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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 of (I.R.S. Employer
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)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 12, 1996
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COMMON STOCK 71,848,756 SHARES
$0.01 PAR VALUE
NON-VOTING COMMON STOCK 0 SHARES
$0.01 PAR VALUE
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2
MEDAPHIS CORPORATION
FORM 10-Q/A
JUNE 30, 1996
PAGE
----
PART I: FINANCIAL INFORMATION
Consolidated Statements of Operations for the three and six months ended June 30,
1996 and 1995.................................................................... 3
Consolidated Balance Sheets as of June 30, 1996 (as restated) and December 31, 1995
(as restated).................................................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and
1995............................................................................. 5
Notes to Consolidated Financial Statements.......................................... 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 14
PART II: OTHER INFORMATION
Exhibits and Reports on Form 8-K.................................................... 22
THIS QUARTERLY REPORT ON FORM 10-Q/A IS BEING FILED AS A RESULT OF THE
COMPANY'S RESTATEMENT OF ITS 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 QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 (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-Q/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 I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenue............................................... $175,193 $141,286 $338,820 $274,379
-------- -------- -------- --------
Salaries and wages.................................... 92,663 79,349 183,228 155,487
Other operating expenses.............................. 38,799 37,585 78,153 68,083
Depreciation.......................................... 5,324 3,718 10,275 7,115
Amortization.......................................... 4,826 4,484 9,735 8,762
Interest expense, net................................. 2,630 2,222 4,735 6,169
Restructuring and other charges....................... 17,175 -- 17,325 31,750
-------- -------- -------- --------
Total expenses.............................. 161,417 127,358 303,451 277,366
Income (loss) before income taxes..................... 13,776 13,928 35,369 (2,987)
Income taxes.......................................... 10,439 6,362 19,307 (2,570)
-------- -------- -------- --------
Net income (loss)................................... 3,337 7,566 16,062 (417)
Pro forma adjustments, principally income taxes....... -- (340) 354 (4,214)
-------- -------- -------- --------
Pro forma net income (loss)......................... $ 3,337 $ 7,226 $ 16,416 $ (4,631)
======== ======== ======== ========
Pro forma net income (loss) per common share.......... $ 0.04 $ 0.10 $ 0.22 $ (0.09)
======== ======== ======== ========
Weighted average shares outstanding................... 75,006 69,053 74,786 52,926
======== ======== ======== ========
See notes to consolidated financial statements.
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4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(AS RESTATED, SEE NOTE 8)
ASSETS
Current Assets:
Cash............................................................... $ 8,496 $ 19,270
Restricted cash.................................................... 15,573 15,340
Accounts receivable, billed........................................ 114,948 84,256
Accounts receivable, unbilled...................................... 111,212 89,429
Other.............................................................. 16,031 14,870
-------- ------------
Total current assets....................................... 266,260 223,165
Property and equipment............................................... 131,999 97,895
Intangible assets.................................................... 486,349 455,611
Other................................................................ 19,093 18,935
-------- ------------
$903,701 $795,606
======== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 6,606 $ 23,220
Accrued compensation............................................... 24,369 24,505
Accrued expenses................................................... 68,593 69,529
Current portion of long-term debt.................................. 9,815 10,681
-------- ------------
Total current liabilities.................................. 109,383 127,935
Long-term debt....................................................... 237,636 150,565
Other obligations.................................................... 15,725 18,926
Deferred income taxes................................................ 27,253 13,499
Convertible subordinated debentures.................................. -- 63,375
-------- ------------
Total liabilities.......................................... 389,997 374,300
Stockholders' Equity:
Preferred stock.................................................... -- 382
Common stock, voting, $.01 par value, 200,000 authorized; issued
and outstanding 71,398 in 1996 and 58,917 in 1995............... 714 589
Common stock, nonvoting, $.01 par value, 600 authorized; none
issued.......................................................... -- --
Paid-in capital.................................................... 499,289 426,387
Retained earnings (deficit)........................................ 13,701 (6,052)
-------- ------------
Total stockholders' equity................................. 513,704 421,306
-------- ------------
$903,701 $795,606
======== ============
See notes to consolidated financial statements.
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5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE
30,
----------------------
1996 1995
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ 16,062 $ (417)
Adjustments to reconcile net income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization.................................... 20,010 15,877
Deferred income taxes............................................ 19,307 (2,851)
Impairment loss on property and equipment........................ 343 5,102
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash.................................... (958) (191)
Increase in accounts receivable, billed........................ (28,222) (13,259)
(Increase) decrease in accounts receivable, unbilled........... (23,916) 418
Decrease in accounts payable................................... (16,190) (4,714)
Decrease in accrued compensation............................... (299) (1,628)
(Decrease) increase in accrued expenses........................ (8,170) 14,994
Other, net..................................................... 616 (3,522)
--------- ----------
Net cash (used for) provided by operating activities........ (21,417) 9,809
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.................................. (12,737) (54,098)
Purchases of property and equipment................................. (34,570) (18,432)
Software development costs.......................................... (26,382) (11,146)
Other............................................................... -- 323
--------- ----------
Net cash used for investing activities...................... (73,689) (83,353)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............................. 9,673 143,199
Proceeds from borrowings............................................ 96,749 46,522
Principal payments of long-term debt................................ (25,612) (102,825)
Other............................................................... 3,813 (10,424)
--------- ----------
Net cash provided by financing activities................... 84,623 76,472
--------- ----------
CASH:
Net change.......................................................... (10,483) 2,928
Balance at beginning of period...................................... 18,979 17,651
--------- ----------
Balance at end of period............................................ $ 8,496 $ 20,579
========= ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest......................................................... $ 7,005 $ 6,346
Income taxes..................................................... 5,684 1,413
Non-cash investing and financing activities:
Liabilities assumed in purchase acquisitions..................... 2,700 2,055
Additions to capital lease obligations........................... 12,620 3,575
Common stock issued in conjunction with purchase acquisitions.... -- 459
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. The Notes
to the 1995 Consolidated and Supplemental Consolidated Financial Statements of
the Company which are contained in the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1995 and the Company's Current Report on
Form 8-K/A dated June 29, 1996, respectively, should be read in conjunction with
these unaudited condensed consolidated financial statements. See Note 8 for a
discussion of the restatement of the Company's consolidated financial statements
for the three months and year ended December 31, 1995 and as of March 31, 1996
and June 30, 1996.
