................. -- 15,672
Other............................................................ 2,301 5,395
-------- --------
153,708 156,013
Less current portion............................................. 9,444 7,752
-------- --------
$144,264 $148,261
======== ========
At December 31, 1995, the Company had a $250 million revolving credit
agreement ("Senior Credit Facility") which was composed of a $240 million
revolving credit line and a $10 million cash management line with a seven-bank
syndicate to finance future acquisitions, working capital and other general
corporate needs. The Company has the option of making "LIBOR" based loans or
"base rate" loans under the Senior Credit Facility. LIBOR based loans bear
interest at LIBOR for the then current interest period plus amounts varying from
1 1/4% to 1 3/4% based on the Company's financial performance. Base rate loans
bear interest equal to prime. At December 31, 1995, the Company had LIBOR based
loans outstanding at interest rates ranging from 7.1% to 7.2%. The Senior Credit
Facility contains, among other things, financial covenants which require the
Company to maintain certain financial ratios. The Company was in compliance with
all covenants as of December 31, 1995.
The Senior Credit Facility expires in March 1997 and can be extended one
year at each anniversary date through March 2000 with the consent of the banks.
Borrowings under the Senior Credit Facility are secured by the stock of the
Company's subsidiaries.
In April 1995, the Company used the net proceeds of its fourth public
offering to repay indebtedness of approximately $121 million then outstanding
under the Senior Credit Facility.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1995 and 1994, the net book value of equipment subject to
capital leases totaled $20.0 million and $12.1 million, respectively.
The carrying amounts of long-term debt and capital lease obligations
reflected in the consolidated balance sheets approximate fair value of such
instruments due to the variable rate nature of the long-term debt and the fixed
rates on the capital lease obligations which approximate market rates.
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
1996...................................................................... $ 9,444
1997...................................................................... 135,614
1998...................................................................... 5,860
1999...................................................................... 1,748
2000...................................................................... 230
Thereafter................................................................ 812
7. CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $63.4 million of 6 1/2% convertible subordinated
debentures to finance the acquisition of CompMed, Inc. The debentures are due on
January 1, 2000. The debenture holders may convert the debentures into shares of
the Company's common stock at a conversion price of $14.00 per share. In 1995,
the
22
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company gave notice of its intent to redeem the debentures on January 1, 1996.
Such notice triggered the conversion right of the debenture holders through the
date of the redemption. All of the debenture holders exercised their conversion
right effective January 1, 1996 and as a result, approximately 4.5 million
shares were issued in the conversion in 1996. The fair value of these
convertible subordinated debentures was approximately $170 million at December
31, 1995, based on the market price of Medaphis common stock into which the
debentures were converted on January 1, 1996. Pro forma net loss per common
share, assuming the debentures had been converted on January 1, 1995, and
assuming the repayment of indebtedness outstanding under the Senior Credit
Facility associated with the Company's April 1995 public offering had occurred
on January 1, 1995 (see Note 6) would have been $(0.01) per share.
8. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases which expire at various dates through 2008. Rent expense was $19.5
million, $12.1 million and $8.8 million for the years ended December 31, 1995,
1994 and 1993, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
1996....................................................................... $18,052
1997....................................................................... 14,776
1998....................................................................... 12,623
1999....................................................................... 7,443
2000....................................................................... 5,282
Thereafter................................................................. 6,020
9. INCOME TAXES
Income tax expense is comprised of the following:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Current:
Federal................................................. $ -- $ 158 $ 59
State................................................... 1,667 407 301
Deferred:
Federal................................................. 2,156 10,914 6,123
State................................................... (530) 1,538 1,023
Valuation allowance....................................... -- -- (457)
------- ------- -------
Income taxes.............................................. 3,293 13,017 7,049
Pro forma provision for income taxes...................... 2,811 1,449 911
------- ------- -------
$ 6,104 $14,466 $ 7,960
======= ======= =======
In 1995 the Company acquired Atwork, Consort and MMS in merger transactions
which were accounted for under the pooling-of-interests method of accounting.
Prior to the mergers, these entities had elected "S" corporation status for
income tax purposes. As a result of the mergers, the entities terminated their
"S" corporation elections. Pro forma net income and pro forma net income per
common share are presented in the consolidated statements of income as if each
of these entities had been a "C" corporation during the periods presented.
23
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to income before income taxes and income tax expense is as
follows:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Income tax expense at federal statutory rate.............. $ 321 $13,090 $ 7,360
State taxes, net of federal benefit....................... 408 2,032 1,197
Goodwill.................................................. 1,298 380 202
Deal costs................................................ 5,623 -- --
Other items not deductible for tax purposes............... 414 166 73
Research and development tax credits...................... -- (596) (314)
Valuation allowance....................................... -- -- (457)
Other..................................................... (1,960) (606) (101)
------- ------- -------
$ 6,104 $14,466 $ 7,960
======= ======= =======
In 1995, the effects of changes in the Company's assessment of the tax
consequences of certain matters comprise substantially all of "other" in the
above rate reconciliation.
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes as of December 31, 1995 and 1994
are as follows:
1995 1994
-------- --------
(IN THOUSANDS)
Net operating loss carryforwards................................. $ 50,479 $ 41,607
Valuation allowance.............................................. (15,248) (10,476)
Accounts receivable, unbilled.................................... (24,842) (21,763)
Depreciation and amortization.................................... (34,472) (14,057)
Accrued expenses................................................. 20,490 1,022
Other deferred tax liabilities................................... (8,606) (16,505)
-------- --------
$(12,199) $(20,172)
======== ========
The valuation allowance relates primarily to the uncertainty of the
realizability of net operating loss carryforwards assumed in certain business
combinations. The change in the valuation allowance during 1995 relates
primarily to the finalization of the purchase price allocation of an entity
acquired in 1994.
