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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-1651222
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(770) 444-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 21, 1997 was approximately $787,082,573 calculated
using the closing price on such date of $10.875. The number of shares
outstanding of the Registrant's common stock (the "Common Stock") as of March
24, 1997 was 72,412,624.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 8, 1997 are incorporated herein by reference in Part III.
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MEDAPHIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE OF
FORM 10-K
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PART I
ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 9
ITEM 3. LEGAL PROCEEDINGS.................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS............................................ 12
EXECUTIVE OFFICERS OF THE REGISTRANT............... 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................ 13
ITEM 6. SELECTED FINANCIAL DATA............................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................ 25
ITEM 11. EXECUTIVE COMPENSATION............................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................... 26
THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 15 U.S.C.A
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. 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 FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.6 TO THIS FORM 10-K, AND ARE HEREBY INCORPORATED 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
ITEM 1. BUSINESS
OVERVIEW OF COMPANY
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company"), provides business management
services and information products primarily to healthcare providers. Medaphis'
healthcare 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. 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 quality of care within hospitals and emerging
integrated healthcare delivery systems. Medaphis currently provides business
management systems and services to approximately 20,000 physicians and over
2,500 hospitals in all 50 states, subrogation and recovery services to
healthcare plans covering in excess of 31 million people throughout the United
States and systems integration and work flow engineering systems and services in
the United States and abroad.
RECENT DEVELOPMENTS
1997 Business Plan
In February 1997 Medaphis announced the implementation during the 1997
fiscal year of a business plan focused on Medaphis' core business and comprised
of the five following components: (1) exiting non-core businesses, such as the
proposed sale of Healthcare Recoveries, Inc. ("HRI") that is discussed below;
(2) achieving improved predictability of results through enhanced management
accountability and controls; (3) reducing costs and increasing efficiencies; (4)
emphasizing customer service; and (5) implementing cross-selling initiatives.
Amended and Restated Credit Agreement
Effective February 4, 1997, Medaphis and its senior lenders entered into
the Second Amended and Restated Credit Agreement (the "Second Amended
Facility"). The lenders' commitments have been increased from $250 million to
$285 million and extended through June 30, 1998. Borrowings under the Second
Amended Facility are secured by substantially all of the Company's assets and
guaranteed by substantially all of the Company's subsidiaries. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
The Second Amended Facility provides for contractual amortization of the
$285 million loan commitments by a scheduled reduction to $200 million on July
31, 1997 (which may be deferred to September 30, 1997 by the required lenders)
and to $150 million on January 31, 1998. As of March 29, 1997, the Company had
approximately $251 million outstanding under the Second Amended Facility. The
Company and its lenders have always contemplated that the contractual
amortization of loan commitments under the Second Amended Facility would be
accomplished through asset divestitures since operating cash flow was never
intended to be utilized for this purpose and would be insufficient to meet these
obligations. Accordingly, at the time that the Second Amended Facility was
consummated and announced in February 1997, the Company adopted and announced
its 1997 business plan which, among other objectives, includes the divestiture
of non-core businesses to meet the Company's contractual obligations under the
Second Amended Facility and otherwise. The Company remains confident that it
will be able to meet its amortization obligations under the Second Amended
Facility through the continued execution of the Company's 1997 business plan and
related asset divestiture program. See Item 1. Recent Developments -- Planned
Divestitures and Assessments of Non-Core Businesses.
The Second Amended Facility provides for adjustment of the interest rates,
fees, charges and other compensation to be paid to the lenders by the Company,
including the vesting of certain warrant arrangements
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for 1% of the Common Stock of the Company on each of January 1, 1998 and April
1, 1998, modification of the financial reporting requirement to the lenders,
restrictions on new acquisitions and certain litigation settlement payments,
establishment of a maximum permitted capital expenditures covenant for the
fiscal quarters ending on or after March 31, 1997 and additional financial
covenants for fiscal quarters ending on and after June 30, 1997.
Abandonment of Reengineering Program
In an effort to improve the productivity and cost efficiency of its
operations, in late 1994 Medaphis undertook a comprehensive reengineering
program. During fiscal 1996, Medaphis assessed the reengineering program to
determine whether the objectives of the program were being achieved. Based upon
this assessment, the Company abandoned the reengineering program and incurred a
charge of $88.2 million in the fourth quarter of fiscal 1996 with respect to
such abandonment. See Note 13 of Notes to Consolidated Financial Statements and
Supplementary Data included in Item 8. Financial Statements and Supplementary
Data. As a result of the assessment it was concluded that it was not cost
effective to continue the development and deployment of the software and
technology upon which the reengineering program was based and that the
reengineering software and technology had no alternative useful application in
the Company's operations. In lieu of further developing and deploying the
reengineering software and technology, the Company intends to further refine,
enhance and develop certain of the Company's existing software and billing
systems and to migrate the Company's billing and accounts receivable management
systems to the Company's most proven software systems and technology, so as to
reduce the number of systems and technologies that must be maintained and
supported.
Planned Divestitures and Assessments of Non-Core Businesses
As part of the Company's strategy to focus on the healthcare provider
market and to meet its contractual loan obligations under the Second Amended
Facility, the Company's 1997 business plan includes the planned divestiture of
HRI and the assessment of alternatives for the BSG Group (BSG Corporation
("BSG"), Rapid System Solutions, Inc. ("Rapid Systems") and Sage Communications,
Inc. ("Sage")). The Company remains confident that the amortization obligations
under the Second Amended Facility will be timely met through the divestiture of
HRI. Consistent with these objectives, in January 1997, the Company engaged
Bear, Stearns & Co., Inc. to act as its exclusive financial advisor in
connection with the divestiture of HRI. The Company has recently filed a
registration statement relating to an initial public offering of 100% of the
outstanding capital stock of HRI and, concurrently, is in the market actively
soliciting interest from prospective financial and strategic buyers for this
business unit. The Company remains confident that these steps will result in the
divestiture of HRI within the appropriate time frame and believes that the net
proceeds of such divestiture will be more than adequate to meet all amortization
obligations required to be paid during 1997 under the Second Amended Facility.
The alternatives with respect to the BSG Group include, but are not limited to,
seeking a buyer, a spin-off transaction or other capital raising alternatives.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 16 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
Services
Medaphis is a leading provider of business management services to the
healthcare industry in the United States. The Company's business management
services enable healthcare providers to outsource to Medaphis business
management functions associated with the delivery of healthcare, thereby
allowing physicians and hospitals to focus on delivering quality medical
services to their patients. The services provided by the Company include both
revenue and cost management services. Revenue management services encompass
billing and accounts receivable management services consisting of medical
coding, automated patient billing, claims submission, capitation analysis, past
due and delinquent accounts receivable collection and contract
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negotiations with payors, including managed care organizations and other
services associated with the revenue cycle of a healthcare provider. Cost
management services include comprehensive practice management services
consisting of front office administration, benefit plan design and
administration, cash flow forecasting and budgeting, general consulting services
and other services associated with the management of the costs of running a
practice for a healthcare provider. In addition, through HRI the Company
provides subrogation and related recovery services primarily to healthcare
payors to assist them in recovering the related benefits provided to insureds
who are injured in accidents or under other circumstances where a third party is
ultimately responsible for paying such benefits. Medaphis plans to divest HRI.
The Company provides business management services to approximately 20,000
physicians and 2,500 hospitals in all 50 states and subrogation and recovery
services to healthcare plans covering in excess of 31 million people throughout
the United States. Accounts receivable and practice management services are
normally provided to customers under contractual arrangements which range from
month-to-month to longer durations, renew automatically at the end of the
initial term and can be canceled by either party with between 90 and 180 days
prior written notification. Fees payable to the Company for its accounts
receivable management services are generally based on a percentage of cash
collected by the Company for its clients. Fees are negotiated based on the
breadth and types of services provided, expected collectibility of the client's
accounts receivable portfolio and the cost of providing such services. The
Company strives to retain its customers to provide a recurring base of revenue.
No single client of the Company in this industry segment accounted for 10% or
more of the Company's consolidated revenue in 1996.
The Company's business management services to hospitals include not only
billing and accounts receivable management services, but also specialized
accounts receivable management services that generally involve more intensive
accounts receivable services, including automated collection procedures. The
Company's specialized accounts receivable management services for hospitals are
usually provided with respect to a specific portfolio or specific type of
accounts receivable.
The management services business in the healthcare industry is highly
competitive. The Company competes with national and regional physician and
hospital reimbursement organizations and certain physician groups and hospitals
which provide their own business management services. Competition among these
organizations is based upon the relationship with the client or prospective
client, the efficiency and effectiveness of converting medical and hospital
services to cash, the ability to provide proactive practice management services
and, to the extent that service offerings are comparable, upon price.