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
NOTE 2 -- LEGAL AND 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
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 the third quarter of 1995 solely 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, judgments
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. On April 11, 1996, certain of the named plaintiffs to the Consolidated
Complaint voluntarily dismissed with prejudice all of their claims. As a result
of these dismissals, the Consolidated Complaint no longer contains any claims
based on the Securities Act of 1933, and the Company's underwriters and outside
directors are no longer named as defendants. On June 26, 1996, the court denied
the plaintiffs' motion to certify a plaintiffs' class. The Company believes that
it has meritorious defenses to this action and intends to assert them
vigorously.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company, through its wholly owned indirect subsidiary, Imonics GmbH,
entered into a 50/50 joint venture (the "Joint Venture") with an affiliate of a
large German corporation (the "European Partner") to pursue custom software
development and systems integration projects for customer service systems
primarily in Germany. The Joint Venture entered into a large software licensing
and software engineering contract (the "Contract") in the first quarter of 1996.
On July 25, 1996, the Joint Venture began discussions with the European Partner
and the related customer regarding difficulties with certain aspects of the
systems integration project. As a result, the parties are negotiating the
restructuring of the operating relationships and economics underlying the
Contract. Although a restructured arrangement among the parties is subject to
the negotiation and execution of definitive agreements, the Company anticipates
that the Contract will be amended and a restructured arrangement will be
executed that will position the Joint Venture to move forward with the project
and to pursue other opportunities and projects on terms and conditions that are
mutually beneficial to the parties. The Company anticipates recording a loss
related to the restructured arrangement of approximately $9 million during the
third quarter of 1996.
Additionally, in July 1996 the Company began to consolidate and integrate
its client/server systems integration businesses under the direction and
leadership of its operating subsidiary, BSG Corporation ("BSG"). BSG's
management has focused its efforts primarily on reorganizing Imonics so that its
business practices more closely align with those of BSG. Many changes have and
will continue to occur at Imonics Corporation ("Imonics") including: headcount
reductions, increased focus on project management, increased cost controls and
implementation of the BSG business model. In addition to the expected $9 million
loss related to the restructured arrangement noted above, the Company
anticipates recording losses in the third quarter of 1996 related primarily to
the reorganization of Imonics of approximately $15 million.
NOTE 3 -- RECENT ACQUISITIONS
From January 1, 1995 through June 30, 1996, 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:
ACQUISITION
COMPANY ACQUIRED CONSIDERATION DATE
-------------------------------------------------------- -------------- --------------
(IN THOUSANDS)
The Medico Group, Ltd. ("MEDICO")....................... * April 1996
Medical Management Computer Services, Inc. ("MMCS")..... * February 1996
CBT Financial Services, Inc. ("CBT").................... * February 1996
The Receivables Management Division of MedQuist, Inc.
("RMD")............................................... $ 17,300 December 1995
The Halley Exchange, Inc. ("Halley").................... * December 1995
Billing and Professional Services, Inc. ("BAPS")........ * October 1995
Medical Office Consultants, Inc. ("MOC")................ * May 1995
Computers Diversified, Inc. ("CDI")..................... 15,500 April 1995
Medical Management, Inc. ("MMI")........................ 8,000 March 1995
Decision Support Group ("DSG").......................... * January 1995
- ---------------
* 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 certain
of these acquisitions is preliminary and will be adjusted when the necessary
information is available. The operating
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
results of the acquired businesses are included in the Company's consolidated
statements of income (loss) from the respective dates of acquisitions.
In addition to the foregoing acquisitions, the Company acquired eight
businesses in 1996 and 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 ACQUISITION
COMPANY ACQUIRED EXCHANGED DATE
---------------------------------------------------------- --------- --------------
Health Data Sciences Corporation ("HDS").................. 6,215,000 June 1996
BSG....................................................... 7,539,000 May 1996
Rapid Systems Solutions, Inc. ("Rapid Systems")........... 1,135,000 April 1996
Intelligent Visual Computing, Inc. ("IVC")................ * February 1996
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
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* Consideration not material.
Since these acquisitions have been recorded using the pooling-of-interests
method of accounting, no adjustments have 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, MMS, Rapid Systems, BSG and HDS
for all periods prior to the mergers. No restatement has been made for the
financial position and operating results of Consort and IVC prior to the
beginning of the fiscal year of their acquisitions due to their immateriality.
A reconciliation of revenue, pro forma net income (loss) and pro forma net
income (loss) per common share of the Company, as previously reported (which
includes Atwork) with the Company after restating for all material acquisitions
accounted for under the pooling-of-interests method of accounting, including the
pro forma provision for "S" corporation income taxes, is as follows (in
thousands, except per share data):
THREE MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 1995 30, 1995
------------- -------------
Revenue:
Medaphis, as previously reported......................... $ 105,984 $ 205,339
HRI...................................................... 5,382 10,183
Consort.................................................. 988 1,780
MMS...................................................... 5,068 10,204
Rapid Systems............................................ 3,325 6,093
BSG...................................................... 16,551 34,064
HDS...................................................... 3,988 6,716
-------- --------
Combined................................................. $ 141,286 $ 274,379
======== ========
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 1995 30, 1995
-------- --------
Pro forma net income (loss):
Medaphis, as previously reported......................... $ 8,809 $ (4,686)
HRI...................................................... 410 1,012
Consort.................................................. 307 529
MMS...................................................... 524 2,020
Rapid Systems............................................ (115) 293
BSG...................................................... (446) 230
HDS...................................................... (1,923) (2,788)
Pro forma provision for "S" corporation income taxes..... (340) (1,241)
-------- --------
Combined................................................. $ 7,226 $ (4,631)
======== ========
Pro forma net income (loss) per common share:
Medaphis, as previously reported......................... $ 0.20 $ (0.12)
======== ========
Combined................................................. $ 0.10 $ (0.08)
======== ========
Prior to its merger with the Company, HDS reported on a fiscal period
ending March 31. HDS's financial position and operating results as of and for
the fiscal year ended March 31, 1996 was combined with the Company's financial
position and operating results as of and for the year ended December 31, 1995.