As of December 31, 1995, the Company had federal net operating loss
carryforwards for income tax purposes of approximately $129 million which expire
at various dates between 1999 and 2010. The Internal Revenue Code may impose
substantial limitations on the use of net operating loss carryforwards upon the
occurrence of an "ownership change." The Company has experienced four ownership
changes which have established maximum annual limitations on income against
which net operating losses incurred prior to the ownership changes may be
offset. However, because the limitation operates in a cumulative manner and in
previous years the Company did not utilize net operating losses, the Company has
approximately $90 million in cumulative unutilized net operating losses
available in 1996. In future years, currently unavailable net operating losses
will become available to offset income prior to the date of their expiration.
10. COMMON STOCK
On May 3, 1995, the Company's Board of Directors declared a two-for-one
stock split of the outstanding shares of common stock. The stock split was
effected in the form of a stock dividend payable on May 31, 1995 to stockholders
of record as of May 24, 1995. The effect of the stock split has been
retroactively applied to all periods presented in the accompanying consolidated
financial statements.
24
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 12, 1995, the Company completed a fourth public offering of its
common stock in which 4,244,000 shares were sold at $31.75 per share. The
Company sold 4,000,000 shares of its common stock and 244,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $121 million.
On December 2, 1993, the Company completed a third public offering of its
common stock in which 6,900,000 shares were sold at $14.00 per share. The
Company sold 6,442,000 shares of its common stock and 458,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $85.5 million.
On March 16, 1994, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation thereby
increasing the number of authorized shares of the Company's voting common stock
from 30 million to 100 million shares.
11. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a NonQualified Stock
Option Plan and a NonQualified Stock Option Plan for Employees of Acquired
Companies ("NonQualified Stock Option Plans"). Stock options outstanding at
December 31, 1995 under the Stock Option Plans permit employees to purchase up
to 6,675,202 shares of the Company's common stock. Granted options expire 11
years after the date of grant and are generally exercisable based on a five year
vesting period. Options outstanding at December 31, 1995 were granted at prices
ranging from $1.14 to $59.44 per share, of which 1,834,033 were exercisable at
that date. Options were exercised during 1995 with grant prices ranging from
$1.14 to $21.36 per share. As of December 31, 1995, 682,006 shares were
available for future grants under these plans.
Activity related to the NonQualified Stock Option Plans is summarized as
follows (in thousands):
1995 1994 1993
----- ----- -----
Options outstanding as of January 1............................. 5,168 4,241 1,725
Granted:
To employees.................................................. 1,540 1,026 1,009
Relating to acquisitions...................................... 654 778 1,678
Canceled........................................................ (222) (292) (35)
Exercised....................................................... (465) (585) (136)
----- ----- -----
Options outstanding as of December 31........................... 6,675 5,168 4,241
===== ===== =====
The Company has a Senior Executive NonQualified Stock Option Plan which
permits certain of the Company's executive officers to purchase up to an
aggregate of 550,746 shares of the Company's common stock at $2 per share. All
options available for grant under this plan have been granted, expire January
16, 2001 and are currently exercisable. As of December 31, 1995, 230,000 options
issued under this plan have been exercised (none during 1995 or 1994).
In 1994, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Restricted Stock Plan (the "Restricted Plan")
for executive officers. The plan was approved by the Company's shareholders at
the annual shareholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value of common stock to certain of the
executive officers of the Company. The restricted stock vests ratably over a
four year period from the date of award. Vesting may be accelerated if certain
performance goals are achieved. One of these performance goals was achieved
based on 1995 results of operations, and accordingly, 50% of the awards made
under this plan have vested.
In 1994 the Company adopted a Non-Employee Director Stock Option Plan
("Director Plan") for non-employees who serve on the Company's Board of
Directors. The plan was approved by the Company's shareholders at the annual
shareholders' meeting in 1995. The Director Plan provides for an initial grant
of 10,000 options at a strike price corresponding to the date on which the
non-employee director is elected or
25
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
appointed to the Board of Directors. Additionally, each non-employee receives an
annual grant of 2,000 options at each subsequent annual meeting in which the
non-employee director is a member of the Board of Directors. All options granted
under the Director Plan vest over a five year period and expire 11 years from
the date of grant. As of December 31, 1995, 48,000 options were outstanding
under the Director Plan at strike prices ranging from $15.74 to $29.83 per
share. No exercises occurred in 1995 and as of December 31, 1995 52,000 shares
were available for future grants under this plan.
On March 4, 1996 the disinterested members of the Company's Board of
Directors approved the Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan ("Re-engineering Incentive Plan") and
the Company granted 155,749 units pursuant to the provisions of the plan to
certain key employees of the Company. The Re-engineering Incentive Plan provides
for the payment of cash bonuses to participants if certain performance goals
related to the Company's re-engineering and consolidation project are achieved
and certain general business improvement milestones are satisfied. Awards under
the plan are based on units awarded to each participant. If the performance
goals specified in the Re-engineering Incentive Plan are achieved and the awards
vest, the value of each unit will equal the average price of the Company's
common stock during the ten trading days immediately preceding such vesting
date. At the point it becomes probable that the performance goals and milestones
will be met, the Company will begin to accrue for the full amount of these
bonuses. All awards made under the plan, to the extent they remain unvested,
terminate on December 31, 1997.
12. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans, a percentage of which are matched by the Company. The Company's
contribution expense was $2.3 million, $1.3 million and $349,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
The Company maintains a noncontributory money purchase pension plan which
covers substantially all employees who are retained by the Company primarily to
service specific physician clients. Contributions are determined annually by the
Company not to exceed the maximum amount deductible for federal income tax
purposes. The Company's contribution to the plan was $1.0 million in 1995, $0.7
million in 1994 and $1.1 million in 1993.