Healthcare Information Technology ("HIT")
The Company's HIT group is a leading provider of information management
systems to the healthcare industry. Medaphis' products address both the business
and clinical management needs of healthcare providers. The Company's products
generally function in either a stand-alone provider setting or across the
healthcare enterprise. Business management products include those designed to
effectively utilize and share staff by automated staff scheduling, to improve
operating room utilization and inventory management via automated scheduling and
inventory systems, to improve staff productivity by reducing or eliminating
repetitive or redundant tasks and to implement best practices via automated
expert-systems technologies. Medaphis' clinical management products can be used
to check for redundant or duplicative procedures, to provide information access
to assist the provider in clinical decision making, to automate manual care
protocols and to allow real-time shared access to a patient's clinical
information. Medaphis' products also provide a variety of interfaces to
third-party products and services which complement the Company's products and
further assist providers with their business and clinical information management
needs.
Medaphis provides its healthcare information technology products to over
1,800 hospitals and approximately 4,000 physicians, primarily in the United
States. The Company provides products to its customers via contractual
relationships that vary depending on the type of products or services being
purchased, such as software licenses, hardware purchases, implementation
services and continuing customer support and software maintenance activities.
Timing of amounts paid to the Company vary by the type of product provided, but
generally include an up front amount followed by payments tied to completion of
implementation events.
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Customer support and software maintenance fees generally renew automatically.
The Company strives to retain its customers to provide a recurring base of
revenue. No single client of the Company in this industry segment accounted for
10% or more of the Company's consolidated revenue during 1996.
The healthcare information technology business is highly competitive. The
Company competes primarily with national companies, many of which have longer
operating histories and greater financial resources than those of the Company.
These competitors exist in both the "best of breed" niche marketplace and in the
enterprise-wide market for broad sets of application products. Competition among
these companies is based on product quality, ease of use and ease of integration
of new products with other existing and planned applications.
BSG Group
In February 1997, Medaphis announced that it was assessing alternatives for
its BSG Group, including a sale, spin-off or other alternative, such as a
partial sale or a joint venture.
The BSG Group 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. The BSG Group
focuses on customers in industries where technology-enabled change and
reengineering can have a significant competitive impact. The BSG Group seeks to
establish long-term alliances with its customers, enabling them to increase
revenue, raise productivity and improve product quality.
The BSG Group offers a wide range of services that enable customers to
utilize effectively advanced information technologies, including those that
incorporate client/server architectures. Its information technology services
include consulting, change management, technology migration, application
development, systems integration, package installation, training and ongoing
systems management. Through long-term alliances with its customers, the BSG
Group helps them to increase revenue, to raise productivity and to improve
product quality. Besides working closely with its customers' information
technology professionals and users, the Company establishes relationships with
its customers' senior management who increasingly view technology as critical to
overall business strategy. No single client of the Company in this industry
segment accounted for 10% or more of the Company's consolidated revenue in 1996.
During the third quarter of 1996, Medaphis consolidated the business
operations of its wholly owned subsidiary, Imonics Corporation ("Imonics"), into
BSG. Imonics operated a software development and support and systems integration
outsourcing business acquired by Medaphis in December 1994. In 1996, Imonics'
business operations were discontinued and the responsibility for completing
Imonics' unfinished software engineering projects was transferred to the BSG
Group.
The client/server information technology and change management industry is
highly fragmented and characterized by low barriers to entry, rapid change and
intense competition. The markets in which the BSG Group competes include
companies specializing in information technology and systems integration
consulting services, application development companies, software development and
systems integration units of major computer equipment manufacturers, information
systems facilities management and outsourcing organizations, major accounting
firms and information systems groups of large general management consulting
firms.
Many of the BSG Group's competitors have longer operating histories and
substantially greater financial, technical and marketing resources, and generate
greater systems technology consulting and systems integration revenue, than does
the BSG Group. The introduction of lower priced competition or significant price
reductions by current or potential competitors, or such competitors' ability to
respond more quickly than the BSG Group to new or emerging technologies or
changes in customer requirements, could have an adverse effect on the BSG
Group's business.
Many of the BSG Group's current and potential customers periodically
evaluate whether to staff system implementation and deployment projects with
their in-house information systems staff instead of an outside services company.
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RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
operating profit or loss and identifiable assets attributable to each segment
for each of the fiscal years 1994 through 1996 is presented in Note 16 of Notes
to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.
HEALTHCARE INDUSTRY
Because a substantial portion of its revenue is derived from organizations
involved in the U.S. healthcare system, the Company's business is impacted by
trends in the 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 healthcare payors have willingly paid the prices
established by providers while other healthcare payors, notably government
programs and managed care companies, have paid far less than established prices
and, in many cases, less than the average cost of providing the services.
Consequently, prices charged to healthcare 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"). In addition, the increasing complexity in the reimbursement system
and the assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased receivables and bad debt levels and
higher business office costs. Healthcare 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; nonetheless, management believes that the
revenue growth rate experienced by the Company's clients continues to be
adversely affected by increased utilization of managed care providers 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 to become more costly.
Management believes that these trends have placed pressure on the rate of
revenue growth and profit margins of the Company's physician and hospital
accounts receivable and practice management operations. Due to these revenue and
margin pressures, Medaphis Physician Services Corporation ("MPSC"), the
Company's largest subsidiary providing accounts receivable and practice
management services to physicians, did not significantly contribute to the
Company's operating profit for 1996, nor is it expected to significantly
contribute until further progress is made in, among other things, ongoing
initiatives designed to reduce redundant costs, improve efficiencies and enhance
operational effectiveness in MPSC's operations.
The United States healthcare industry continues to experience significant
change as 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.
RESEARCH AND DEVELOPMENT
Information regarding research and development (which consists primarily of
software development costs) is included in Note 1 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data.
REGULATION
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection service in certain limited
circumstances. The Medicare statutes that restrict the assignment of Medicare
claims are supplemented by Medicare regulations and provisions in the Medicare
Carrier's Manual (the "Manual"). The Medicare regulations and the Manual provide
that a billing service that prepares and sends bills for the provider or
physician and does not receive and negotiate the checks made payable to the
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provider or physician does not violate the restrictions on assignment of
Medicare claims. Management believes that its practices do not violate the
restrictions on assignment of Medicare claims, but rather the Company operates
in a manner consistent with these provisions because it bills only in the name
of the medical provider, checks and payments for Medicare services are made
payable to the medical provider and the Company lacks any power, authority or
ability to negotiate checks made payable to the medical provider. Medaphis'
medical billing and collection activities are also governed by numerous federal
and state civil and criminal laws. 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. See Item 3. Legal Proceedings.
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows a
private person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and for such person to share in any
amounts paid to the government in damages and civil penalties. Successful
plaintiffs can receive up to 25-30% of the total recovery from the defendant.
Such qui tam actions or "whistle-blower lawsuits" have increased significantly
in recent years and have increased the risk that a company engaged in the
healthcare industry, such as Medaphis and many of its customers, may become the
subject of a federal or state investigation or may ultimately be required to
defend a false claims action, may be subjected to government investigation and
possible criminal fines, may be sued by private payors and may be excluded from
Medicare, Medicaid and/or other federally funded healthcare programs as a result
of such an action. The government on its own may also institute a Civil False
Claims Act case, either in conjunction with a criminal prosecution or as a stand
alone civil case. Whether instituted by a qui tam plaintiff or by the
government, the government can recover triple its damages together with civil
penalties of $5,000 -- $10,000 per false claim. Under applicable case law, a
party successfully sued under the Federal False Claims Act may be jointly and
severally liable for damages and penalties. Some state laws also provide for
false claims actions, including actions initiated by a qui tam plaintiff. There
can be no assurance that Medaphis will not be the subject of false claims or qui
tam proceedings relating to its billing and collection activities or that
Medaphis will not be the subject of further government scrutiny or
investigations relating to its billing and accounts receivable management
services operations. See Item 3. Legal Proceedings. Any such proceeding or
investigation could have a material adverse effect upon the Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. The Federal
Fair Debt Act also provides for, among other things, a civil right of action
against any debt collector who fails to comply with the provisions thereof.
Various states have also promulgated laws and regulations that govern credit
collection practices. In general, these laws and regulations prohibit certain
fraudulent and oppressive credit collection practices and also may impose
license or registration requirements upon collection agencies. In addition,
state credit collection laws and regulations generally provide for criminal
fines, civil penalties and injunctions for failure to comply with such laws and
regulations. Although most of the Company's billing and accounts receivable
management services the Company provides to its clients are not considered debt
collection services, the Company may be subjected to regulation as a "debt
collector" under the Federal Fair Debt Act and as a "collection agency" under
certain state collection agency laws and regulations. Management believes that
the Company operates in accordance with the Federal Fair Debt Act and complies
in all material respects with the applicable collection agency laws and
regulations governing collection practices in the states in which it conducts
its business or is exempt from such laws and regulations.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Hospitals are paid a predetermined amount for operating expenses
relating to each Medicare patient admission based on the patient's diagnosis.