HDS's financial position and operating results for 1996, which have been
restated to a calendar year basis, have been combined with the Company's
financial position and operating results for 1996. Accordingly, HDS's operating
results for the three months ended March 31, 1996, were duplicated in the year
ended December 31, 1995 and the six months ended June 30, 1996. HDS's revenue
and net income for that three month period were $3,758,000 and $382,000,
respectively.
The following unaudited pro forma financial information presents the
results of operations of the Company for the six months ended June 30, 1996 and
1995 as if all the material acquisitions noted above had occurred on January 1,
1995. The pro forma information presented below does not purport to be
indicative of the results that would have been obtained if the operations had
actually been combined for the periods presented and is not necessarily
indicative of operating results to be expected in future periods (in thousands,
except per share data).
PRO FORMA SIX MONTHS
ENDED JUNE 30,
-----------------------
1996 1995
-------- --------
Revenue...................................................... $338,820 $288,050
Net income (loss)............................................ 16,416 (3,492)
Net income (loss) per share.................................. $ 0.22 $ (0.06)
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- FINANCING TRANSACTIONS
In 1995, the Company gave notice of its intent to redeem its 6 1/2%
convertible subordinated debentures due January 1, 2000. The debentures were
convertible into shares of the Company's common stock at a conversion price of
$14.00 per share. All of the debenture holders exercised their conversion right
effective January 1, 1996, and as a result, approximately 4.5 million shares of
common stock were issued in the conversion.
NOTE 5 -- RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges for the quarter ended June 30, 1996
included transaction fees, costs and expenses associated with the Rapid Systems,
BSG and HDS pooling-of-interests transactions of approximately $12.7 million.
The remaining balance of restructuring and other charges during this period
represents costs associated with the Company's ongoing reengineering and
consolidation project as well as certain costs related to the reorganization of
Imonics.
Restructuring and other charges for the quarter ended March 31, 1996
included costs and benefits associated with the merger with IVC, the Company's
ongoing reengineering and consolidation project and the re-evaluation of the
estimated transaction fees, costs and expenses associated with several
pooling-of-interests transactions consummated in 1995.
In connection with the Atwork merger, the Company incurred transaction
fees, costs and expenses of approximately $6.0 million. In accordance with the
pooling-of-interests accounting treatment, these costs have been reflected in
the operating results for the six months ended June 30, 1995.
In the quarter ended March 31, 1995, management of the Company approved a
restructuring plan relating to the consolidation of the Company's data
processing function in its operating subsidiary, Medaphis Physician Services
Corporation ("MPSC"). Substantially all of MPSC'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. In the quarter ended March 31, 1995, the Company recorded a reserve
for the exit costs associated with the restructuring plan of approximately $15.0
million. During the third quarter of 1996, the Company expects to finalize a
revision to its restructuring plan and record additional restructuring and other
charges of approximately $11 million. A description of the type and amount of
exit costs incurred in the six months ended June 30, 1996 are as follows (in
thousands):
RESERVE INCURRED RESERVE
BALANCE THROUGH BALANCE
12/31/95 6/30/96 6/30/96
-------- -------- --------
Lease termination costs.................................. $ 5,990 $ 889 $5,101
Incremental costs associated with discontinued client
contracts.............................................. 4,691 1,423 3,268
Other.................................................... 1,788 491 1,297
-------- -------- --------
$ 12,469 $2,803 $9,666
======= ======= =======
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the quarter ended March 31, 1995, MPSC formalized an involuntary
severance benefit plan and the Company recorded a charge of approximately $5.0
million 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 $936,000 during the six-month period
ended June 30, 1996.
In the quarter ended March 31, 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.
NOTE 6 -- INCOME TAXES
In 1995 and 1996, Medaphis acquired Atwork, MMS, Rapid Systems and BSG in
merger transactions which were accounted for as poolings-of-interests. Prior to
such mergers, Atwork, MMS, Rapid Systems and a company acquired by BSG prior to
the BSG merger had elected "S" corporation status under the Internal Revenue
Code for income tax purposes. As a result of such mergers (or, in the case of
the company acquired by BSG, its acquisition by BSG), such entities terminated
their "S" corporation elections. Pro forma net income (loss) and pro forma net
income (loss) per common share are presented as if the entities had been "C"
corporations during the three and six months ended June 30, 1996 and 1995. The
effect of the tax status change associated with the acquisition of Rapid Systems
could not be determined during the second quarter of 1996, therefore, the effect
of the tax status change will be recorded within income taxes in the third
quarter of 1996 with an offsetting benefit recorded within pro forma
adjustments. Management of the Company believes the effect of the Rapid Systems
tax status change is not material.
NOTE 7 -- 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 client/server information technology services,
healthcare information systems 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 represents total revenue
less operating expenses. Corporate items include general corporate expenses.