13. RESTRUCTURING AND OTHER CHARGES
During July 1994, the Company began a comprehensive re-engineering and
consolidation project in order to enhance its ability to provide more effective
and efficient business management services to its clients.
In January 1995, Management approved a restructuring plan relating to the
consolidation project. Substantially all of the Company's local business offices
at the commitment date were leased. Business offices will be exited in
accordance with the guidelines established in the Company's restructuring plan.
The Company will negotiate lease buyouts and subleasing arrangements with
lessors, where possible, to mitigate its remaining contractual obligations under
lease agreements. The re-engineering project is expected to be substantially
completed during 1997.
26
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A description of the type and amount of exit costs recorded at the
commitment date and subsequently incurred are as follows:
INCURRED RESERVE
THROUGH BALANCE
INITIAL DECEMBER 31, DECEMBER 31,
RESERVE 1995 1995
------- ------------ ------------
(IN THOUSANDS)
Lease termination costs.............................. $ 6,726 $ 736 $ 5,990
Incremental costs associated with discontinued client
contracts.......................................... 5,488 797 4,691
Other................................................ 2,823 1,035 1,788
------- ------------ ------------
$15,037 $2,568 $ 12,469
======= ========== ==========
In January 1995, Management of the Medaphis Physician Services Corporation
formalized an involuntary severance benefit plan. The Company recorded a charge
of approximately $5.0 million in 1995 in accordance with Statement of Financial
Accounting Standards No. 112, to reflect the expense for employees' rights to
involuntary severance benefits that have accumulated to date. Involuntary
severance costs charged against the liability were approximately $745,000 for
the year ended December 31, 1995.
In January 1995, the Company assessed the recoverability of its long lived
assets and recorded an impairment loss of approximately $5.0 million related to
property and equipment that will be disposed of as a result of the restructuring
plan.
In connection with the Atwork, HRI, Consort and MMS mergers, the Company
incurred transaction fees, costs and expenses of approximately $6.0 million,
$2.0 million, $1.2 million and $2.5 million, respectively. In accordance with
the requirements of pooling of interests accounting, these costs have been
reflected in the operating results for 1995.
The Company recorded a charge of $12 million in 1995 for the administrative
fees, costs and expenses it anticipates incurring in connection with the Federal
Investigation and various putative class action lawsuits which have been filed
against the Company, certain of its officers and directors and its lead
underwriters from its April 1995 public offering.
In connection with the Halley acquisition, the Company recorded a $1.8
million charge related to the cost of purchased research and development
activities related to acquired technology for which technological feasibility
had not yet been established and which had no alternative future uses.
Prior to the Company's merger with MMS, MMS terminated a merger agreement
with an unrelated third party. In connection with the termination of this
agreement, MMS agreed to pay costs associated with the planned merger and
potential initial public offering of the combined entity. Such costs amounted to
approximately $3.7 million and were recorded as a charge in 1995.
14. CERTAIN LEGAL MATTERS
The United States Attorney's Office for the Central District of California
is conducting an investigation (the "Federal Investigation") of Medaphis'
billing and collection practices in its offices located in Calabasas and
Cypress, California (the "Designated Offices"). Medaphis first became aware of
the Federal Investigation when it received search warrants and grand jury
subpoenas on June 13, 1995. Although the precise scope of the Federal
Investigation is not known at this time, Medaphis believes that the U.S.
Attorney's Office is investigating allegations of billing fraud and that the
inquiry is focused upon Medaphis' billing and collection practices in the
Designated Offices. Numerous federal and state civil and criminal laws govern
medical billing and collection activities. In general, these laws provide for
various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs. Although the Designated Offices
represent less than 2% of
27
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Medaphis' annual revenue, there can be no assurance that the Federal
Investigation will be resolved promptly, that additional subpoenas or warrants
will not be received by Medaphis or that the Federal Investigation will not have
a material adverse effect upon the Company. The Company recorded a charge of $12
million in 1995 for the administrative fees, costs and expenses it anticipates
incurring in connection with the Federal Investigation and the putative class
action lawsuits described below. The charge is intended to cover only the
anticipated administrative expenses of the Federal Investigation and the
lawsuits and does not include any provision for fines, penalties, damages,
assessments, or sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its officers and directors and the lead underwriters associated with
Medaphis' public offering of common stock in April 1995 were named as defendants
in putative shareholder class action lawsuits filed in the Federal District
Court for the Northern District of Georgia. In general, these lawsuits allege
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts, including the registration statement filed in
connection with Medaphis' public offering of common stock in April 1995. On
October 13, 1995, the named plaintiffs in these lawsuits filed a consolidated
class action complaint ("Consolidated Complaint"). On January 3, 1996, the court
denied defendants' motion to dismiss the Consolidated Complaint which argued
that the Complaint failed to state a claim upon which relief may be granted. The
Company believes that it has meritorious defenses to this action and intends to
assert them vigorously.
15. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
1995 1994 1993
------- -------- -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.................... $11,454 $108,781 $23,799
Additions to capital lease obligations................. 17,377 5,356 2,352
Common stock issued in conjunction with acquisitions... 459 38,796 --
Cash paid for:
Interest............................................... 10,579 6,599 4,364
Income taxes........................................... 2,785 375 397
28
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. LINES OF BUSINESS
The Company operates in two major lines of business: Services (providing
healthcare business management services to physicians, hospitals and payors) and
Technology Systems (principally systems integration services and computer
software and hardware sales). Total revenue by segment includes only sales to
unaffiliated customers as reported in the Company's consolidated statements of
income. Operating profit is total revenue less operating expenses. Corporate
items include interest income and expense and other general corporate expenses.
