1
EXHIBIT 99.4
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 included in this Exhibit. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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.
The consolidated financial statements give retroactive effect to the
mergers of wholly owned subsidiaries of Medaphis Corporation with and into
Health Sciences Corporation in June 1996, BSG Corporation in May 1996, and Rapid
System Solutions, Inc. in April 1996. These acquisitions have been recorded
using the pooling of interests method of accounting.
As discussed in Note 18, the accompanying 1995 consolidated financial
statements have been restated. As a result of the restatement of the 1995
consolidated financial statements, the financial statement schedule was also
restated.
DELOITTE & TOUCHE LLP
June 29, 1996
(October 22, 1996 as to Note 18)
Atlanta, Georgia
2
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
------------ -------- --------
(AS
RESTATED,
SEE NOTE 18)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenue..................................................... $559,877 $398,934 $279,326
-------- -------- --------
Salaries and wages.......................................... 325,868 227,109 164,474
Other operating expenses.................................... 140,296 95,195 71,363
Depreciation................................................ 14,487 9,430 7,285
Amortization................................................ 18,048 10,691 7,878
Interest expense, net....................................... 10,062 5,926 6,573
Restructuring and other charges............................. 54,950 1,905 --
-------- -------- --------
Total expenses.................................... 563,711 350,256 257,573
Income (loss) before income taxes........................... (3,834) 48,678 21,753
income taxes................................................ 1,787 16,155 7,049
-------- -------- --------
Net income (loss)................................. (5,621) $ 32,523 $ 14,704
======== ======== ========
Pro forma adjustments, principally income taxes............. (2,883) (1,817) (1,180)
-------- -------- --------
Pro forma net income (loss)............................... $ (8,504) $ 30,706 $ 13,524
======== ======== ========
Pro forma net income (loss) per common share................ $ (0.15) $ 0.51 $ 0.26
======== ======== ========
Weighted average shares outstanding......................... 56,591 60,245 51,109
======== ======== ========
See notes to consolidated financial statements.
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3
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................................. $ 19,270 $ 17,651
Restricted cash........................................... 15,340 8,683
Accounts receivable, billed............................... 84,256 62,507
Accounts receivable, unbilled............................. 89,429 93,940
Other..................................................... 14,870 11,294
---------- ----------
Total current assets.............................. 223,165 194,075
Property and equipment...................................... 97,895 49,032
Intangible assets........................................... 455,611 376,827
Other....................................................... 18,935 7,217
---------- ----------
$ 795,606 $ 627,151
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 23,220 $ 17,726
Accrued compensation...................................... 24,505 24,900
Accrued expenses.......................................... 69,529 51,435
Current portion of long-term debt......................... 10,681 10,752
---------- ----------
Total current liabilities......................... 127,935 104,813
Long-term debt.............................................. 150,565 148,261
Other obligations........................................... 18,926 30,433
Deferred income taxes....................................... 13,499 23,172
Convertible subordinated debentures......................... 63,375 63,375
---------- ----------
Total liabilities................................. 374,300 370,054
---------- ----------
Stockholders' Equity:
Preferred stock........................................... 382 225
Common stock, voting, $.01 par value, 100,000 authorized
in 1995 and
30,000 in 1994; issued and outstanding 58,917 in 1995
and 49,990
in 1994................................................ 589 500
Common stock, nonvoting, $.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 426,387 251,534
Retained earnings (deficit)............................... (6,052) 4,838
---------- ----------
Total stockholders' equity........................ 421,306 257,097
---------- ----------
$ 795,606 $ 627,151
========== ==========
See notes to consolidated financial statements.