Corporate assets consist primarily of cash and cash equivalents, deferred
financing costs,
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12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed assets, miscellaneous prepaids and receivables and real estate purchased
in acquisitions. Information concerning operations in these lines of business is
as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS)
Revenue:
Services.................................... $106,158 $103,001 $212,655 $201,182
Technology Systems.......................... 69,861 38,597 127,432 73,837
Corporate and eliminations.................. (826) (312) (1,267) (640)
-------- -------- -------- --------
$175,193 $141,286 $338,820 $274,379
======== ======== ======== ========
Operating profit(1):
Services.................................... $ 11,861 $ 15,733 $ 24,781 $ 31,410
Technology Systems.......................... 26,272 2,691 41,201 8,086
Corporate................................... (4,552) (2,274) (8,553) (4,564)
-------- -------- -------- --------
$ 33,581 $ 16,150 $ 57,429 $ 34,932
======== ======== ======== ========
Interest expense, net......................... 2,630 2,222 4,735 6,169
Restructuring and other charges............... 17,175 -- 17,325 31,750
-------- -------- -------- --------
Income (loss) before income taxes............. $ 13,776 $ 13,928 $ 35,369 $ (2,987)
======== ======== ======== ========
Identifiable assets:
Services.................................... $561,901 $513,710 $561,901 $513,710
Technology systems.......................... 328,770 168,689 328,770 168,689
Corporate................................... 13,030 6,348 13,030 6,348
-------- -------- -------- --------
$903,701 $688,747 $903,701 $688,747
======== ======== ======== ========
Depreciation and amortization:
Services.................................... $ 6,648 $ 5,502 $ 11,826 $ 10,735
Technology Systems.......................... 3,296 2,605 7,813 4,976
Corporate................................... 206 95 371 166
-------- -------- -------- --------
$ 10,150 $ 8,202 $ 20,010 $ 15,877
======== ======== ======== ========
Capital expenditures:
Services.................................... $ 6,991 $ 6,423 $ 16,203 $ 10,143
Technology Systems.......................... 7,424 4,014 17,134 7,488
Corporate................................... 680 576 1,233 801
-------- -------- -------- --------
$ 15,095 $ 11,013 $ 34,570 $ 18,432
======== ======== ======== ========
- ---------------
(1) Excludes interest income and expense. Also excludes restructuring and other
charges of $2.9 million (Services) and $14.3 million (Technology Services)
for the three months ended June 30, 1996; and $3.5 million and $25 million
(Services) and $13.8 million and $6.8 million (Technology Services) for the
six months ended June 30,1996 and 1995, respectively.
In March 1996, the Joint Venture entered into a large software licensing
and software engineering contract. Included in revenue during the quarter ended
March 31, 1996 in the accompanying Consolidated Statements of Income (Loss) is
approximately $12.5 million relating to the Company's share of net earnings of
the Joint Venture.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- RESTATEMENT OF 1995 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND
MARCH 31, AND JUNE 30, 1996 BALANCE SHEETS
The Company has restated its supplemental 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 in
December 1995 for which the Company recognized associated license fee revenue in
1995. Subsequent to the issuance of the Company's 1995 supplemental consolidated
financial statements in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, 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 Company has hereby restated its
unaudited balance sheets as of March 31, 1996 and June 30, 1996 contained in its
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1996
and June 30, 1996, respectively, for the effect of the 1995 restatement
adjustments. 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
REPORTED AS RESTATED
------------- -----------
As of December 31, 1995:
Total current assets........................................ $ 228,357 $ 223,165
Total assets................................................ 801,869 795,606
Total current liabilities................................... 125,658 127,935
Total liabilities........................................... 375,439 374,300
Total stockholders' equity.................................. 426,430 421,306
As of March 31, 1996 (unaudited):
Total current assets........................................ 199,934 194,742
Total assets................................................ 779,966 773,703
Total current liabilities................................... 98,321 100,598
Total liabilities........................................... 324,786 323,647
Total stockholders' equity.................................. 455,180 450,056
As of June 30, 1996 (unaudited):
Total current assets........................................ 271,452 266,260
Total assets................................................ 909,964 903,701
Total current liabilities................................... 107,106 109,383
Total liabilities........................................... 391,136 389,997
Total stockholders' equity.................................. 518,828 513,704
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Medaphis, The Next Generation Business Services Company, provides
transaction processing and client/server information technology systems and
services for clients in multiple vertical markets, initially concentrated in
healthcare. Medaphis' healthcare transaction 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's healthcare
transaction processing services also provide subrogation and related recovery
services primarily to healthcare payors. Medaphis' healthcare information
systems include patient centered clinical information management systems and
enterprise wide patient and employee scheduling systems. These systems are
designed to improve efficiency and the quality of care within hospitals and
emerging integrated healthcare delivery systems. The Company's client/server
information technology services are designed to effect fundamental business
process transformation and innovation through the rapid, high impact
development, delivery, deployment and maintenance of client/server technology
and the careful, deliberate transfer of the processes and related technology to
its clients.
Medaphis' business is impacted by trends in the U.S. healthcare industry.
As healthcare expenditures have grown as a percentage of the 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 recognized 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 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 reengineering and consolidation project have placed pressure
on the rate of revenue growth and margins in the Company's physician operations
which are the subject of such reengineering and consolidation project. Due to
these revenue and margin pressures, Medaphis Physician Services Corporation
("MPSC") did not significantly contribute to the Company's operating profit for
the second half of 1995. During the first half of 1996, the Company's Services
Division generated revenue and operating profit of $212.7 million and $24.8
million, respectively. MPSC adversely affected the results of operations of the
Services Division for the three and six months ended June 30, 1996; however, its
operating results in the second quarter improved slightly over the first quarter
of 1996. MPSC is in the process of implementing initiatives which management of
the Company believes will allow MPSC to improve its operations over the long
term. The reengineering and consolidation project was commenced in earnest in
early 1995 and has been designed to reduce costs, increase consistency and
quality of services and enhance operating margins in the Company's transaction
processing services operations through office consolidation and the strategic
use and deployment of scanning, imaging, work flow and process engineering and
client/server distributed computing technology and services. The Company intends
to continue to develop and refine such technology and practices, and then to
deploy such technology and practices throughout MPSC. Management of the Company
continues to assess the technology and processes necessary to ensure the
Company's long-term success and believes that the reengineering project and
related management initiatives are positioning the Company for improvements in
operating results over the long term. Management of the Company currently
anticipates that the reengineering and consolidation project will continue
through 1998.