Additional changes in the reimbursement provisions of the Medicare and Medicaid
programs may continue to reduce the rate of increase of federal expenditures for
hospital inpatient costs and charges. Such changes could
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have an adverse effect on the operations of hospitals in general, and
consequently reduce the amount of the Company's revenue related to its hospital
clients.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (the
"Health Insurance Act"), which includes an expansion of certain fraud and abuse
provisions, such as expanding the application of Medicare and Medicaid fraud
penalties to other federal healthcare programs, and creating additional criminal
offenses relating to "healthcare benefit programs," which are defined to include
both public and private payor programs. The Health Insurance Act also provides
for forfeitures and asset freezing orders in connection with such healthcare
offenses. Civil monetary penalties and program exclusion authority available to
the OIG also have been expanded. The Health Insurance Act contains provisions
for instituting greater coordination of federal, state and local enforcement
agency resources and actions through the OIG. There also have been several
recent healthcare reform proposals which have included an expansion of the
anti-kickback laws to include referrals of any patients regardless of payor
source.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program, projected that the Medicare "trust fund"
is likely to become insolvent by the year 2002 if the current growth rate of
approximately 10% per annum in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the federal
budget, both the Congress and the Clinton Administration have made proposals to
reduce the rate of increase in projected Medicare and Medicaid expenditures and
to change funding mechanisms and other aspects of both programs. In late 1995,
Congress passed legislation that would substantially reduce projected
expenditure increases and would make significant changes in the Medicare and the
Medicaid programs. The Clinton Administration has proposed alternate measures to
reduce, to a lesser extent, projected increases in Medicare and Medicaid
expenditures. Neither proposal became law prior to Congress' 1996 adjournment.
Medaphis anticipates that both the Clinton Administration and the Republican
majorities in Congress will introduce legislation in 1997 designed to reduce
projected increases in Medicare and Medicaid expenditures and to make other
changes in the Medicare and Medicaid programs. Medaphis anticipates that such
proposed legislation would, if adopted, change aspects of the present methods of
paying physicians under such programs and provide incentives for Medicare and
Medicaid beneficiaries to enroll in health maintenance organizations and other
managed care plans. Medaphis cannot predict the effect of any such legislation,
if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These market reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services by integrated delivery systems may result in a decrease in
demand for Medaphis' billing and collection services for particular physician
practices, but this decrease may be offset by an increase in demand for
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Medaphis' consulting and comprehensive business management services (including
billing and collection services) for the new provider systems.
EMPLOYEES
The Company currently employs approximately 9,375 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
ACQUISITIONS
In fiscal 1996, Medaphis completed four acquisitions that were accounted
for as purchases and four acquisitions that were accounted for as
poolings-of-interests. The four purchase acquisitions are as follows:
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.
On October 8, 1996, the Company acquired the assets and assumed
substantially all of the liabilities of Sage. Sage provides systems
integration services and data warehousing decision support applications,
primarily to the telecommunications industry.
For each of the foregoing acquisitions, the purchase price was allocated to
the assets acquired and the liabilities assumed based on their estimated fair
value as of the date of acquisition.
The Company acquired the following businesses in fiscal 1996 which were
recorded using the pooling-of-interests method of accounting:
On February 29, 1996, the Company exchanged 92,991 shares of its
Common Stock for all of the outstanding shares of common stock of
Intelligent Visual Computing, Inc. ("IVC"). IVC provides systems
integration and work flow engineering systems and services to clients in
healthcare and other industries.
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.
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.
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 Health Data Sciences Corporation ("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
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monitoring, scheduling, documentation and control of patient care. During
1995, HDS had revenue of $12.2 million.
Because 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
consolidated financial statements included in this Report have been restated to
include the financial position and operating results of Rapid Systems, BSG and
HDS for all periods prior to the acquisitions. No restatement has been made for
the financial position and operating results of IVC prior to the beginning of
the fiscal year of its acquisition due to its immateriality.
In August 1996 Medaphis announced that it did not anticipate any
significant acquisitions in the near term.
ITEM 2. PROPERTIES
The Company's principal executive offices are leased and are located in
Atlanta, Georgia. The lease expires in February 2000.
SERVICES
MPSC's principal office is leased and is located in Atlanta, Georgia. The
lease expires in February 2000. In addition to its principal office, MPSC,
through its various operating subsidiaries, occupies approximately 25
information processing centers ("IPCs") and local business offices throughout
the United States. Three of the facilities are owned and are unencumbered. The
remainder of the facilities are leased with expiration dates ranging from March
1997 to December 2008. Medaphis Services Corporation's principal office is
leased and is located in Norcross, Georgia. The lease expires in May 2002.
HIT
The HIT group's principal office is leased and is located in Atlanta,
Georgia. The lease expires in February 2000. In addition to its principal
office, HIT, through its various operating subsidiaries, occupies approximately
25 offices in the United States, Australia, Canada and Europe. All facilities
are leased and such leases expire on dates ranging from March 1997 to April
2004.
BSG GROUP
The BSG Group's principal offices are located in Austin and Houston, Texas.
The leases expire in the year 2000. In addition to its principal offices, the
BSG Group, through its various operating subsidiaries, occupies approximately 25
offices in the United States. All facilities are leased and such leases expire
on dates ranging from April 1998 to April 2005.
ITEM 3. LEGAL PROCEEDINGS
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 search 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
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charges of $12 million in the third quarter of 1995 and $2 million in the fourth
quarter of 1996 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 which were filed following the
Company's announcement of the Federal Investigation. The charges are intended to
cover only the anticipated expenses of the Federal Investigation and the related
lawsuits and do 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 current and former 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' public statements and 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 defendant's
motion to dismiss the Consolidated Complaint. 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 1933 Act 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 plaintiffs and the defendants have reached an agreement in principle
to settle this action on a class-wide basis for $4.75 million, subject to court
approval and other customary conditions (the "1995 Class Action Settlement").
The 1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County, Georgia,
described more fully below. The Company expects to receive approximately $3.7
million from insurance to fund a portion of the 1995 Class Action Settlement and
accrued approximately $1.2 million in the quarter ending December 31, 1996 to
fund the anticipated balance of the 1995 Class Action Settlement and to pay
certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis Common Stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning the Company's Gottlieb's Financial Services, Inc. ("GFS") subsidiary.
No subpoenas or other process have been issued to the Company or to GFS in
connection with the investigation. There can be no assurance that this matter
will be resolved promptly, that subpoenas will not be received by Medaphis or
that the investigation will not have a material adverse effect upon Medaphis.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis Common Stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. On
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December 30, 1996, the defendants filed a motion to dismiss most of the 1996
Consolidated Complaint. On February 3, 1997, the plaintiffs filed a Consolidated
Second Amended Complaint. On February 14, 1997, the defendants moved to dismiss
the Consolidated Second Amended Complaint in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. The plaintiff seeks rescissory, compensatory and
punitive damages, rescission, injunctive relief and costs. On January 10, 1997,
the defendants filed a demurrer to the complaint. The demurrer was denied on
February 5, 1997. On March 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the 1933 Act, but the Company believes
that it has substantial defenses to the alleged damages relating to the 1933 Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG common stock were converted to Medaphis
stock options in connection with Medaphis' acquisition of BSG. The plaintiffs
allege failure to perform diligence, breaches of fiduciary duties of candor,
loyalty and fair dealing and negligence against the BSG defendants (Papermaster,
Pickering, Lundeen, Smith, Noorda and Grosh) and fraud and deceit against the
Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it is conducting a non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that
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additional lawsuits will not be filed against the Company, that the lawsuits,
the written demands and the pending governmental investigations will not have a
disruptive effect upon the operations of the business, that the written demands,
the defense of the lawsuits and the pending investigations will not consume the
time and attention of the senior management of the Company and that the
resolution of the lawsuits, the written demands and the pending governmental
investigations will not have a material adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of March 31, 1997:
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
- ---- --- -------- ---------------
David E. McDowell................ 54 Chairman and Chief Executive 1996
Officer and Director
Carl James Schaper............... 45 Executive Vice President and 1997
President of Medaphis
Healthcare
Information Technology Company
William R. Spalding.............. 38 Executive Vice President -- 1996
Strategic Planning
Jerome H. Baglien................ 47 Senior Vice President and 1997
Chief
Financial Officer
Daniel S. Connors, Jr............ 54 Senior Vice President -- 1996
Personnel & Administration
Harvey Herscovitch............... 59 Senior Vice 1997
President -- Strategy &
Organization
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
DAVID E. MCDOWELL joined Medaphis in October 1996 as Chairman and Chief
Executive Officer. Mr. McDowell was appointed to the Medaphis Board of Directors
in May 1996. From 1992 to 1996, Mr. McDowell was President, Chief Operating
Officer and a director of McKesson Corporation. McKesson Corporation is the
world's largest distributor of pharmaceutical and healthcare products through
McKesson Drug Company in the United States and Medis Health and Pharmaceutical
Services, Inc. in Canada.