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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)........................................... $ (5,621) $ 32,523 $ 14,704
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 32,535 20,121 15,163
Impairment loss on property and equipment................. 5,035 -- --
Deferred income taxes..................................... 1,312 15,239 6,586
Other non-cash charges.................................... 417 1,208 --
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash............................ (3,253) (1,963) (508)
Increase in accounts receivable, billed................ (21,549) (8,038) (9,868)
Increase in accounts receivable, unbilled.............. (9,714) (24,279) (16,930)
Increase in accounts payable........................... 4,738 5,341 3,625
Increase (decrease) in accrued compensation............ (396) 5,704 3,789
Increase (decrease) in accrued expenses................ 25,725 (3,844) 2,181
Other, net............................................. (5,841) 2,197 (489)
--------- --------- --------
Net cash provided by operating activities......... 23,388 44,209 18,253
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (76,077) (153,385) (68,563)
Purchases of property and equipment......................... (50,986) (13,063) (7,178)
Software development costs.................................. (35,611) (9,519) (3,478)
Other....................................................... 650 (1,969) (559)
--------- --------- --------
Net cash used for investing activities............ (162,024) (177,936) (79,778)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 151,825 4,933 97,703
Proceeds from borrowings.................................... 140,780 122,100 71,432
Payments of long-term debt.................................. (138,244) (6,108) (78,435)
Dividends to shareholders of acquired companies............. (6,751) (8,528) (3,090)
Other....................................................... (7,355) (675) 157
--------- --------- --------
Net cash provided by financing activities......... 140,255 111,722 87,767
--------- --------- --------
CASH AND CASH EQUIVALENTS
Net change.................................................. 1,619 (22,005) 26,242
Balance at beginning of year (see Note 2)................... 17,651 39,656 14,731
--------- --------- --------
Balance at end of year...................................... $ 19,270 $ 17,651 $ 40,973
========= ========= ========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
--------------------------------------------------------------------------------
COMMON PREFERRED RETAINED TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ --------- --------- -------- ----------- -------------
(IN THOUSANDS)
Balance at December 31,
1992..................... 40,164 $401 11,420 $272 $115,987 $(28,784) $ 87,876
Issuance of common
stock................. 6,482 64 -- -- 85,443 -- 85,507
Exercise of stock
options............... 476 5 -- -- 1,387 -- 1,392
Issuance and conversion
of preferred stock at
acquired companies.... 38 1 8,032 (50) 3,950 -- 3,901
Pre-merger dividends to
former owners......... -- -- -- -- -- (3,440) (3,440)
Net income............... -- -- -- -- -- 14,704 14,704
Other.................... (9) -- -- -- 451 (541) (90)
------ ---- ------ ---- -------- -------- --------
Balance at December 31,
1993..................... 47,151 471 19,452 222 207,218 (18,061) 189,850
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................. 19 -- -- -- 14 -- 14
Issuance of common stock
in acquisitions....... 2,108 21 -- -- 38,775 -- 38,796
Exercise of stock
options............... 734 8 -- -- 2,162 -- 2,170
Issuance and conversion
of preferred stock at
acquired companies.... -- -- 2,739 3 3,465 -- 3,468
Pre-merger dividends to
former owners......... -- -- -- -- -- (8,378) (8,378)
Net income............... -- -- -- -- -- 32,523 32,523
Other.................... (13) -- -- -- (24) (692) (716)
------ ---- ------ ---- -------- -------- --------
Balance at December 31,
1994..................... 49,990 500 22,191 225 251,534 4,838 257,097
Issuance of common
stock................. 4,239 42 -- -- 121,580 -- 121,622
Issuance of common stock
in acquisitions....... 20 -- -- -- 459 -- 459
Exercise of stock
options............... 555 6 -- -- 12,516 -- 12,522
Issuance and conversion
of preferred stock at
acquired companies.... 3,344 33 (2,737) 157 37,398 -- 37,588
Pre-merger dividends to
former owners......... -- -- -- -- -- (4,517) (4,517)
Net loss, as restated.... -- -- -- -- -- (5,621) (5,621)
Other.................... 769 8 -- -- 2,900 (752) 2,156
------ ---- ------ ---- -------- -------- --------
Balance at December 31,
1995, as restated........ 58,917 $589 19,454 $382 $426,387 $ (6,052) $421,306
====== ==== ====== ==== ======== ======== ========
See notes to consolidated financial statements.