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To date, the Company has been able to offset the margin and revenue
pressures experienced at MPSC through expanded growth in its client/server
information technology services and information management operations. Much of
this growth has come from the signing of new systems integration and healthcare
information systems contracts which have included significant initial license
fees as well as through strategic acquisitions. Given the size and complexity of
the large-scale systems integration and healthcare information system contracts
entered into by the Company and the license fees associated therewith,
management of the Company believes that the results of operations for the
Company's Technology Systems Division may be subject to significant quarterly
fluctuations based upon the timing of receipt of such contracts. However,
management also anticipates that the episodic nature of the Company's existing
systems integration operations should be partially offset over time by the
results of operations of BSG Corporation ("BSG") and Rapid Systems Solutions,
Inc. ("Rapid Systems"), which historically have had a larger number of smaller
systems integration projects which have not included significant initial license
fees and the adoption by Imonics Corporation ("Imonics") of the BSG business
model.
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.
RESULTS OF OPERATIONS
The following table shows the percentage of certain items reflected in the
Company's Consolidated Statements of Income (Loss) to revenue.
THREE MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE
30, 30,
------------- -------------
1996 1995 1996 1995
----- ----- ----- -----
Revenue........................................................... 100.0% 100.0% 100.0% 100.0%
Salaries and wages................................................ 52.9 56.2 54.1 56.7
Other operating expenses.......................................... 22.1 26.6 23.1 24.8
Depreciation...................................................... 3.0 2.6 3.0 2.6
Amortization...................................................... 2.8 3.2 2.9 3.2
Interest expense, net............................................. 1.5 1.5 1.4 2.2
Restructuring and other charges................................... 9.8 -- 5.1 11.6
----- ----- ----- -----
Income (loss) before income taxes................................. 7.9 9.9 10.4 (1.1)
Income taxes...................................................... 6.0 4.5 5.7 (0.9)
----- ----- ----- -----
Net income (loss)................................................. 1.9 5.4 4.7 (0.2)
Pro forma adjustments............................................. -- (0.3) 0.1 (1.5)
----- ----- ----- -----
Pro forma net income (loss)....................................... 1.9% 5.1% 4.8% (1.7)%
===== ===== ===== =====
Revenue. Revenue increased 24% to $175.2 million in the second quarter of
1996 as compared with $141.3 million in the second quarter of 1995 and increased
23% to $338.8 million in the six month period ended June 30, 1996 as compared
with $274.4 million in the same period in 1995. Revenue growth results from: (i)
acquisitions; (ii) increases in sales to information management and systems
integration clients; and (iii) increases in the number of business management
services clients. The Company has consummated 18 business combinations during
the period from January 1, 1995 through June 30, 1996.
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16
Revenue of the Company's Services and Technology Systems Divisions for the
three and six months ended June 30, 1996 and 1995 is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Services Division..................................... $106,158 $103,001 $212,655 $201,182
Technology Systems Division........................... $ 69,861 $ 38,597 $127,432 $ 73,837
A substantial portion of the revenue in the Company's Services Division is
recurring, representing approximately 57.5% of consolidated revenue. Included in
revenue of the Company's Technology Systems Division for the three months ended
June 30, 1996 is approximately $14.5 million of fees associated with the
licensing of Health Data Sciences Corporation's ("HDS") healthcare information
system. Included in revenue of the Company's Technology Systems Division for the
three months ended March 31, 1996 is approximately $12.5 million related to the
Company's share of net earnings of the Joint Venture, as hereinafter defined.
Salaries and Wages. Salaries and wages decreased to 52.9% of revenue in
the second quarter of 1996 from 56.2% in the second quarter of 1995 and
decreased to 54.1% of revenue in the six month period ended June 30, 1996 from
56.7% in the same period in 1995. The decrease resulted primarily from the
continued growth in the Company's Technology Systems Division.
Other Operating Expenses. Other operating expenses decreased to 22.1% of
revenue in the second quarter of 1996 from 26.6% in the second quarter of 1995
and decreased to 23.1% of revenue in the six month period ended June 30, 1996
from 24.8% in the same period in 1995. The decreases resulted primarily from
benefits of economies of scale due to growth in the Company's business. Other
operating expenses are primarily comprised of postage, facility and equipment
rental, telecommunications, travel, outside consulting services and office
supplies.
Depreciation. Depreciation expense was $5.3 million in the second quarter
of 1996 as compared with $3.7 million in the second quarter of 1995 and $10.3
million in the six month period ended June 30, 1996 as compared with $7.1
million in the same period in 1995. This increase reflects the Company's
investment in property and equipment to support growth in its business,
including acquisitions.
The Company has commenced a comprehensive reengineering and consolidation
project. Management anticipates increases in depreciation expense in 1996 and
thereafter as a result of the installation of new computer equipment as part of
the reengineering and consolidation project.
Amortization. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $4.8 million in the second quarter of 1996 as compared with $4.5 million in
the second quarter of 1995 and $9.7 million in the six month period ended June
30, 1996 as compared with $8.8 million the same period in 1995. The increase is
primarily due to increased amortization of the Company's software products.
Management anticipates that amortization expense in 1996 and thereafter will
increase upon the completion of its reengineering and consolidation project. The
Company intends to amortize the software applications developed in connection
with this project over their estimated useful lives of five to seven years.
Interest. Net interest expense was $2.6 million in the second quarter of
1996 as compared with $2.2 million in the second quarter of 1995. This increase
is primarily due to increased borrowings under the Senior Credit Facility to
finance acquisitions. Net interest expense decreased to $4.7 million in the six
month period ended June 30, 1996 as compared with $6.2 million the same period
in 1995. The decrease is primarily due to the conversion of the Company's
subordinated debentures into common stock on January 1, 1996. Management
anticipates that future interest expense will be impacted by interest rate
fluctuations, increased borrowings under the Senior Credit Facility and
continued investment in the Company's reengineering and consolidation project.