CARL JAMES SCHAPER joined Medaphis in March 1997 as President of Medaphis
Healthcare Information Technology Company and Executive Vice President of
Medaphis. From 1994 to 1997, Mr. Schaper held numerous positions with Dun &
Bradstreet Software, including President, Chief Executive Officer, Chief
Operating Officer, Executive Vice President, and Senior Vice President, Field
Operations and Marketing. From 1989 to 1994, Mr. Schaper held several positions
with Banyan Systems, Inc., including Senior Vice President, Worldwide Sales and
Marketing, Vice President, North America Field Operations and Regional Vice
President.
WILLIAM R. SPALDING joined Medaphis in January 1996 as Senior Vice
President -- Administration, General Counsel and Secretary and was promoted to
the position of Executive Vice President -- Strategic Planning in February of
1997. Prior to joining the Company, Mr. Spalding served as a partner in the law
firm
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of King & Spalding, where he specialized in mergers and acquisitions and
securities transactions. Mr. Spalding joined King & Spalding in 1985.
JEROME H. BAGLIEN joined Medaphis in February 1997 as Senior Vice President
and Chief Financial Officer. From 1993 to 1996 Mr. Baglien was employed by
Keebler Company where he served as Chief Financial Officer. From 1988 to 1993,
Mr. Baglien served as Vice President, Finance and Administration with Lamb
Weston, Inc., a wholly owned subsidiary of ConAgra. From 1983 to 1988, Mr.
Baglien was employed by Tree Top, Inc. as Chief Financial Officer and
Controller.
DANIEL S. CONNORS, JR. joined Medaphis in November 1996 as Senior Vice
President -- Personnel and Administration. During 1996, Mr. Connors served as
Vice President, Strategic Implementation with D.F. Blumberg & Associates, Inc.
From 1993 to 1996, Mr. Connors served as President and Chief Operating Officer
of Technology Service Solutions, an IBM/Eastman Kodak joint venture company.
From 1965 to 1993, Mr. Connors was employed by IBM Corporation where he held
several executive positions and ultimately served as Vice President, Point of
Sales Services.
HARVEY HERSCOVITCH joined Medaphis in February 1997 and serves as Senior
Vice President -- Strategy & Organization. From 1993 to December 1996, Mr.
Herscovitch served as an independent consultant in the pharmaceutical benefits
management and wholesale pharmaceutical distribution industries. Prior to 1993,
Mr. Herscovitch was employed by IBM Corporation in a variety of executive
positions dealing with the services side of the business.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the Nasdaq National Market under
the symbol MEDA.
The prices in the table below represent the high and low sales price for
the Common Stock as reported in the National Market System for the periods
presented. Such prices are based on inter-dealer bid and asked prices without
markup, markdown, commissions or adjustments and may not represent actual
transactions.
YEAR ENDED DECEMBER 31, 1995 HIGH LOW
---------------------------- ------- -------
First Quarter............................................. $32.750 $22.000
Second Quarter............................................ 34.250 20.500
Third Quarter............................................. 30.375 20.250
Fourth Quarter............................................ 38.500 26.000
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---------------------------- ------- -------
First Quarter............................................. $53.250 $34.000
Second Quarter............................................ 50.250 34.625
Third Quarter............................................. 42.500 11.250
Fourth Quarter............................................ 18.500 8.250
The last reported sales price of the Common Stock as reported on the Nasdaq
National Market on March 24, 1997 was $10.5625 per share. As of March 24, 1997
the Company's Common Stock was held of record by 822 stockholders.
Medaphis has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. The Second
Amended Facility contains restrictions on the Company's ability to declare or
pay cash dividends on its Common Stock.
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RECENT SALES OF UNREGISTERED SECURITIES
Conversion of Medaphis Convertible Subordinated Debentures
Effective January 1, 1996, all holders of the Company's 6.5% convertible
subordinated debentures exercised their rights to convert the debentures into an
aggregate 4,526,786 shares of Medaphis Common Stock at $14.00 per share, or at
an aggregate conversion price of $63,375,004. The Company relied on Section 4(2)
of the 1933 Act as its exemption from the registration requirements of the 1933
Act.
Warrants Issued in Connection with the Second Amended Facility
On February 4, 1997, the Company entered into the Second Amended Facility.
As an inducement for the lenders named therein to enter into the Second Amended
Facility, the Company offered and issued to such lenders warrants to purchase
the Company's Common Stock. The warrants contain a vesting arrangement whereby
1% of the Company's Common Stock vests in favor of the lenders on each of
January 1, 1998 and April 1, 1998. The Company relied on Section 4(2) of the
1933 Act as its exemption from the registration requirements of the 1933 Act.
Intelligent Visual Computing, Inc.
On February 29, 1996, the Company acquired IVC by merger (the "IVC
Merger"). As the merger consideration for the IVC Merger, Medaphis offered and
issued to the former IVC shareholders an aggregate 92,991 shares of Medaphis
Common Stock for all of the outstanding common stock, par value $.01 per share,
of IVC. The Company relied on Section 4(2) of the 1933 Act as its exemption from
the registration requirements of the 1933 Act.
Issuance to Certain Employees of Health Data Sciences Corporation
On January 21, 1997, the Company offered, and on February 4, 1997 issued,
an aggregate 31,449 shares of restricted Medaphis Common Stock to certain key
employees of HDS, a wholly owned subsidiary, for $.01 per share, or an aggregate
offering and sales price of $314.49. The Company relied on Section 4(2) of the
1933 Act as its exemption from the registration requirements of the 1933 Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1996. The selected consolidated financial information of Medaphis
for each of the four fiscal years in the period ended December 31, 1996 and as
of December 31, 1996, 1995, 1994 and 1993 has been derived from the audited
consolidated financial statements of Medaphis which give retroactive effect to
the mergers with Automation Atwork Companies ("Atwork"), HRI, Medical Management
Sciences, Inc. ("MMS"), Rapid Systems, BSG and HDS, all of which have been
accounted for as poolings-of-interests. The selected consolidated financial data
of Medaphis for the fiscal year ended December 31, 1992 and as of December 31,
1992 has been derived from the unaudited consolidated financial statements of
Medaphis, which give retroactive effect to the mergers with Atwork, HRI, MMS,
Rapid Systems, BSG and HDS. Management believes that the unaudited consolidated
financial statements referred to above include all adjustments (consisting only
of normal recurring adjustments) that are necessary for a fair presentation of
the financial position and results of operations for such periods.
The loan commitments under the Company's Second Amended Facility will
reduce to $200 million and $150 million as of July 31, 1997, and January 31,
1998, respectively, and will expire on June 30, 1998. In developing its 1997
business plan, the Company did not expect to generate sufficient cash flow from
operations to meet the required debt reduction and, therefore, management of the
Company has adopted plans to dispose of HRI and is seeking alternatives for the
BSG Group which it believes will generate sufficient net proceeds to meet the
required debt reductions.
The Company has retained investment banking counsel to advise it on the
divestiture of HRI as well as to assist in the evaluation of alternatives for
the BSG Group. There can be no assurance that the Company will
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be successful in its efforts divest HRI and/or the BSG Group. If the Company is
unable to generate sufficient net proceeds through the divestiture of HRI and/or
the BSG Group or obtain alternative debt financing by July 31, 1997, unless
extended by the lenders until September 30, 1997, the Company's borrowings under
the Second Amended Facility will become immediately due and payable. As a
result, there are doubts that the Company will continue as a going concern, and
therefore, the Company may be unable to realize its assets and discharge its
liabilities in the normal course of business. The consolidated financial
statements of the Company do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should the Company be unable
to continue as a going concern.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue.................................. $ 608,313 $559,877 $398,934 $279,326 $175,424
Salaries and wages....................... 398,573 325,868 227,109 164,474 106,296
Other operating expenses................. 163,677 140,296 95,195 71,363 51,241
Depreciation............................. 28,276 14,487 9,430 7,285 4,775
Amortization............................. 20,016 18,048 10,691 7,878 4,043
Interest expense, net.................... 11,585 10,062 5,926 6,573 965
Restructuring and other charges.......... 179,768 54,950 1,905 -- --
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................ (124,621) (5,621) 32,523 14,704 5,534
Net income (loss)........................ (124,621) (5,621) 32,523 14,704 9,010(1)
Pro forma net income (loss)(2)........... (123,642) (8,504) 30,706 13,524 9,629
Weighted average shares outstanding...... 71,225 56,591 60,245 51,109 48,843
PER SHARE DATA(2)
Pro forma income (loss) before
extraordinary item and cumulative
effect of accounting change........... $ (1.74) $ (.15) $ 0.51 $ 0.26 $ 0.13
Pro forma net income loss................ $ (1.74) $ (.15) $ 0.51 $ 0.26 $ 0.21
AS OF DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital.......................... $ 75,633 $ 95,230 $ 89,262 $ 71,278 $ 36,570
Intangible assets........................ 389,033 455,611 376,827 183,190 116,383
Total assets............................. 815,624 795,606 627,151 367,281 228,305
Long-term debt........................... 215,752 150,565 148,261 9,803 16,059
Convertible subordinated debentures...... -- 63,375 63,375 63,375 60,000
Stockholders' equity..................... 392,290 421,306 257,097 189,850 87,876
- ---------------
(1) Reflects the extraordinary loss of $2.1 million relating to the prepayment
of certain indebtedness net of income tax benefit and the cumulative benefit
for the change in accounting for income taxes arising from the adoption of
Statement of Financial Accounting Standards No. 109 of $5.6 million.