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6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements give
retroactive effect to the mergers of wholly-owned subsidiaries of Medaphis
Corporation with and into Health Data Sciences Corporation in June 1996, BSG
Corporation in May 1996, and Rapid System Solutions, Inc. in April 1996. These
acquisitions have been recorded using the pooling-of-interests method of
accounting.
CONSOLIDATION. 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. Medaphis Corporation ("Medaphis" or 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 based on the terms
of the underlying contracts which are primarily time and material or fixed price
contracts. Revenue from time and material type contracts is recognized as
services are rendered and costs are incurred based on contractual rates. Revenue
from fixed price contracts is recorded using the percentage of completion
method. Expected losses are charged to operations in the period such losses are
determined. Revenue for which customers have not yet been invoiced is reflected
as accounts receivable, unbilled in the accompanying consolidated balance
sheets.
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.
6
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. If the Company determines that the
carrying values of specific intangible assets are not recoverable, the Company
would record a charge to reduce the carrying value of such assets to their fair
values. 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
$36.3 million and $9.5 million in 1995 and 1994, respectively. The Company
recorded research and development expenses of approximately $2.8 million, $4.6
million and $3.7 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
three to seven years. Amortization expense related to the Company's capitalized
software costs totaled $5.1 million, $2.9 million and $2.6 million in 1995, 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 per
common share is based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Common stock
equivalents include the dilutive effect of the assumed exercise of certain
outstanding stock options and conversion of convertible preferred stock. Fully
diluted pro forma net income per common share is not presented as it is not
materially different from primary pro forma net income per common share. The
Company's convertible subordinated debentures were not considered common stock
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8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents at issuance and are included in the computation of fully diluted pro
forma net income per common share.
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.
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9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
COMPANY ACQUIRED EXCHANGED ACQUISITION DATE
---------------- --------- ----------------
Health Data Sciences Corporation ("HDS").................. 6,215,000 June 1996
BSG Corporation ("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
- ---------------
* Consideration not material
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, 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.
Prior to its merger with the Company, HRI reported on a fiscal period
ending June 30. HRI's financial position and operating results as of and for the
period ended June 30, 1994 were combined with the Company's financial position
and operating results as of and for 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. The
beginning cash and cash equivalents balance in the accompanying 1994
consolidated statement of cash flows does not equal the December 31, 1993 cash
and cash equivalents balance as a result of the combination, in the 1993
consolidated balance sheet, of HRI's financial position as of June 30, 1994 with
the financial position of the Company as of December 31, 1993.
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 years ended March 31, 1996, 1995 and 1994 were combined with the Company's
financial position and operating results as of and for the years ended December
31, 1995, 1994 and 1993, respectively.
9
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of revenue, pro forma net income (loss) and pro forma net
income (loss) per common share of the Company, as originally reported and as
restated, Rapid Systems, BSG, HDS and combined, including the pro forma
provision for Rapid Systems and BSG income taxes, is as follows:
1995 1994 1993
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Medaphis, as originally reported.................... $467,747 $319,138 $228,745
Restatement adjustments (Note 18)................... (4,426) -- --
-------- -------- --------
Medaphis, as restated............................... 463,321 319,138 228,745
Rapid Systems....................................... 14,722 8,558 4,335
BSG................................................. 69,663 49,174 26,495
HDS................................................. 12,171 22,064 19,751
-------- -------- --------
Combined............................................ $559,877 $398,934 $279,326
======== ======== ========
Pro forma net income (loss):
Medaphis, as originally reported.................... $ 444 $ 22,935 $ 13,069
Restatement adjustments (Note 18)................... (5,124) -- --
-------- -------- --------
Medaphis, as restated............................... (4,680) 22,935 13,069
Rapid Systems....................................... 972 773 647
BSG................................................. (1,045) 1,329 (6,010)
HDS................................................. (3,173) 6,037 6,087
Pro forma provision for Rapid Systems and BSG income
taxes............................................ (578) (368) (269)
-------- -------- --------
Combined............................................ $ (8,504) $ 30,706 $ 13,524
======== ======== ========
Pro forma net income (loss) per common share:
Medaphis, as originally reported.................... $ 0.01 $ 0.50 $ 0.34
======== ======== ========
Medaphis, as restated............................... $ (0.09) $ 0.50 $ 0.34
======== ======== ========
Combined............................................ $ (0.15) $ 0.51 $ 0.26
======== ======== ========
A summary of revenue and pro forma net income for each of the three
pooling-of-interests transactions consummated after the first quarter of 1995
for interim year-to-date periods preceding the dates of consummation are as
follows (In thousands):
INTERIM PERIOD
PRECEDING PRO FORMA
COMPANY ACQUIRED CONSUMMATION REVENUE NET INCOME
---------------- ------------------ ------- ----------
HRI........................................... June 30, 1995 $10,183 $1,012
Consort....................................... September 30, 1995 $ 2,805 $ 455
MMS........................................... September 30, 1995 $14,625 $ 185
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.