Restructuring and Other Charges. Restructuring and other charges for the
quarter ended June 30, 1996 included transaction fees, costs and expenses
associated with the Rapid Systems, BSG and HDS pooling-of-
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interests transactions of approximately $12.7 million. The remaining balance of
restructuring and other charges during this period represents costs associated
with the Company's ongoing reengineering and consolidation project as well as
certain costs related to the reorganization of Imonics.
Restructuring and other charges for the quarter ended March 31, 1996
included costs and benefits associated with the merger with Intelligent Visual
Computing, Inc. ("IVC"), the Company's ongoing reengineering and consolidation
project and the re-evaluation of the estimated transaction fees, costs and
expenses associated with several pooling-of-interests transactions consummated
in 1995.
In connection with the Atwork merger, the Company incurred transaction
fees, costs and expenses of approximately $6.0 million. In accordance with the
pooling-of-interests accounting treatment, the costs associated with the Atwork
merger have been reflected in the operating results of the Company in the first
quarter of 1995.
The Company has commenced a comprehensive reengineering and consolidation
project in order to enhance its ability to provide more effective and efficient
business management services to its clients. This project is designed to further
enhance the Company's long-term operating efficiency and client service
capability. It is currently anticipated that the project will continue through
1998. As a result of this project, the Company recorded restructuring and other
charges of approximately $25 million in the first quarter of 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). During the third quarter of 1996, the Company expects
to finalize a revision to this project and record additional restructuring and
other charges of approximately $11 million.
Income (Loss) Before Income Taxes. The Company's income before income
taxes was 7.9% of revenue in the second quarter of 1996 as compared with 9.9% of
revenue in the second quarter of 1995. The decrease is primarily the result of
charges recorded in the second quarter of 1996 relating to the Rapid Systems,
BSG and HDS mergers which were offset by the results of the Company's technology
systems operations in the quarter ended June 30, 1996. The Company's income
before income taxes was 10.4% of revenue for the six month period ended June 30,
1996 as compared with a loss before income taxes of 1.1% of revenue in the same
period in 1995. The increase is primarily a result of restructuring and other
charges recorded in the first quarter of 1995. During the quarter and six months
ended June 30, 1996, the Company's income before income taxes was positively
impacted by the operations of the Company's Technology Systems Division,
principally Imonics in the first quarter of 1996 and Rapid Systems, BSG and HDS
in the second quarter of 1996. Imonics' results for the first quarter of 1996
included approximately $12.5 million representing its share of the net earnings
of the Joint Venture. HDS's second quarter results included approximately $14.5
million of fees associated with the licensing of HDS's healthcare information
system.
Income Taxes. The Company's historical effective income tax rates were
75.8% and 54.6% for the quarter and six months ended June 30, 1996,
respectively, compared with a provision of 45.7% and a benefit of 86.0% for the
same periods in 1995. The increase in tax rates between quarters resulted from
the non-deductible merger costs incurred in the quarter ended June 30, 1996. The
increase between the rates for the six month periods results from the benefit
recorded in the first quarter of 1995 related to the change in tax status of
Atwork, net of the effect of non-deductible merger costs incurred in the first
quarter of 1995. On a pro forma basis, assuming Atwork, Consort, MMS, Rapid
Systems and a company acquired by BSG prior to the BSG merger were 'C'
corporations for all periods presented, the Company's pro forma effective tax
rate would have been 75.8% and 53.6% for the quarter and six months ended June
30, 1996, respectively, compared with 48.1% and 72.0% (resulting from a tax
provision recorded on a pro forma pre-tax loss) for the same periods in 1995.
The increase in the Company's pro forma effective tax rate for the quarter ended
June 30, 1996 resulted primarily from the aforementioned non-deductible merger
costs in the second quarter of 1996. The decrease in the Company's pro forma
effective tax rate for the six month period ended June 30, 1996, resulted
primarily from the non-deductible merger costs incurred in the first quarter of
1995.
Pro Forma Net Income (Loss). The Company's pro forma net income for the
quarter ended June 30, 1996, was $3.3 million as compared with $7.2 million in
the year-earlier period. The decrease is a result of the above-mentioned merger
charges. The pro forma net income for the six month period ended June 30, 1996
was $16.4 million as compared with a pro forma net loss of $4.6 million in the
year-earlier period. The increase
17
18
in pro forma net income from the year-earlier period is primarily a result of
charges recorded in the first quarter of 1995 relating to the reengineering and
consolidation project and the Atwork merger.
Pro Forma Net Income (Loss) Per Common Share. The weighted average shares
outstanding were 75,006,000 and 74,786,000 for the quarter and six months ended
June 30, 1996, respectively, compared with 69,053,000 and 52,926,000 for the
same periods in 1995. Pro forma net income (loss) per common share was $0.04 and
$0.22 for the quarter and six months ended June 30, 1996, respectively, compared
with $0.10 and $(0.09) for the same periods in 1995. The decrease in pro forma
net income (loss) per common share in the second quarter of 1996 as compared to
the same period of 1995 primarily was due to the charges associated with the
Rapid Systems, BSG and HDS mergers. The increase in pro forma net income (loss)
per common share in the six months ended June 30, 1996, as compared with the
prior period, is primarily the result of the charges recorded in the first
quarter of 1995 relating to the reengineering and consolidation project and the
Atwork merger and the results of the Company's technology systems operations in
the six months ended June 30, 1996.
RECENT ACQUISITIONS
On February 12, 1996, the Company acquired substantially all of the assets
and assumed certain of the related liabilities of Medical Management Computer
Services, Inc. ("MMCS"). MMCS provides billing and accounts receivable
management services primarily to emergency room physicians.