Corporate assets consist primarily of cash and cash equivalents, deferred
financing costs, fixed assets, miscellaneous prepaids and receivables and real
estate purchased in an acquisition. Information concerning operations in these
lines of business is as follows:
1995 1994 1993
-------- -------- --------
Revenue
Services............................................. $401,666 $291,452 $208,808
Technology systems................................... 63,195 28,407 20,574
Corporate and eliminations........................... (1,540) (721) (637)
-------- -------- --------
$463,321 $319,138 $228,745
======== ======== ========
Operating Profit(1)
Services............................................. $ 54,010 $ 48,339 $ 32,541
Technology systems................................... 24,757 3,768 70
Corporate............................................ (12,087) (6,550) (5,026)
-------- -------- --------
$ 66,680 $ 45,557 $ 27,585
======== ======== ========
Interest expense, net.................................. $ 10,812 $ 6,251 $ 6,556
Restructuring and other charges........................ 54,950 1,905 --
-------- -------- --------
Income before income taxes............................. $ 918 $ 37,401 $ 21,029
======== ======== ========
Identifiable Assets
Services............................................. $548,410 $496,074 $281,519
Technology systems................................... 151,071 54,902 7,573
Corporate............................................ 12,697 5,425 29,833
-------- -------- --------
$712,178 $556,401 $318,925
======== ======== ========
Depreciation and Amortization
Services............................................. $ 21,194 $ 14,454 $ 10,883
Technology systems................................... 4,196 405 364
Corporate............................................ 559 184 118
-------- -------- --------
$ 25,949 $ 15,043 $ 11,365
======== ======== ========
Capital Expenditures
Services............................................. $ 28,304 $ 8,724 $ 3,726
Technology systems................................... 16,780 1,304 320
Corporate............................................ 1,549 726 167
-------- -------- --------
$ 46,633 $ 10,754 $ 4,213
======== ======== ========
- ---------------
(1) Does not include any allocation of interest income and expense and general
corporate expenses. Also excludes restructuring and other charges in 1995
and 1994 as follows: Services, $45.2 million and $1.9 million; Technology,
$9.75 million and zero.
29
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
Revenue........................................ $110,085 $117,422 $117,789 $ 118,025
Pro forma net income (loss).................... (11,881) 9,697 223 (2,719)
Pro forma net income (loss) per common share... $ (.27) $ 0.18 $ -- $ (0.05)
Weighted average shares outstanding............ 43,812 53,141 52,299 50,730
1994
Revenue........................................ $ 68,249 $ 74,629 $ 81,712 $ 94,548
Pro forma net income........................... 4,739 5,745 6,330 6,121
Pro forma net income per common share.......... $ 0.11 $ 0.13 $ 0.14 $ 0.13
Weighted average shares outstanding............ 45,114 44,994 45,238 46,788
18. RESTATEMENT OF 1995 CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for the
three months and year ended December 31, 1995. The restatement results primarily
from a software licensing agreement entered into by Imonics Corporation, a
wholly owned subsidiary of the Company ("Imonics"), in December 1995 for which
the Company recognized associated license fee revenue in 1995. Subsequent to the
issuance of the Company's 1995 consolidated financial statements in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, management discovered unauthorized correspondence which created a
contingency for the license fee payable under this agreement. Such contingency
precluded recognition of license fee revenue in 1995 associated with this
agreement. The previously recognized license fee revenue and certain other
adjustments, previously considered immaterial and not recorded, are included as
part of the restatement adjustments to the Company's previously reported results
of operations and financial position. The significant effects of the restatement
are as follows:
AS PREVIOUSLY AS
REPORTED RESTATED
------------- --------
FOR THE YEAR ENDED DECEMBER 31, 1995:
Revenue................................................................ $ 467,747 $463,321
Salaries and wages..................................................... 250,990 253,033
Other operating expenses............................................... 116,229 117,659
Income before income taxes............................................. 9,458 918
Net income (loss)...................................................... 2,749 (2,375)
Pro forma net income (loss)............................................ 444 (4,680)
Pro forma net income (loss) per common share........................... 0.01 (0.09)
AS OF DECEMBER 31, 1995:
Total current assets................................................... 175,711 170,519
Total assets........................................................... 718,441 712,178
Total current liabilities.............................................. 108,536 110,813
Total liabilities...................................................... 350,691 349,552
Total stockholders' equity............................................. 367,750 362,626
30
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Medaphis
Corporation and its subsidiaries, included in the Annual Report to
Stockholders for the year ended December 31, 1995, are in Part II, Item 8
of this document:
Independent Auditors' Report;
Consolidated Statements of Income -- years ended December 31, 1995
(as restated), 1994 and 1993;
Consolidated Balance Sheets -- as of December 31, 1995 (as restated)
and 1994;
Consolidated Statements of Cash Flows -- years ended December 31,
1995 (as restated), 1994 and 1993;
Consolidated Statements of Stockholders' Equity -- years ended
December 31, 1995 (as restated), 1994 and 1993; and
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
Included in Part IV of the report:
Schedule II -- Valuation and Qualifying Accounts -- years ended
December 31, 1995 (as restated), 1994 and 1993.
3. Exhibits
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
2.1 -- Merger Agreement, dated as of July 21, 1993, by and between Registrant, MED
Acquisition Corp. and Medical Management of New England, Inc. (incorporated by
reference to Exhibit 2.1, and incorporated by reference, to Registration Statement
on Form S-3, File No. 33-71552).
2.2 -- Acquisition and Merger Agreement, dated as of September 1, 1993, by and among
Registrant, MedSub, Inc., Gottlieb's Financial Services, Inc. and Asset Management
of Jacksonville, Inc. (incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on September 13, 1993).
2.3 -- Asset Purchase Agreement, dated as of October 20, 1993, by and among Registrant,
Medaphis Physicians Services Corporation and CyCare Systems, Inc. (incorporated by
reference to Exhibit 2, to Current Report on Form 8-K filed on October 21, 1993).