(2) In 1995 and 1996, Company acquired Atwork, Consort, MMS, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior
to the mergers, Atwork, Consort, MMS, IVC, Rapid Systems and a company
acquired by BSG prior to the Company's merger with BSG had elected "S"
corporation status for income tax purposes. As a result of the 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 in the
consolidated statements of operations as if each of these entities had been
a "C" corporation during the periods presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In fiscal 1996 Medaphis: (1) acquired eight companies in four transactions
accounted for as purchases and in four transactions accounted for as
poolings-of-interests; (2) recorded a charge of $138.6 million in the fourth
quarter related to the abandonment of its reengineering program begun in late
1994, the shutdown of Imonics and other matters; (3) incurred a significant net
loss due primarily to the reengineering abandonment and other restructuring
charges and operating losses in both its BSG Group and Services segments; (4)
was sued under the federal securities laws for allegedly misleading disclosures
about earnings and other matters, which lawsuits have not been resolved and are
costly for Medaphis to defend; and (5) used cash in excess of cash provided by
operations to fund working capital of $7.9 million and incurred capital
expenditures of $51.1 million, with the result that by December 31, 1996, the
Company had borrowed $242.7 million of the $250 million available under its bank
credit facilities. In response to these events, in February 1997 Medaphis
entered into the Second Amended Facility which provides $35 million of
additional debt capacity, but also requires significant reductions in the
lenders' commitments to $200 million in July 1997 (which may be extended by the
lenders to September 30, 1997) and to $150 million in January 1998.
In order to generate funds necessary to make the required payments under
the Second Amended Facility in July 1997 and January 1998, the Company announced
its plan to sell or spin-off its wholly owned operating subsidiary, HRI, by
filing a registration statement with the Commission relating to an initial
public offering of 100% of the common stock of HRI. Because HRI is not
considered a segment of the Company, the Company will not record the financial
position, results of operations and cash flows of HRI as discontinued
operations. Medaphis also is assessing alternatives for its BSG Group. The
alternatives include, but are not limited to, seeking a buyer, a spin-off
transaction or other capital raising alternatives.
In February 1997, Medaphis announced the implementation during the 1997
fiscal year of a business plan focused on Medaphis' core business and comprised
of the five following components: (1) exiting non-core businesses, such as the
planned sale of HRI that is discussed below; (2) achieving improved
predictability of results through enhanced management accountability and
controls; (3) reducing costs and increasing efficiencies; (4) emphasizing
customer service; and (5) implementing cross-selling initiatives.
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 healthcare
payors have willingly paid the prices established by providers while other
healthcare 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 healthcare 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"). The increasing complexity in the reimbursement system and the
assumption of greater payment responsibility by individuals have caused
healthcare providers to experience increased receivables and bad debt levels and
higher business office costs. Healthcare 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 providers' responses to
revenue pressures, management believes that the revenue growth rate experienced
by the Company's clients continues to be adversely affected by increased managed
care and other industry factors impacting healthcare providers in the United
States. At the same time, the process of submitting healthcare claims for
reimbursement to third-party payors in accordance with applicable industry and
regulatory standards continues to grow in complexity and to become more costly.
Management believes that these trends have placed pressure on the rate of
revenue growth and profit margins of the Company's physician accounts receivable
and practice management operations. Due to these revenue and margin pressures,
MPSC, the Company's largest subsidiary providing accounts receivable and
practice management services to physicians, did not significantly contribute to
the Company's operating profit for 1996 and this trend is not expected to
improve until further progress is made with, among other things, ongoing
initiatives designed to reduce redundant costs, improve efficiencies and enhance
operational effectiveness in MPSC's operations.
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RESULTS OF OPERATIONS
The following table shows certain items reflected in the Company's
statements of operations as a percentage of revenue:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
Revenue..................................................... 100.0% 100.0% 100.0%
Salaries and wages.......................................... 65.5 58.2 56.9
Other operating expenses.................................... 26.9 25.1 23.9
Depreciation................................................ 4.6 2.6 2.3
Amortization................................................ 3.3 3.2 2.7
Interest expense, net....................................... 1.9 1.8 1.5
Restructuring and other charges............................. 29.6 9.8 0.5
----- ----- -----
Income (loss) before income taxes........................... (31.8) (0.7) 12.2
Income tax expense (benefit)................................ (11.3) 0.3 4.0
----- ----- -----
Net income (loss)........................................... (20.5) (1.0) 8.2
Pro forma adjustments 0.2 (0.5) (0.5)
----- ----- -----
Pro forma net income (loss)................................. (20.3)% (1.5)% 7.7%
===== ===== =====
REVENUE
Revenue classified by the Company's different operating segments is as
follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Revenue:
Services......................................... $415,328 $402,467 $291,536
BSG Group........................................ 113,988 98,615 57,732
HIT.............................................. 81,646 60,521 50,387
Corporate and eliminations....................... (2,649) (1,726) (721)
-------- -------- --------
$608,313 $559,877 $398,934
======== ======== ========
Services' operations in fiscal 1996 experienced minimal net business growth
as new sales were largely offset by client losses. Services' revenue in 1996
increased 3.2% from 1995 as compared with an increase of 38.1% in 1995 from
1994. The slowdown in revenue growth is attributable to the above-mentioned
revenue pressures on the physician accounts receivable and practice management
operations. The growth in 1995 was primarily attributable to acquisitions.
These client losses are partly due to the reengineering and consolidation
effort undertaken by MPSC. During the consolidation effort, management's focus
was redirected to consolidation and away from client service. Services' 1995
revenue growth resulted from acquisitions and an increase in the number of
business management services clients.
The BSG Group's 1996 revenues increased 15.6% from 1995 which had increased
70.8% from 1994. The increases in the BSG Group's revenue reflect the demand for
the BSG Group's service offerings as migration to client/server architectures
continued to accelerate. This demand for the BSG Group's services were
negatively affected in 1996 by a decrease in the revenues generated by Imonics.
HIT's revenue increased 34.9% in 1996 as compared with the same period in
1995. This increase is primarily the result of an increase in the number of
healthcare information system licenses sold by HDS. Included in HIT's revenue
for the 1996 fiscal year is approximately $14.5 million of onetime fees
associated with these licenses. HIT's revenue for 1995 increased 20.1% from
1994. This growth was due to an increase in the sales of Atwork's scheduling
products which was offset by HDS not selling as many healthcare information
system licenses in fiscal year 1995 as compared to fiscal year 1994.
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SALARIES AND WAGES
Salaries and wages represented 65.5% of revenue in 1996 as compared with
58.2% and 56.9% in 1995 and 1994, respectively. The increase in salaries and
wages as a percentage of revenue for 1996, as compared with 1995, is due to a
slowdown in the growth of the Company's revenue and an increase in the
employment levels (both employees and independent contractors) across the
Company. The increase in 1995 resulted from a decrease in the revenue recognized
at HDS offset by the changes in compensation to the former owners of Atwork.
OTHER OPERATING EXPENSES
Other operating expenses increased to 26.9% of revenue in 1996 from 25.1%
in 1995 which had increased from 23.9% in 1994. The increase in other operating
expenses as a percentage of revenue for 1996, as compared with 1995, is due to a
slowdown in the growth of the Company's revenue. The increase in 1995 was a
result of the decrease in the 1995 revenue at HDS primarily associated with the
timing of new sales. Other operating expenses are primarily comprised of
postage, facility and equipment rental, telecommunications, travel, office
supplies, legal, accounting and other outside professional services.
DEPRECIATION
Depreciation expense was $28.3 million in 1996, $14.5 million in 1995 and
$9.4 million in 1994. These increases reflect the Company's investment in
property and equipment, including approximately $42 million of new computer and
other data processing equipment purchased in connection with the Company's
reengineering program, to support growth in its business, including
acquisitions.
The Company wrote down the value of the equipment purchased in connection
with the Company's reengineering program to its net realizable value during the
fourth quarter of 1996 and recorded a charge of approximately $16 million. The
Company expects depreciation expense to increase by approximately $6.5 million
in 1997 from the 1996 expense amount.
AMORTIZATION
Amortization of intangible assets, which are primarily associated with the
Company's acquisitions and software products, was $20.0 million in 1996, $18.0
million in 1995 and $10.7 million in 1994. The increases are primarily due to
increased amortization of goodwill and client lists resulting from acquisitions.