10
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1994
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Revenue..................................................... $582,556 $529,075
Net income (loss)........................................... (5,349) 26,497
Net income (loss) per common share.......................... $ (0.09) $ 0.42
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...................................... 19,485 16,038
Equipment................................................... 100,866 47,599
Other....................................................... 6,055 3,424
-------- -------
139,118 77,775
Less accumulated depreciation............................... 41,223 28,743
-------- -------
$ 97,895 $49,032
======== =======
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
1995 1994
-------- --------
(IN THOUSANDS)
Goodwill.................................................... $361,096 $303,057
Client lists................................................ 51,862 52,146
Software development costs.................................. 82,219 43,558
Other....................................................... 2,159 2,159
-------- --------
497,336 400,920
Less accumulated amortization............................... 41,725 24,093
-------- --------
$455,611 $376,827
======== ========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
1995 1994
------- -------
(IN THOUSANDS)
Accrued costs of businesses acquired........................ $13,582 $18,305
Funds due clients........................................... 12,757 6,893
Deferred revenue............................................ 11,590 12,050
Accrued legal costs......................................... 8,264 296
Accrued restructuring and severance costs................... 7,801 --
Interest.................................................... 2,917 2,340
Other....................................................... 12,618 11,551
------- -------
$69,529 $51,435
======= =======
11
12
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%............................................. 23,670 14,232
Deferred purchase price relating to acquisitions............ -- 15,672
Other....................................................... 9,576 8,395
-------- --------
161,246 159,013
Less current portion........................................ 10,681 10,752
-------- --------
$150,565 $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 $20.3 million and $11.4 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........................................................ $ 10,681
1997........................................................ 141,669
1998........................................................ 6,106
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
12
13
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 $(0.07) 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 $22.4
million, $13.3 million and $10.0 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........................................................ $20,809
1997........................................................ 17,133
1998........................................................ 14,896
1999........................................................ 9,445
2000........................................................ 6,961
Thereafter.................................................. 9,525
9. INCOME TAXES
Income tax expense is comprised of the following:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Current:
Federal................................................. $ 66 $ 264 $ 59
State................................................... 1,795 439 301
Deferred:
Federal................................................. 413 13,977 4,019
State................................................... (928) 1,988 1,023
Valuation allowance....................................... 441 (513) 1,647
------- ------- -------
Income taxes.............................................. 1,787 16,155 7,049
Pro forma provision for income taxes...................... 3,389 1,817 1,180
------- ------- -------
$ 5,176 $17,972 $ 8,229
======= ======= =======
In 1995 and 1996 the Company acquired Atwork, Consort, MMS and Rapid
Systems and a subsidiary of BSG 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.
13
14
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............... $(1,342) $17,037 $7,614
State taxes, net of federal benefit........................ 361 2,475 1,483
Goodwill................................................... 1,298 380 202
Deal costs................................................. 5,623 -- --
Other items not deductible for tax purposes................ 371 272 73
Research and development tax credits....................... -- (596) (314)
Valuation allowance........................................ 441 (513) (726)
Other...................................................... (1,576) (1,083) (103)
------- ------- ------
$ 5,176 $17,972 $8,229
======= ======= ======
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............................ $ 58,888 $ 49,504
Research and development credits............................ 1,078 1,078
Valuation allowance......................................... (18,310) (13,415)
Accounts receivable, unbilled............................... (31,841) (28,232)
Depreciation and amortization............................... (37,674) (17,263)
Accrued expenses............................................ 21,166 1,558
Other deferred tax liabilities.............................. (6,806) (16,402)
-------- --------
$(13,499) $(23,172)
======== ========
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 $144 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 three 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 $85 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. CAPITAL 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.