2.4 -- Processing Agreement by and between Medaphis Physician Services Corporation and
CyCare Systems, Inc. (incorporated by reference to Exhibit 2.4 to Annual Report
Form 10-K for the year ended December 31, 1993, File No. 000-19480).
2.5 -- Asset Purchase Agreement between Medaphis Physician Services Corporation and
Datamedic Corporation (incorporated by reference to Exhibit 2 to Quarterly Report
on Form 10-Q for the quarterly report period ended March 31, 1994).
2.6 -- Stock Purchase Agreement, dated May 31, 1994 between AssetCare, Inc.,
Learner-Eureka, Inc., Northwest Creditors Service, Inc., and Merchants Collection
Association of San Francisco, Inc. (incorporated by reference to Exhibit 2 to
Quarterly Report on Form 10-Q for the quarterly report period ended June 30, 1994).
31
34
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
2.7 -- Merger Agreement, dated July 11, 1994, between Registrant, Medaphis Physician
Services Corporation, and Medical Management Resources, Inc. (incorporated by
reference to Exhibit 2.2 to Quarterly Report on Form 10-Q for quarterly report
period ended June 30, 1994).
2.8 -- Asset Purchase Agreement, dated July 27, 1994, between Registrant, SunMed, Inc.,
Physician Billing, Inc., and PBI Investments (incorporated by reference to Exhibit
2.3 to Quarterly Report on Form 10-Q for quarterly report period ended June 30,
1994).
2.9 -- Merger Agreement, dated September 2, 1994, by and between Registrant and AdvaCare,
Inc. (incorporated by reference to Exhibit 2.1 to Registration Statement on Form
S-4, File No. 33-83808).
2.10 -- Merger Agreement, dated September 30, 1994 among Registrant, New Sub, Inc. and
Central Billing Services, Inc. (incorporated by reference to Exhibit 2.4 to Current
Report on Form 8-K filed on October 4, 1994).
2.11 -- Asset Purchase Agreement dated as of December 30, 1994 by and among Registrant,
MedSub, Inc., Broadway & Seymour, Inc. and BSI North Carolina, Inc. (incorporated
by reference to Exhibit 2 to Current Report on Form 8-K filed on January 13, 1995).
2.12 -- Merger Agreement, dated January 29, 1995, by and among Registrant, BullSub, Inc.,
Automation Atwork, Atwork Australia, Atwork Canada-Corp., Atwork-Europe and Atwork,
U.K. (incorporated by reference to Exhibit 2.1 to Registration Statement on Form
S-4, File No. 33-8891).
2.13 -- Stock Purchase Agreement, dated December 31, 1995, among MedQuist Receivables
Management Company, MedQuist, Inc. and Medaphis Hospital Services Corporation
(incorporated by reference to Exhibit 2.4 to Current Report on Form 8-K filed on
January 19, 1996).
2.14 -- Asset Purchase Agreement dated December 31, 1995, among Medaphis Hospital Services
Corporation, MedQuist Inc. and MedQuist CCI, L.P. (incorporated by reference to
Exhibit 2.5 to Current Report on Form 8-K filed on January 19, 1996).
2.15 -- Amended and Restated Merger Agreement, dated July 28, 1995, among Registrant,
RaySub, Inc. and Healthcare Recoveries, Inc. (incorporated by reference to Exhibit
2.1 to Current Report on Form 8-K filed on September 12, 1995).
2.16 -- Merger Agreement, dated October 13, 1995, among Registrant, NukSub, Inc. and
Consort Technologies, Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on December 5, 1995).
2.17 -- Merger Agreement, dated December 29, 1995 among Registrant, CarSub, Inc. and
Medical Management Sciences, Inc. (incorporated by reference to Exhibit 2.1 to
Current Report on Form 8-K filed on January 19, 1996).
2.18 -- Merger Agreement, dated as of March 15, 1996, by and among Registrant, BSG Sub,
Inc. and BSG Corporation (incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-4, File No. 33-2506).
2.19* -- Merger Agreement, dated as of March 12, 1996, by and among Registrant, Rapid
Systems Solutions, Inc. and RipSub, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of Registrant's Registration Statement on Form S-1, File
No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3 of Registrant's Quarterly Report on Form
10-Q for the Quarterly Period Ended March 31, 1993).
32
35
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
3.3 -- Certificate of Amendment of Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.3 to the Registrant's Registration
Statement on Form 8-A/A, filed on March 28, 1995).
3.4 -- Amended and Restated By-Laws of Registrant (incorporated by reference to Exhibit
3.2 of Registrant's 1992 Form 10-K, File No. 000-19480).
4.0 -- Indenture by and between Registrant and Trust Company Bank, as Trustee, dated
December 30, 1992 (incorporated by reference to Exhibit 4 to Current Report on Form
8-K filed on January 11, 1993).
4.1* -- Specimen Common Stock Certificate.
4.2 -- Form of Option Certificate relating to Registrant's Stock Option Plan (incorporated
by reference to Exhibit 4.2, and to Registration Statement on Form S-1, File No.
33-42216).
4.3 -- Form of Option Certificate relating to Registrant's Executive Performance Plan
(incorporated by reference to Exhibit 4.3, Registration Statement on Form S-1, File
No. 33-42216).
4.4 -- Form of Option Certificate relating to Registrant's Stock Option Plan for
Employee's of Acquired Companies (incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-3, File No. 33-71552).
4.5* -- Form of Option Certificate relating to Registrant's Restricted Stock Plan.
4.6* -- Form of Option Certificate relating to Registrant's Non-Employee Director Stock
Option Plan.
4.7 -- Registration Rights Agreement, dated November 15, 1989, among Registrant,
Prudential Venture Partners II and Rhode Island Securities Corporation
(incorporated by reference to Exhibit 4.13 to Registration Statement on Form S-1,
File No. 33-42216).