INTEREST
Net interest expense was $11.6 million in 1996, $10.1 million in 1995 and
$5.9 million in 1994. The increases in 1996 and 1995 are primarily due to
increased borrowings under the Company's expanded credit facility to finance
acquisitions and the Company's investment in its reengineering and consolidation
project. Management anticipates that future interest expense will change as a
result of increases in interest rates and borrowings under the Second Amended
Facility.
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RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
Restructuring charges....................................... $ 14,076 $15,000 $ --
Software abandonment........................................ 86,088 1,800 --
Property and equipment impairment........................... 35,592 5,000 --
Intangible asset impairment................................. 13,048 -- 1,905
Legal costs................................................. 12,800 12,000 --
Pooling charges............................................. 8,953 11,700 --
Severance costs............................................. 3,913 5,000 --
Other....................................................... 5,298 4,450 --
-------- ------- ------
$179,768 $54,950 $1,905
======== ======= ======
Restructuring Charges. In 1995, Management approved a restructuring plan
relating to the consolidation of the Company's data processing function in MPSC.
The Company recorded a reserve for the exit costs associated with the
restructuring plan of approximately $15.0 million.
During 1996, the Company revised its original plan of consolidating into
ten regional IPCs and reduced these reserves by approximately $1.8 million. The
Company has adopted a plan to downsize certain of the existing IPCs and the
costs associated with exiting these facilities will be charged against the
restructuring reserves established in 1995. The Company also incurred
approximately $5.2 million of costs which were related to MPSC's reengineering
and consolidation project which had not previously been accrued.
Also during 1996, the Company restructured its client/server system
integration businesses and consolidated Rapid Systems into BSG and adopted a
plan to shut down Imonics. In connection with this restructuring, the Company
recorded charges of approximately $3.0 million for the costs associated with the
termination of certain leases, approximately $6.5 million for severance costs
for all notified employees of Imonics and approximately $1.2 million for other
exit activities.
Software Abandonment. In June 1996, the Company began a comprehensive
assessment of the reengineering program for the Company's Services division
which was begun in 1994. The comprehensive review was completed and management
concluded that it was not cost effective to continue the development and
deployment of the software and technology upon which the reengineering program
was based and that the reengineering software and technology had no alternative
useful application in the Company's operations. In connection with abandonment
of its reengineering program and the shutdown of Imonics, the Company abandoned
certain software development projects and recorded charges for the write-off of
approximately $86.1 million of capitalized software development costs related to
these projects.
In connection with The Halley Exchange, Inc. acquisition in 1995, 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.
Property and Equipment Impairment. In connection with the abandonment of
the reengineering project and the shutdown of Imonics in 1996 and the
restructuring of MPSC in 1995, the Company assessed the recoverability of
certain of its long lived assets and recorded impairment losses of approximately
$35.6 million and $5.0 million in 1996 and 1995, respectively.
Intangible Asset Impairment. In 1996, the Company adopted a plan to shut
down Imonics and recorded a charge of approximately $13 million for the
write-off of the unamortized goodwill associated with the purchase of Imonics.
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.
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Legal Costs. In 1996, the Company recorded a charge of $5.0 million for
the administrative fees, costs and expenses it anticipates incurring in
connection with various putative class action lawsuits which have been filed
since August 14, 1996 against the Company and certain of its former officers,
one of whom was also a director. The Company also accrued $4.6 million for the
legal costs and other fees the Company has or plans to incur in connection with
the turnaround effort undertaken by the new management team and various other
legal matters.
The Company recorded charges of $2.0 million and $12.0 million in 1996 and
1995, respectively, for the administrative fees, costs and expenses it
anticipates incurring in connection with the Federal Investigation and various
putative class action lawsuits which are based on the Federal Investigation. In
1996, the Company reached an agreement in principle to settle the class action
lawsuits which are based on the Federal Investigation for $4.75 million. Also in
1996, the Company has recorded a $1.2 million charge for its portion of this
settlement (the Company expects the remainder of the settlement to be funded by
insurance).
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996 and 1995.
1996 1995
------ -------
(IN THOUSANDS)
Atwork...................................................... $ (430) $ 6,000
HRI......................................................... (778) 2,000
Consort Technologies, Inc................................... (529) 1,200
MMS......................................................... (845) 2,500
IVC......................................................... 169 --
Rapid Systems............................................... 584 --
BSG......................................................... 6,094 --
HDS......................................................... 4,688 --
------ -------
$8,953 $11,700
====== =======
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $0.9 and
$5.0 million in 1996 and 1995, respectively, 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. Also, in
1996 the Company recorded a charge of $3.0 million for severance costs
associated with former executive management.
Other Costs. During 1996, the Company canceled an initiative to develop an
on-line practice management system. The Company recorded a charge of
approximately $2.0 million relating to the deferred costs associated with this
project. The Company also accrued $1.3 million for certain liabilities
associated with the Company's billing and accounts receivable management
services operations. In addition, the Company also recorded a charge of
approximately $2.0 million for miscellaneous asset write-offs.
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. In addition,
in 1995 the Company recorded a charge of $750,000 for certain amounts paid to
the former owners of an acquired company.
During the fourth quarter of 1996, the Company recorded charges of $138.6
million related to the abandonment of the reengineering program, the shut down
of Imonics and other charges as discussed above.
INCOME (LOSS) BEFORE INCOME TAXES
The Company's income (loss) before income taxes was (31.8)% of revenues in
1996 as compared with (0.7)% in 1995 and 12.2% in 1994. The reasons for the
losses before income taxes in 1996 and 1995 are the
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23
above mentioned revenue pressure MPSC is experiencing and the restructuring and
other charges taken by the Company. Excluding restructuring and other charges
from all years presented, income before income taxes as a percentage of revenue
would have been (2.2)%, 9.1% and 12.7%, respectively for 1996, 1995 and 1994.
INCOME TAXES
Effective income tax rates for the periods presented vary from statutory
rates primarily as a result of nondeductible expenses associated with merger
transactions consummated by the Company in 1996 and previous years. Pro forma
adjustments for income taxes have been provided for companies which elected to
be treated as "S" Corporations under the Internal Revenue Code of 1986, as
amended, prior to merging with the Company.
ACQUISITIONS
In fiscal 1996, Medaphis completed four acquisitions that were accounted
for as purchases and four acquisitions that were accounted for as
poolings-of-interests. The four purchase acquisitions are as follows:
On February 12, 1996, the Company acquired substantially all of the
assets and assumed certain of the related liabilities of 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. CBT provides
collection and billing services primarily to hospitals.
On April 16, 1996, the Company acquired the outstanding capital stock
of MEDICO. MEDICO provides billing and accounts receivable management
services primarily to anesthesiologists.
On October 8, 1996, the Company acquired the assets and assumed
substantially all of the liabilities of Sage. Sage provides systems
integration services and data warehousing decision support applications,
primarily to the telecommunications industry.
For each of the foregoing acquisitions, the purchase price was allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition.
The Company acquired the following businesses in fiscal 1996 which were
recorded using the pooling-of-interests method of accounting:
On February 29, 1996, the Company exchanged approximately 92,991
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.
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.
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.
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
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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.
Because 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
consolidated financial statements included in this report have been restated to
include the financial position and operating results of Rapid Systems, BSG and
HDS for all periods prior to the acquisitions. No restatement has been made for
the financial position and operating results of IVC prior to the beginning of
the fiscal year of its acquisition due to its immateriality.
In August 1996, Medaphis announced that it did not anticipate any
significant acquisitions in the near term.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $75.6 million at December 31, 1996, and
had unrestricted cash and cash equivalents of $7.6 million.
The Company used $7.9 million in cash for operating activities in the year
ended December 31, 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 and other
charges and the ongoing revenue and margin pressures at MPSC.
At December 31, 1996, the Company had $242.7 million of borrowings
outstanding under the $250 million revolving credit agreement (the "Senior
Credit Facility"). Borrowings under the Senior Credit Facility bore interest at
interest rates ranging from 6.78% to 6.90%. On February 4, 1997, the Company
entered into the Second Amended Facility. This agreement replaced the Senior
Credit Facility and increased the revolving line of credit to $285 million. The
Second Amended Facility expires on June 30, 1998 and may be extended or
otherwise amended pursuant to the agreement. Borrowings under the Second Amended
Facility are secured by substantially all of the Company's assets and are
guaranteed by substantially all of the Company's subsidiaries. The Second
Amended Facility effectively refinanced the loans outstanding under the Senior
Credit Facility and can be used to finance working capital and other general
corporate needs with restrictions on new acquisitions, certain litigation
settlement payments and capital expenditures for the fiscal quarter ending March
31, 1997. The Second Amended Facility provides for "base rate" loans which bear
interest equal to prime plus 1% as long as certain financial covenants are met.