14
15
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.
Prior to the Company's merger with BSG, BSG had two classes of preferred
stock outstanding. Dividends were noncumulative and payable at 8% per year at
the discretion of BSG's board of directors. The preferred shares were
convertible, at the option of the holder on a one-to-one basis into common
shares of BSG, and the preferred shareholders had the right to vote on an as
converted basis. In connection with BSG's merger with the Company on May 6,
1996, all preferred shares were converted into common shares of BSG which were
subsequently exchanged for common shares of the Company.
Prior to the Company's merger with HDS, HDS had three classes of preferred
stock outstanding. The preferred stock carried no guaranteed dividend features
and had no mandatory redemption features. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of HDS. In
connection with HDS's merger with the Company on June 29, 1996, all preferred
shares were converted into common shares of HDS which were subsequently
exchanged for common shares of the Company.
Prior to the Company's merger with HDS, HDS had a class of mandatorily
redeemable preferred stock (the "HDS Redeemable Preferred Stock") outstanding.
The HDS Redeemable Preferred Stock consisted of 830,000 shares which were
redeemable at $10 per share. In June 1995, HDS redeemed all the remaining shares
of outstanding HDS Redeemable Preferred Stock for $10 per share. As of December
31, 1994, $6.6 million related to the HDS Redeemable Preferred Stock was
classified in other obligations on the accompanying balance sheets.
Prior to the Company's merger with HRI, HRI had a class of redeemable
convertible preferred stock (the "HRI Redeemable Preferred Stock") which was
convertible, at the holder's option into common stock of HRI. The HRI Redeemable
Preferred Stock required certain mandatory redemptions at future dates or upon
liquidation, dissolution or merger of HRI. Pursuant to HRI's merger with the
Company, all outstanding shares of the HRI Redeemable Preferred Stock were
converted into common stock of HRI which were subsequently exchanged in the
merger for common stock of the Company. As of December 31, 1994, $13.3 million
related to the HRI Redeemable Preferred Stock was classified in other
obligations on the accompanying balance sheets.
11. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non Qualified Stock
Option Plan, a Non Qualified Stock Option Plan for Employees of Acquired
Companies and several stock option plans assumed as a result of the BSG Merger
(collectively the "Stock Option Plans"). Stock options outstanding at December
31, 1995 under the Stock Option Plans permit employees to purchase up to
9,465,295 shares of the Company's common stock. Granted options expire 10 to 11
years after the date of grant and generally vest over a five year period.
Subsequent to the merger of BSG with and into the Company, the Company has
offered to issue options under the Company's Non Qualified Stock Option Plan for
Employees of Acquired Companies in exchange for options outstanding under the
BSG option plans. Options outstanding under the Stock Option Plans at December
31, 1995 were granted at prices ranging from $0.65 to $59.44 per share, of which
2,605,762 were exercisable at that date. Options were exercised during 1995 with
grant prices ranging
15
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from $0.22 to $21.36 per share. As of December 31, 1995, 2,084,154 shares were
available for future grants under these plans.
Activity related to the Stock Option Plans is summarized as follows:
1995 1994 1993
----- ----- -----
(IN THOUSANDS)
Options outstanding as of January 1......................... 6,434 5,456 2,405
Granted:
To employees.............................................. 1,543 1,028 1,009
Relating to acquisitions.................................. 2,481 914 2,249
Canceled.................................................... (434) (366) (62)
Exercised................................................... (559) (598) (145)
----- ----- -----
Options outstanding as of December 31....................... 9,465 6,434 5,456
===== ===== =====
The Company has a Senior Executive Non Qualified 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 stockholders 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 stockholders at the annual
stockholders' 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 appointed to the Board of Directors.