4.8 -- Amendment No. 1 to Registration Rights Agreement, dated as of December 1, 1989,
among Registrant and the several persons named therein (incorporated by reference
to Exhibit 4.14 to Registration Statement on Form S-1, File No. 33-42216).
4.9 -- Amended and Restated Registration Rights Agreement, effective as of December 1,
1989, among Registrant and the several persons named therein (incorporated by
reference to Exhibit 4.15 to Registration Statement on Form S-1, File No.
33-42216).
4.10 -- Registration Rights Agreement, dated as of March 17, 1995, by and among Registrant,
David Michael Warner and John P. Holton (incorporated by reference to Exhibit 4.10
to Annual Report on Form 10-K for the year ended December 31, 1994, File No.
000-19480).
4.11 -- Form of Common Stock Purchase Warrant issued to Fredrica Morf and Ursula Nelson
(incorporated by reference to Exhibit 4.19 to Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 000-19480).
4.12 -- Form of Warrant Agreement between AdvaCare and certain litigants, entered into in
settlement of litigation, dated June 30, 1994 (incorporated by reference to Exhibit
4.22 to Registrant's Annual Report on Form 10-K for the year ended December 31,
1994, File No. 000-19480).
4.13 -- Form of Amendment to Warrant Agreement between AdvaCare and certain litigants,
entered into in settlement of litigation, dated November 30, 1994 (incorporated by
reference to Exhibit 4.23 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, File No. 000-19480).
4.14 -- Form of Warrant issued to certain litigants in settlement of litigation
(incorporated by reference to Exhibit 4.24 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1994, File No. 000-19480).
4.15 -- Form of Registration Rights Agreement among Registrant, Bryan Dieter and The
Decision Support Group, Inc (incorporated by reference to Exhibit 4.26 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, File
No. 000-19480).
33
36
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
4.16 -- Form of Registration Rights Agreement among Registrant, Humana Inc. and Warburg,
Pincus Capital Company, L.P. (incorporated by reference to Exhibit 4.15 to
Registration Statement on Form S-4, File No. 33-96996).
4.17 -- Form of Registration Rights Agreement among Registrant, Mahmoud R. Ghavi, Barry G.
Wahlig, William L. McCready, and Kimberly D. Elkins (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed on December 5, 1995).
4.18 -- Form of Registration Rights Agreement among Registrant, William J. Denonia, Lori T.
Cardill, Carol T. Shumaker, Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust and Paulanne H. Thacker Retained Annuity Trust (incorporated
by reference to Exhibit 4.1 to Current Report on Form 8-K filed on January 19,
1996).
4.19 -- Form of Registration Rights Agreement among Registrant, Raymond J. Noorda and
Steven G. Papermaster (incorporated by reference to Exhibit 4.17 to Registration
Statement on Form S-4, File No. 33-2506).
4.20 -- Form of Registration Rights Agreement among Registrant, Michael Clark, Andrei
Mitran, and Steven Theidke (incorporated by reference to Exhibit 4.18 to
Registration Statement on Form S-4, File No. 33-2506).
4.21* -- Notice of Redemption for 6.5% Convertible Subordinated Debentures Due 2000.
10.1 -- Amended and Restated Medaphis Corporation Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 28.1 to Registration Statement on Form S-8,
File No. 33-46847).
10.2 -- First Amendment to Amended and Restated Medaphis Corporation Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 28.1 to Registrant's Registration
Statement on Form S-8, File No. 33-64952).
10.3 -- Second Amendment to Amended and Restated Medaphis Corporation Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10.5 to Annual Report on Form
10-K for the year ended December 31, 1992, File No. 000-19480).
10.4 -- Third Amendment to Amended and Restated Medaphis Corporation Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10 to Quarterly Report on Form
10-Q for the Quarterly Period Ended March 31, 1993).
10.5 -- Fourth Amendment to Amended and Restated Medaphis Corporation Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form
10-Q for the Quarterly Period Ended June 30, 1993).
10.6 -- Fifth Amendment to the Amended and Restated Medaphis Corporation Non-Qualified
Stock Option Plan (incorporated by reference to Annual Report on Form 10-K for the
year ended December 31, 1993, File No. 000-19480).
10.7 -- Sixth Amendment to Medaphis Corporation Amended and Restated Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10 to Quarterly Report on Form
10-Q for the Quarterly period ended March 31, 1994).
10.8 -- Seventh Amendment to Medaphis Corporation Amended and Restated Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 99 to Registration Statement on
Form S-8, File No. 33-95742).
10.9 -- Medaphis Corporation Senior Executive Performance Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 28.2 to Registration Statement on Form S-8,
File No. 33-46847).
10.10 -- First Amendment to Medaphis Corporation Senior Executive Performance Non-Qualified
Stock Option Plan (incorporated by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q for the Quarterly Period Ended June 30, 1993).
34
37
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
10.11 -- Medaphis Corporation Non-Qualified Stock Option Plan for Employees of Acquired
Companies (incorporated by reference to Exhibit 99.1 to Registration Statement on
Form S-8, File No. 33-67752).
10.12 -- First Amendment to Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference to Exhibit 99 to
Registration Statement on Form S-8, File No. 33-71556).
10.13 -- Second Amendment to Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference to Exhibit 99 to
Registration Statement on Form S-8, File No. 33-88442).
10.14* -- Third Amendment to Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies.
10.15 -- Medaphis Corporation non-employee Director Stock Option Plan, dated as of August
12, 1994 (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994).
10.16 -- Medaphis Corporation 1994 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.25 to Annual Report on Form 10-K for the year ended December 31, 1993,
File No. 000-19480).
10.17 -- Medaphis Corporation 1995 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.14 to Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 000-19480).