On February 20, 1996, the Company acquired substantially all of the assets
and assumed certain of the related liabilities of CBT Financial Services, Inc.
("CBT"). CBT provides collection and billing services primarily to hospitals.
On April 16, 1996, the Company acquired the outstanding capital stock of
The Medico Group, Ltd. ("MEDICO"). MEDICO provides billing and accounts
receivable management services primarily to anesthesiologists.
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.
On February 29, 1996, the Company exchanged shares of its common stock for
all of the outstanding shares of common stock of IVC. IVC provides systems
integration and work flow engineering systems and services to clients in the
healthcare and other industries. This transaction has been accounted for using
the pooling-of-interests method of accounting.
On April 3, 1996, the Company exchanged approximately 1.1 million shares of
its common stock for all of the outstanding shares of common stock of Rapid
Systems. 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 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 Rapid Systems.
On May 6, 1996, the Company exchanged approximately 7.5 million shares of
its common stock for all of the outstanding shares of common stock of BSG. In
addition, the Company assumed BSG stock options representing approximately 2.3
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
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 BSG.
18
19
On June 29, 1996, the Company exchanged approximately 6.2 million shares of
its common stock for all of the outstanding shares of common stock of HDS. In
addition, the Company assumed HDS stock options representing approximately
433,000 additional shares of the Company's common stock. HDS is a developer and
supplier of advanced healthcare information systems which address a healthcare
enterprise's clinical information needs through the integrated monitoring,
scheduling, documentation and control of patient care. During 1995, HDS had
revenue of $12.2 million. 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 HDS.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $156.9 million at June 30, 1996,
including $8.5 million of cash.
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 reengineering and consolidation project. The
Company used $21.4 million in cash for operating activities (excluding the
effects of restructuring, merger and other charges, the Company used
approximately $3.0 million in cash for operating activities) in the six months
ended June 30, 1996. The decrease in the Company's operating cash flows resulted
from the increased levels of working capital committed to the Company's
technology systems operations, expenditures related to restructuring, merger and
other charges, and the ongoing revenue and margin pressures at MPSC. Management
of the Company expects the continued use of cash to fund restructuring and
merger costs, growth of the Company's technology systems operations and to
support operations of MPSC until further progress is made in the Company's
reengineering and consolidation project and the improvement of MPSC's overall
operations. Management expects to fund such cash requirements through cash flows
from its operations and, to the extent necessary, through amounts available for
borrowing under the Senior Credit Facility.
At June 30, 1996, approximately $215.3 million of borrowings were
outstanding under the Company's $250 million Senior Credit Facility. 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.
In December 1995, the Company gave notice of its intent to redeem its
6 1/2% convertible subordinated debentures due January 1, 2000. The debentures
were convertible into shares of the Company's common stock at a conversion price
of $14.00 per share. All of the debenture holders exercised their conversion
right effective January 1, 1996, and as a result, approximately 4.5 million
shares of common stock were issued in the conversion.
The Company has commenced a comprehensive reengineering and consolidation
project. As part of this project, the Company initially anticipated
consolidating MPSC's processing functions currently being performed in
approximately 300 local business offices into approximately ten or less regional
processing centers. During the third quarter of 1996, the Company expects to
finalize a revision to this project to reduce the number of regional processing
centers and record additional restructuring and other charges of approximately
$11 million. The Company anticipates obtaining additional computer equipment for
approximately $5 million, and incurring additional software development costs of
approximately $20 million relating to this project. Additionally, the Company
anticipates incurring lease buy-out and termination payments, involuntary
severance payments, and other cash expenditures of approximately $17 to $20
million. 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 the three months ended June 30, 1996, the Company capitalized
approximately $13 million 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 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
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20
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 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 the third quarter of 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, judgments 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. On April 11, 1996, certain of the named plaintiffs to the Consolidated
Complaint voluntarily dismissed with prejudice all of their claims. As a result
of these dismissals, the Consolidated Complaint no longer contains any claims
based on the Securities Act of 1933, and the Company's underwriters and outside
directors are no longer named as defendants. On June 26, 1996, the court denied
the plaintiffs' motion to certify a plaintiffs' class. The Company believes that
it has meritorious defenses to this action and intends to assert them
vigorously.
The Company, through its wholly owned indirect subsidiary, Imonics GmbH,
entered into a 50/50 joint venture (the "Joint Venture") with an affiliate of a
large German corporation (the "European Partner") to pursue custom software
development and systems integration projects for customer service systems
primarily in Germany. The Joint Venture entered into a large software licensing
and software engineering contract (the "Contract") in the first quarter of 1996.
On July 25, 1996, the Joint Venture began discussions with the European Partner
and the related customer regarding difficulties with certain aspects of the
systems integration project. As a result, the parties are negotiating the
restructuring of the operating relationships and economics underlying the
Contract. Although a restructured arrangement among the parties is subject to
the negotiation and execution of definitive agreements, the Company anticipates
that the Contract will be amended and a restructured arrangement will be
executed that will position the Joint Venture to move forward with the project
and to pursue other opportunities and projects on terms and conditions that are
mutually beneficial to the parties. The Company anticipates recording a loss
related to the restructured arrangement of approximately $9 million during the
third quarter of 1996.
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Additionally, in July 1996 the Company began to consolidate and integrate
its client/server systems integration businesses under the direction and
leadership of its operating subsidiary, BSG. BSG's management has focused its
efforts primarily on reorganizing Imonics so that its business practices more
closely align with those of BSG. Many changes have and will continue to occur at
Imonics including: headcount reductions, increased focus on project management,
increased cost controls and implementation of the BSG business model. In
addition to the expected $9 million loss related to the restructured arrangement
noted above, the Company anticipates recording losses in the third quarter of
1996 related primarily to the reorganization of Imonics of approximately $15
million.