Additionally, each non-employee director 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.
16
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $3.3 million, $1.9 million and $0.7 million 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.
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 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
17
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 to the Company 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 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, judgements 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 United States
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.
18
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................. 17,646 5,356 2,352
Common stock issued in conjunction with acquisitions... 459 38,796 --
Cash paid for:
Interest............................................... 11,129 6,796 4,504
Income taxes........................................... 3,155 517 541
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................................... 159,751 108,203 71,155
Corporate and eliminations........................... (1,540) (721) (637)
-------- -------- --------
$559,877 $398,934 $279,326
======== ======== ========
Operating Profit(1)
Services............................................. $ 54,010 $ 48,339 $ 32,541
Technology systems................................... 19,255 14,720 811
Corporate............................................ (12,087) (6,550) (5,026)
-------- -------- --------
$ 61,178 $ 56,509 $ 28,326
======== ======== ========
Interest expense, net.................................. $ 10,062 $ 5,926 $ 6,573
Restructuring and other charges........................ 54,950 1,905 --
-------- -------- --------
Income before income taxes............................. $ (3,834) $ 48,678 $ 21,753
======== ======== ========
Identifiable Assets
Services............................................. $548,410 $496,074 $281,519
Technology systems................................... 234,499 125,652 55,929
Corporate............................................ 12,697 5,425 29,833
-------- -------- --------
$795,606 $627,151 $367,281
======== ======== ========
19
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1994 1993
-------- -------- --------
Depreciation and Amortization
Services............................................. $ 21,194 $ 14,454 $ 10,883
Technology systems................................... 10,782 5,483 4,162
Corporate............................................ 559 184 118
-------- -------- --------
$ 32,535 $ 20,121 $ 15,163
======== ======== ========
Capital Expenditures
Services............................................. $ 28,304 $ 8,724 $ 3,726
Technology systems................................... 21,133 3,613 3,285
Corporate............................................ 1,549 726 167
-------- -------- --------
$ 50,986 $ 13,063 $ 7,178
======== ======== ========
- ---------------
(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
Systems, $9.75 million and zero.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ ------------
QUARTER ENDED
-------------------------------------------------
(AS
RESTATED,
SEE NOTE 18)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
Revenue........................................ $133,093 $141,286 $140,752 $144,746
Pro forma net income (loss).................... (11,857) 7,226 (2,723) (1,150)
Pro forma net income (loss) per common share... $ (0.23) $ 0.10 $ (0.05) $ 0.02
Weighted average shares outstanding............ 50,932 69,053 57,696 58,068
1994
Revenue........................................ $ 85,194 $ 89,829 $ 98,119 $125,792
Pro forma net income........................... 7,122 5,088 5,288 13,208
Pro forma net income per common share.......... $ 0.12 $ 0.09 $ 0.09 $ 0.21
Weighted average shares outstanding............ 59,666 59,533 59,921 61,787
18. RESTATEMENT OF 1995 CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its financial statements for the three months and
year ended December 31, 1995. The restatement results primarily from a software
licensing agreement entered into by the Company's Imonics subsidiary 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 made by an Imonics
employee 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
20
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
------------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1995:
Revenue..................................................... $564,303 $559,877
Salaries and wages.......................................... 323,825 325,868
Other operating expenses.................................... 138,866 140,296
Income (loss) before income taxes........................... 4,706 (3,834)
Net loss.................................................... (497) (5,621)
Pro forma net loss.......................................... (3,380) (8,504)
Pro forma net loss per common share......................... (0.06) (0.15)
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
21
22
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)............................ $3,205 $6,718 $1,278(1) $(4,976)(2) $6,225
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts......... $2,193 $4,089 $ 338(1) $(3,415)(2) $3,205
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts......... $1,212 $3,697 $ 227(1) $(2,943)(2) $2,193
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(1) Represents the allowance recorded in conjunction with acquired companies.
(2) Represents write-off of uncollectible accounts receivable.
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