10.18 -- Restricted Stock Plan of the Registrant dated as of August 12, 1994 (incorporated
by reference to Exhibit 10.2 to Registration Statement on Form S-4, File No.
33-88910).
10.19* -- Form of Medaphis Corporation Employee Stock Purchase Plan.
10.20 -- Employee's Retirement Savings Plan and Trust Agreement (incorporated by reference
to Exhibit 10.10 to Registration Statement on Form S-1, File No. 33-42216).
10.21 -- First Amendment to the Medaphis Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.14 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 000-19480).
10.22 -- Second Amendment to the Medaphis Employees' Retirement Savings Plan (incorporated
by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 000-19480).
10.23 -- Third Amendment to the Medaphis Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.16 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 000-19480).
10.24 -- Fourth Amendment to the Medaphis Employees' Retirement Savings Plan (incorporated
by reference to Exhibit 10.17 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 000-19480).
10.25 -- Medaphis Employees' Retirement Savings Plan (incorporated by reference to Exhibit
10.21 to Annual Report on Form 10-K for the year ended December 31, 1994, File No.
000-19480).
10.26 -- First Amendment to Medaphis Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.22 to Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 000-19480).
10.27 -- Automation Atwork 401(k) Profit Sharing Plan and Trust (incorporated by reference
to Exhibit 10.23 to Annual Report on Form 10-K for the year ended December 31,
1994, File No. 000-19480).
35
38
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
10.28 -- First Amendment to the Automation Atwork 401(k) Profit Sharing Plan and Trust
(incorporated by reference to Exhibit 10.24 to Annual Report on Form 10-K for the
year ended December 31, 1994, File No. 000-19480).
10.29 -- Loan Agreement, dated October 1, 1983, between Medical Management Consultants, Inc.
and Development Authority of Cobb County (incorporated by reference to Exhibit
10.16 to Registration Statement on Form S-1, File No. 33-42216).
10.30 -- $90,000,000 Revolving and Cash Management Loan Facilities for Medaphis Corporation
from the Lenders named therein dated August 13, 1993, (incorporated by reference to
Exhibit 99.1 to Current Report on Form 8-K filed on September 13, 1993).
10.31 -- First Modification of Amended and Restated Credit Agreement among the Registrant
and the Lenders named therein, dated July 1, 1994 (incorporated by reference to
Exhibit 10.1 of Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1994).
10.32 -- Second Modification of Amended and Restated Credit Agreement among the Registrant
and the Lenders named therein, dated November 23, 1994 (incorporated by reference
to Exhibit 10.33 to Annual Report on Form 10-K for the year ended December 31,
1994, File No. 000-19480).
10.33 -- Third Modification of Amended and Restated Credit Agreement among the Registrant
and the Lenders named therein, dated March 17, 1995 (incorporated by reference to
Exhibit 10.34 of Annual Report on Form 10-K for the year ended December 31, 1994,
File No. 000-19480).
10.34* -- Fourth Modification of Amended and Restated Credit Agreement among the Registrant
and the Lenders named therein, dated January 31, 1996.
10.35 -- Certificate of Merger of CompMed, Inc. with and into Medaphis Physician Services
Corporation dated as of December 31, 1993 (incorporated by reference to Exhibit
10.30 to Annual Report on Form 10-K for the year ended December 31, 1993, File No.
000-1948).
10.36 -- Employment Agreement, dated December 14, 1992, between MedCorp Holding, Inc. and
Dennis A. Pryor (incorporated by reference to Exhibit 10.26 to Annual Report on
Form 10-K for the year ended December 31, 1992, File No. 000-19480).
10.37 -- Amendment No. 1 to the Employment Agreement between Dennis A. Pryor and Medaphis
Physician Services Corporation (formerly MedCorp holding, Inc., which changed its
named to CompMed, Inc. and subsequently merged into Medaphis Physician Services
Corporation) (incorporated by reference to Exhibit 10.37 to Annual Report on Form
10-K for the year ended December 31, 1994, File No. 000-19480).
10.38 -- Lease Agreement, dated January 15, 1992, between Financial Enterprises III (a
general partnership consisting of Martin L. Brill and Dennis A. Pryor) and CompMed,
Inc. (incorporated by reference to Exhibit 10.28 to Annual Report on Form 10-K for
the year ended December 31, 1992, File No. 000-19480).
10.39 -- Lease Agreement, dated August 1, 1989, between Financial Enterprises III (a general
partnership consisting of Martin L. Brill and Dennis A. Pryor) and Medical
Management Sciences South, Inc. (currently CompMed, Inc.) (incorporated by
reference to Exhibit 10.30 to Annual Report on Form 10-K for the year ended
December 31, 1992, File No. 000-19480).
10.40 -- Lease Agreement, dated October 1, 1992, between Financial Enterprises III (a
general partnership consisting of Martin L. Brill and Dennis A. Pryor) and CompMed,
Inc. (incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K for
the year ended December 31, 1992, File No. 000-19480).
10.41 -- Agreement for Management Services by and among Registrant, INTEGRATEC Med-Services,
Inc. and Medaphis Hospital Services Corporation, dated as of January 13, 1993
(incorporated by reference to Exhibit 10.37 to Annual Report on Form 10-K for the
year ended December 31, 1993, File No. 000-19480).
36
39
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
10.42 -- Lease Agreement by and among Welsh, Carson, Anderson & Stowe IV, Registrant and
Medaphis Hospital Services Corporation, dated January 21, 1994 (incorporated by
reference to Exhibit 10.37 to Annual Report on Form 10-K for the year ended
December 31, 1993, File No. 000-19480).
10.43 -- Employment Agreement by and between MedSub, Inc. and James M. Drinkwater, dated
September 1, 1993 (incorporated by reference to Exhibit 10.37 to Annual Report on
Form 10-K for the year ended December 31, 1993, File No. 000-19480).