The loan commitments under the Second Amended Facility will reduce to $200
million and $150 million on July 31, 1997 (unless extended by the lenders to
September 30, 1997) and January 31, 1998, respectively. In late 1996 and in
1997, the Company has taken actions to reduce capital expenditures and to
monitor uses of cash. The Company believes that it will be able to fund its
operating cash requirements through operating cash flows and limited borrowings
under the Second Amended Facility through July 31, 1997, when the Company will
be required to reduce the outstanding amount of borrowings under the Second
Amended Facility to a maximum of $200 million. In developing its 1997 business
plan, the Company did not expect to generate sufficient cash flow from
operations to meet the required debt reduction and, therefore, management has
adopted plans to divest HRI and is seeking alternatives for the BSG Group which
it believes will generate sufficient net proceeds to meet the July 31, 1997
reduction in the loan commitments required by the Second Amended Facility. The
Company has retained investment banking counsel to advise it on the divestiture
of HRI as well as to assist in the evaluation of alternatives for the BSG Group.
On March 14, 1997, the Company filed a registration statement with the
Commission relating to the planned initial public offering of 100% of the common
stock of HRI. This initial public offering is subject to review by the
Commission and the marketability of HRI. There can be no assurance that the
Company will be successful in its efforts to sell HRI and/or the BSG Group. If
the Company is unable to generate sufficient net proceeds through the sale of
HRI and/or the BSG Group or obtain alternative debt financing by July 31, 1997,
unless extended by the lenders until September 30, 1997, the Company's lender
can cause the borrowing under the Second Amended Facility to become immediately
due and payable.
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As part of the consideration paid to the six-bank syndicate for the Second
Amended Facility, the Company issued the lenders warrants with vesting
arrangements for 1% of the Common Stock of the Company on each of January 1,
1998 and April 1, 1998. These warrants terminate if the Company has no
outstanding borrowings on the line of credit on December 31, 1997. The Company
has not allocated any value to these warrants because management believes the
Company will generate sufficient cash flows from asset sales to repay all the
borrowings under the Second Amended Facility by December 31, 1997.
In December 1995, the Company gave notice of its intent to redeem its 6.5%
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 rights
effective January 1, 1996, and as a result, approximately 4.5 million shares of
Common Stock were issued in the conversion.
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 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 search 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 charges of $12 million in the third quarter of 1995 and $2
million in the fourth quarter of 1996, 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 which were
filed following the Company's announcement of the Federal Investigation. The
charges are intended to cover only the anticipated expenses of the Federal
Investigation and the related lawsuits and do 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 current and former 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' public statements and 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 defendant's
motion to dismiss the Consolidated Complaint. 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 1933 Act, 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 plaintiffs and the defendants have reached an agreement in principle
to settle this action on a class-wide basis for $4.75 million, subject to court
approval and other customary conditions (the "1995 Class Action Settlement").
The 1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County, Georgia,
described more fully below. The Company expects to receive approximately $3.7
million from insurance to fund a portion of the 1995 Class Action Settlement and
accrued approximately $1.2 million in the
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quarter ending December 31, 1996 to fund the anticipated balance of the 1995
Class Action Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis Common Stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as internal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning GFS. No subpoenas or other process have been issued to the Company or
to GFS in connection with this investigation.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis Common Stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. On December 30, 1996, the defendants filed a
motion to dismiss most of the 1996 Consolidated Complaint. On February 3, 1997,
the plaintiffs filed a Consolidated Second Amended Complaint. On February 14,
1997, the defendants moved to dismiss the Consolidated Second Amended Complaint
in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations, and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. The plaintiff seeks rescissory, compensatory and
punitive damages, rescission, injunctive relief and costs. On January 10, 1997,
the defendants filed a demurrer to the complaint. The demurrer was denied on
February 5, 1997. On March 18, 1997, the court denied the plaintiff's motion for
a preliminary injunction. As a result of the Company's restatement of its fiscal
1995 financial statements, the Company may not be able to sustain a defense to
strict liability on certain claims under the 1933 Act, but the Company believes
that it has substantial defenses to the alleged damages relating to the 1933 Act
claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda,
24
27
Gregory A. Grosh, Medaphis and Randolph G. Brown on November 12, 1996 in the
Superior Court, Law Division, Essex County, State of New Jersey. The alleged
class consists of persons and entities whose options to purchase BSG common
stock were converted to Medaphis stock options in connection with Medaphis'
acquisition of BSG. The plaintiffs allege failure to perform diligence, breaches
of fiduciary duties of candor, loyalty and fair dealing and negligence against
the BSG defendants (Papermaster, Pickering, Lundeen, Smith, Noorda and Grosh)
and fraud and deceit against the Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Commission notified the Company that it is
conducting a nonpublic investigation into, among other things, certain trading
and other issues related to Medaphis' August 14, 1996 and October 22, 1996
announcements of the Company's loss for the quarter ending September 30, 1996
and its restated consolidated financial statements for the three months and year
ended December 31, 1995 and its restated unaudited balance sheets as of March
31, 1996 and June 30, 1996. The Company intends to cooperate fully with the
Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that additional lawsuits
will not be filed against the Company, that the lawsuits, the written demands
and the pending governmental investigations will not have a disruptive effect
upon the operations of the business, that the written demands, the defense of
the lawsuits and the pending investigations will not consume the time and
attention of the senior management of the Company and that the resolution of the
lawsuits, the written demands and the pending governmental investigations will
not have a material adverse effect upon the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Management of the Company" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 1997 and is incorporated herein by reference.
25
28
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held May 8, 1997 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 8, 1997 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the section entitled
"Certain Transactions" of the Proxy Statement for the Annual Meeting of
Stockholders to be held May 8, 1997 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Independent Auditors' Report;
Consolidated Statements of Operations -- years ended December 31, 1996,
1995 and 1994;
Consolidated Balance Sheets -- as of December 31, 1996 and 1995;
Consolidated Statements of Cash Flows -- years ended December 31, 1996,
1995 and 1994;
Consolidated Statements of Stockholders' Equity -- years ended December
31, 1996, 1995 and 1994; and Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 1996, 1995 and 1994.
Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference
to other filings:
EXHIBIT
NO. DOCUMENT
- ------- --------
2.1 -- Amended and Restated Merger Agreement, dated July 28, 1995,
among Registrant, RaySub, Inc. and Healthcare Recoveries,
Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on September 12, 1995).
2.2 -- Merger Agreement, dated December 29, 1995, among Registrant,
CarSub, Inc. and Medical Management Sciences, Inc.
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on January 19, 1996).
26
29
EXHIBIT
NO. DOCUMENT
- ------- --------
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 fiscal year ended December 31, 1995,
File No. 000-19480 (the "1995 Form 10-K")).
2.4 -- 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. 33-2506).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
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 to
Registration Statement on Form 8-A/A, filed on March 28,
1995).
3.4 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 4.4 to
Registration Statement on Form S-8, Registration No. 333-
03213).
3.5 -- Amended and Restated By-Laws of Registrant (incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, File No. 000-19480
(the "1992 Form 10-K")).
4.1 -- Indenture by and between Registrant and Trust Company Bank,
as Trustee, dated December 30, 1992 (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on January 11, 1993).
4.2 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1995 Form 10-K).
4.3 -- Form of Option Agreement relating to Registrant's Stock
Option Plan (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-1, File No. 33-42216).
4.4 -- Form of Option Agreement relating to Registrant's Executive
Performance Plan (incorporated by reference to Exhibit 4.3
to Registration Statement on Form S-1, File No. 33-42216).
4.5 -- Form of Option Agreement relating to Registrant's Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3, File No. 33-71552).
4.6 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to the
1995 Form 10-K).
4.7 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 4.6 to the 1995 Form 10-K).
4.8 -- Registration Rights Agreement, dated as of March 17, 1995,
by and among Registrant, David Michael Warner and John P.
Holton (incorporated by reference to Exhibit 4.10 to Annual
Report on Form 10-K for the year ended December 31, 1994,
File No. 000-19480 (the "1994 Form 10-K")).
4.9 -- Form of Common Stock Purchase Warrant issued to Fredrica
Morf and Ursula Nelson (incorporated by reference to Exhibit
4.19 to the 1994 Form 10-K).
27
30
EXHIBIT
NO. DOCUMENT
- ------- --------
4.10 -- Form of Warrant issued to one or more lenders pursuant to
Registrant's Second Amended and Restated Credit Agreement,
dated as of February 4, 1997 (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed on February
18, 1997).
4.11 -- Form of Registration Rights Agreement among Registrant,
Bryan Dieter and The Decision Support Group, Inc.
(incorporated by reference to Exhibit 4.26 to the 1994 Form
10-K).
4.12 -- Form of Registration Rights Agreement among Registrant,
Mahmoud R. Ghavi, Barry G. Wahlig, William L. McCready, and
Kimberly D. Elkins (incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed on December 5, 1995).
4.13 -- Form of Registration Rights Agreement among Registrant,
William J. DeZonia, Lori T. Caudill, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust and Paulanne H. Thacker Retained
Annuity Trust (incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed on January 19, 1996).