The Company has restated its supplemental 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 in
December 1995 for which the Company recognized associated license fee revenue in
1995. Subsequent to the issuance of the Company's 1995 supplemental consolidated
financial statements in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, 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 Company has hereby restated its
unaudited balance sheets as of March 31, 1996 and June 30, 1996 contained in its
Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1996
and June 30, 1996, respectively, for the effect of the 1995 restatement
adjustments. 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
REPORTED AS RESTATED
------------- -----------
As of December 31, 1995:
Total current assets........................................ $ 228,357 $ 223,165
Total assets................................................ 801,869 795,606
Total current liabilities................................... 125,658 127,935
Total liabilities........................................... 375,439 374,300
Total stockholders' equity.................................. 426,430 421,306
As of March 31, 1996 (unaudited):
Total current assets........................................ 199,934 194,742
Total assets................................................ 779,966 773,703
Total current liabilities................................... 98,321 100,598
Total liabilities........................................... 324,786 323,647
Total stockholders' equity.................................. 455,180 450,056
As of June 30, 1996 (unaudited):
Total current assets........................................ 271,452 266,260
Total assets................................................ 909,964 903,701
Total current liabilities................................... 107,106 109,383
Total liabilities........................................... 391,136 389,997
Total stockholders' equity.................................. 518,828 513,704
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 Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1995 filed on January 10, 1997.
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 -- Merger Agreement, dated as of May 23, 1996, by and among Registrant, RAKSub, Inc.
and HDS, Inc. (incorporated by reference to Exhibit 2.1 to Registration Statement
on Form S-4, File No. 333-04451).
2.2 -- Merger Agreement, dated as of March 15, 1996, by and among Registrant, BSGSub,
Inc. and BSG Corporation (incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4, file No. 333-2506).
2.3 -- Merger Agreement, dated as of March 12, 1996, by and among Registrant, Rapid
Systems Solutions, Inc. and RipSub, Inc. (incorporated by reference to Exhibit
2.19 to Annual Report on Form 10-K for the year ended December 31, 1995, File No.
000-19480).
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 Amended and Restated 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).
3.3 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 of Registrant's Registration
Statement on Form 8-A/A, filed on May 22, 1996).
3.4 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of
the Registrant (incorporated by reference to Exhibit 4.4 of the Registrant's
Registration Statement on Form S-8, File No. 333-03213).
3.5 -- 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).
10.1 -- Medaphis Corporation Reengineering, 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. 333-2506).
10.2 -- Agreement for Collection Services between AssetCare, Inc. and Galen Health Care,
Inc., dated March 28, 1996, (incorporated by reference to Exhibit 10.7 of the
Quarterly Report on Form 10-Q for the period ended March 31, 1996).
11 -- Statement regarding Computation of Earnings Per Share.
27 -- Financial Data Schedule (for SEC use only).
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(b) Reports on Form 8-K
The following reports on Form 8-K have been filed by the Company during the
quarter ended June 30, 1996:
FINANCIAL
STATEMENTS DATE OF FILE
ITEM REPORTED FILED REPORT DATE
- ------------------------------------------------ ---------- -------------- --------------
Announced the signing of Merger Agreements for
Rapid Systems and BSG......................... Yes(1) March 13, 1996 April 4, 1996
Acquisition of BSG.............................. No May 6, 1996 May 21, 1996
Supplemental Consolidated Financial Statements
of the Company to give effect for the mergers
with Rapid Systems and BSG.................... Yes(2) April 3, 1996 May 24, 1996
Restatement of Quarterly Consolidated Statements
of Income (Loss) of the Company to give effect
for the mergers with Rapid Systems and BSG.... Yes(3) May 29, 1996 May 29, 1996
- ---------------
(1) Pro Forma Combined Financial Statements of the Company for the years ended
December 31, 1995, 1994, and 1993 (unaudited), and Supplemental
Consolidated Financial Statements of the Company (unaudited) for the years
ended December 31, 1995, 1994, and 1993 were filed.
(2) Supplemental Consolidated Financial Data of the Company (audited) for the
years ended December 31, 1995, 1994 and 1993 were filed (as amended by the
Company's Current Report on Form 8-K/A filed on January 10, 1997).
(3) Supplemental Quarterly Consolidated Statements of Income of the Company
(unaudited) for each of the four quarters in the year ended December 31,
1995 and the quarter ended March 31, 1996 were filed (as amended by the
Company's Current Report on Form 8-K/A filed on January 10, 1997).
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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
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INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------ ---------------------------------------------------------------------- -------------
2.1 -- Merger Agreement, dated as of May 23, 1996, by and among Registrant,
RAKSub, Inc. and HDS, Inc. (incorporated by reference to Exhibit 2.1
to Registration Statement on Form S-4, File No. 333-04451)............
2.2 -- Merger Agreement, dated as of March 15, 1996, by and among Registrant,
BSGSub, Inc. and BSG Corporation (incorporated by reference to Exhibit
2.1 to Registration Statement on Form S-4, file No. 333-2506).........
2.3 -- Merger Agreement, dated as of March 12, 1996, by and among Registrant,
Rapid Systems Solutions, Inc. and RipSub, Inc. (incorporated by
reference to Exhibit 2.19 to Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480)..........................
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 Amended and Restated 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).................................................
3.3 -- Certificate of Amendment of Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.3 of Registrant's Registration
Statement on Form 8-A/A, filed on May 22, 1996).......................
3.4 -- Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to Exhibit
4.4 of Registrant's Registration Statement on Form S-8, File No.
333-03213)............................................................
3.5 -- 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)....
10.1 -- Medaphis Corporation Reengineering, 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. 333-2506)....................................................
10.2 -- Agreement for Collection Services between AssetCare, Inc. and Galen
Health Care, Inc., dated March 28, 1996, (incorporated by reference to
Exhibit 10.7 of the Quarterly Report on Form 10-Q for the period ended
March 31, 1996).......................................................
11 -- Statement regarding Computation of Earnings Per Share.................
27 -- Financial Data Schedule (for SEC use only)............................