10.44 -- Employment Agreement by and between Registrant and Randolph G. Brown, dated March
24, 1995 (incorporated by reference to Exhibit 10.46 of Annual Report on Form 10-K
for the year ended December 31, 1994, File No. 000-19480).
10.45 -- Employment Agreement by and between Registrant and John P. Holton, dated as of
March 17, 1995 (incorporated by reference to Exhibit 10.47 of Annual Report on Form
10-K for the year ended December 31, 1994, File No. 000-19480).
10.46 -- Employment Agreement by and between Registrant and Michael Warner, dated as of
March 17, 1995 (incorporated by reference to Exhibit 10.48 of Annual Report on Form
10-K for the year ended December 31, 1994, File No. 000-19480).
10.47* -- Employment Agreement by and between Registrant and James F. Thacker, dated as of
December 29, 1995.
10.48 -- Master Equipment Lease, dated January 25, 1994, by and between Trust Company Bank
and Registrant (incorporated by reference to Exhibit 10.63 of Annual Report on Form
10-K for the year ended December 31, 1994, File No. 000-19480).
10.49 -- Collection Agreement by and between Columbia/HCA Healthcare Corporation and
AssetCare, Inc. (incorporated by reference to Exhibit 10.1 to Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1994). Portions of Exhibit 10.1
have been omitted pursuant to a request for confidential treatment filed with
Securities and Exchange Commission. The omitted portions have been filed separately
with the Commission.
10.50 -- Termination of Collection Agreement by and between Columbia/HCA Healthcare
Corporation and AssetCare, Inc. (incorporated by reference to Exhibit 10.70 to
Annual Report on Form 10-K for the year ended December 31, 1994, File No.
000-19480).
10.51 -- Master Agreement, dated July 21, 1994, between Registrant and Broadway & Seymour,
Inc. (incorporated by reference to Exhibit 10 to Amendment No. 2 to Registration
Statement on Form S-4 filed on October 17, 1994).
10.52 -- Termination of Master Agreement, dated July 21, 1994, between Registrant and
Broadway & Seymour, Inc. (incorporated by reference to Exhibit 10.72 to Annual
Report on Form 10-K for the year ended December 31, 1994, File No. 000-19480).
10.53 -- Merger of SunMed, Inc. into Gottlieb's Financial Services, Inc. (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1994).
10.54 -- Executive Protection Policy for Registrant (incorporated by reference to Exhibit
10.6 to Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995).
10.55 -- Directors and Officers Liability Insurance Excess Policy for Registrant
(incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995).
10.56 -- Directors and Officers liability and reimbursements excess policy for Registrant
(incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995).
37
40
EXHIBIT
NO. DOCUMENT
- ------- -----------------------------------------------------------------------------------
10.57 -- Lease and Development and Participation Agreement, dated April 21, 1995
(incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.58 -- Master Equipment Lease Agreement Intended for Security with Nationsbanc Leasing
Corporation, dated May 31, 1995 (incorporated by reference to Exhibit 10.2 to
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995).
10.59* -- Equipment Lease, dated September 29, 1995, by and between Nationsbanc Leasing
Corporation of North Carolina and Registrant.
10.60* -- Equipment Leased, dated October 31, 1995 by and between Nationsbanc Leasing
Corporation of North Carolina and Registrant.
10.61* -- Equipment Lease, dated January 31, by and between Nationsbanc Leasing Corporation
of North Carolina and Registrant.
10.62* -- Equipment Lease, dated February 29, 1996, by and between Nationsbanc Leasing
Corporation of North Carolina and Registrant.
10.63 -- Tivoli Systems, Inc. End User Software License Agreement, dated June 30, 1995
(incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1995).
10.64 -- Medaphis Corporation Re-engineering. Consolidation and Business Improvement Cash
Incentive Plan, dated February 21, 1996 (incorporated by reference to Exhibit 10.1
to Registration Statement on Form S-4, File No. 33-2506).
10.65* -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH & Co. KG, dated March
13, 1996.
11 -- Statement re: computation of Per Share Earnings.
13* -- 1995 Annual Report to Stockholders submitted herewith but not "filed", except for
those portions expressly incorporated by reference herein.
21* -- Subsidiaries of Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
99.1* -- Consolidated Class Action Complaint filed in the United States District Court for
the Northern District of Georgia, Atlanta Division.
- ---------------
* Previously filed with Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.
38
41
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended December
31, 1995:
FINANCIAL
ITEM REPORTED STATEMENTS FILED DATE OF REPORT
------------------------------------------- ---------------- -----------------
Restatement of Medaphis Corporation Yes(1) October 13, 1995
Supplemental Consolidated Financial
Statements to effect for the acquisition
of Healthcare Recoveries, Inc.
Acquisition of Consort Technologies, Inc. No November 22, 1995
- ---------------
(1) Financial statements for Healthcare Recoveries, Inc. for the years ended
June 30, 1992, 1993 and 1994 (audited) and the nine months ended March 31,
1995 (unaudited) and Supplemental Consolidated Financial Statements of
Medaphis Corporation for the years ended December 31, 1992, 1993 and 1994
(audited) were filed.
39
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: January 10, 1997 MEDAPHIS CORPORATION
By: /s/ Michael R. Cote
-------------------------------------------
Michael R. Cote
Senior Vice President -- Finance,
Chief Financial Officer and
Assistant Secretary
40
43
MEDAPHIS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ------------------------------------------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts (as
restated)............................ $3,109 $ 528 $1,278(1) $ (1,103)(2) $3,812
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts......... $1,363 $1,624 $ 338(1) $ (216)(2) $3,109
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts......... $1,162 $ 333 $ 227(1) $ (359)(2) $1,363
- ---------------
(1) Represents the allowance recorded in conjunction with acquired companies.
(2) Represents write-off of uncollectible accounts receivable.
41