4.14 -- Form of Registration Rights Agreement among Registrant,
Raymond J. Noorda and Steven G. Papermaster (incorporated by
reference to Exhibit 4.17 to Registration Statement on Form
S-4, file No. 33-2506).
4.15 -- Form of Registration Rights Agreement among Registrant,
Michael Clark, Andrei Mitran, and Steven Theidke
(incorporated by reference to Exhibit 4.18 to Registration
Statement on Form S-4, File No. 33-2506).
4.16 -- Notice of Redemption for 6.5% Convertible Subordinated
Debentures Due 2000 (incorporated by reference to Exhibit
4.21 to the 1995 Form 10-K).
4.17 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees.
10.1 -- Amended and Restated Medaphis Corporation Non-Qualified
Stock Option Plan (incorporated by reference to Exhibit 28.1
to Registration Statement on Form S-8, File No. 33-46847).
10.2 -- First Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.1 to Registration Statement on Form S-8, File
No. 33-64952).
10.3 -- Second Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.5 to the 1992 Form 10-K).
10.4 -- Third Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1993).
10.5 -- Fourth Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.6 -- Fifth Amendment to the Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (the "1993 Form 10-K")).
10.7 -- Sixth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1994).
28
31
EXHIBIT
NO. DOCUMENT
- ------- --------
10.8 -- Seventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-95742).
10.9 -- Eighth Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07203).
10.10 -- Ninth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.2 to Registration Statement on Form S-8, File
No. 333-07203).
10.11 -- Tenth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.3 to Registration Statement on Form S-8, File
No. 333-7203).
10.12 -- Eleventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan.
10.13 -- Medaphis Corporation Senior Executive Performance
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.2 to Registration Statement on Form S-8, File
No. 33-46847).
10.14 -- First Amendment to Medaphis Corporation Senior Executive
Performance Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.15 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference
to Exhibit 99.1 to Registration Statement on Form S-8, File
No. 33-67752).
10.16 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-71556).
10.17 -- Second Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-88442).
10.18 -- Third Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.14 to the 1995 Form
10-K).
10.19 -- Fourth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.2 to Registration
Statement on Form S-8, File No. 333-3213).
10.20 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.1 to Registration
Statement on Form S-8, File No. 333-07627).
10.21 -- Sixth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies.
10.22 -- Medaphis Corporation Non-Employee Director Stock Option
Plan, dated as of August 12, 1994 (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994).
10.23 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Non-Executive Employees.
10.24 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
29
32
EXHIBIT
NO. DOCUMENT
- ------- --------
10.25 -- Restricted Stock Plan of the Registrant, dated as of August
12, 1994 (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-4, File No. 33-88910).
10.26 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 to the 1995 Form
10-K).
10.27 -- First Amendment to Medaphis Corporation Employee Stock
Purchase Plan.
10.28 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.29 -- Amended and Restated Medaphis Employees' Retirement Savings
Plan.
10.30 -- First Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan.
10.31 -- Form of Second Amendment to the Amended and Restated
Medaphis Employees' Retirement Savings Plan.
10.32 -- Loan Agreement, dated October 1, 1983, between Medical
Management Consultants, Inc. and Development Authority of
Cobb County (incorporated by reference to Exhibit 10.16 to
Registration Statement on Form S-1, File No. 33-42216).
10.33 -- Second Amended and Restated Credit Agreement, dated as of
February 4, 1997, among the Registrant, the lenders listed
therein and the Agent (incorporated by reference to Exhibit
99.2 to Current Report on Form 8-K filed on February 18,
1997).
10.34 -- Certificate of Merger of CompMed, Inc. with and into
Medaphis Physician Services Corporation dated as of December
31, 1993 (incorporated by reference to Exhibit 10.30 to the
1993 Form 10-K).
10.35 -- Employment Agreement, dated December 14, 1992, between
MedCorp Holding, Inc. and Dennis A. Pryor (incorporated by
reference to Exhibit 10.26 to the 1992 Form 10-K).
10.36 -- Amendment No. 1 to the Employment Agreement between Dennis
A. Pryor and Medaphis Physician Services Corporation
(formerly MedCorp Holding, Inc., which changed its name to
CompMed, Inc. and subsequently merged into Medaphis
Physician Services Corporation (incorporated by reference to
Exhibit 10.37 to the 1994 Form 10-K)).
10.37 -- Lease Agreement, dated August 1, 1989, between Financial
Enterprises III (a general partnership consisting of Martin
L. Brill and Dennis A. Pryor) and Medical Management
Sciences South, Inc.
10.38 -- Agreement for Management Services by and among Registrant,
INTEGRATEC Med-Services, Inc. and Medaphis Hospital Services
Corporation, dated as of January 13, 1993 (incorporated by
reference to Exhibit 10.37 to the 1993 Form 10-K).
10.39 -- Employment Agreement by and between Registrant and Randolph
G. Brown, dated March 24, 1995 (incorporated by reference to
Exhibit 10.46 to the 1994 Form 10-K).
10.40 -- Master Equipment Lease, dated January 25, 1994, by and
between Trust Company Bank and Registrant (incorporated by
reference to Exhibit 10.63 to the 1994 Form 10-K).
10.41 -- Lease and Development and Participation Agreement, dated
April 21, 1995 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.42 -- Master Equipment Lease Agreement Intended for Security with
NationsBank Leasing Corporation, dated May 31, 1995
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995).
30
33
EXHIBIT
NO. DOCUMENT
- ------- --------
10.43 -- Equipment Lease, dated September 29, 1995, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.70 to
the 1995 Form 10-K).
10.44 -- Equipment Lease, dated October 31, 1995 by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.71 to
the 1995 Form 10-K).
10.45 -- Equipment Lease, dated January 31, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.72 to
the 1995 Form 10-K).
10.46 -- Equipment Lease, dated February 29, 1996, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.73 to
the 1995 Form 10-K).
10.47 -- Tivoli Systems, Inc. End User Software License Agreement,
dated June 30, 1995 (incorporated by reference to exhibit
10.3 to Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.48 -- Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan, dated February 21,
1996 (incorporated by reference to Exhibit 10.1 to
Registration Statement on Form S-4, File no. 33-2506).
10.49 -- Employment Agreement by and between Registrant and David E.
McDowell, dated November 19, 1996.
10.50 -- Employment Agreement by and between Registrant and Daniel S.
Connors, Jr., dated February 25, 1997.
10.51 -- Employment Agreement by and between Registrant and Carl
James Schaper, dated February 25, 1997.
10.52 -- Employment Agreement by and between Registrant and Jerome H.
Baglien, dated January 3, 1997.
11 -- Statement re: Computation of Per Share Earnings.
21 -- Subsidiaries of Registrant.
23.1 -- Consent of Deloitte & Touche LLP.
27 -- Financial Data Schedule (for SEC use only).
99.1 -- Consolidated Class Action Complaint filed in the United
States District Court for the Northern District of Georgia,
Atlanta Division (incorporated by reference to Exhibit 99.1
to the 1995 Form 10-K).
99.2 -- Consolidated Class Action Complaint filed in the United
States District Court, Northern District of Georgia, Atlanta
Division.
99.3 -- Complaint filed in Los Angeles County Superior Court.
99.4 -- Class Action Complaint filed in Superior Court of New
Jersey, Law Division, Essex County.
99.5 -- Verified Derivative Complaint filed in the United States
District Court, Northern District of Georgia, Atlanta
Division.
99.6 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
- ---------------
* The exhibits which are referenced in the above documents are hereby
incorporated by reference. Such exhibits have been omitted for purposes of
this filing but will be furnished supplementary to the Commission upon
request.
31
34
(b) Reports on Form 8-K
One report on Form 8-K/A was filed during the quarter ended December
31, 1996:
FINANCIAL
ITEM REPORTED STATEMENTS FILED DATE OF REPORT
------------- ---------------- -----------------
Restatement of Medaphis Corporation's Supplemental
Consolidated Financial Statements to effect for
the merger with HDS........................... Yes(1) November 14, 1996
- ---------------
(1) Supplemental Consolidated Financial Statements of the Company (audited) for
the years ended December 31, 1995 (as restated), 1994 and 1993 were filed.
32
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Medaphis Corporation
(Registrant)
By: /s/ JEROME H. BAGLIEN
------------------------------------
Jerome H. Baglien
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Date: March 31, 1997
33
36
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID E. MCDOWELL Chairman, Chief Executive March 31, 1997
- ----------------------------------------------------- Officer and Director
David E. McDowell
/s/ JEROME H. BAGLIEN Senior Vice President and Chief March 31, 1997
- ----------------------------------------------------- Financial Officer (Principal
Jerome H. Baglien Accounting Officer)
/s/ ROBERT C. BELLAS, JR. Director March 31, 1997
- -----------------------------------------------------
Robert C. Bellas, Jr.
/s/ DAVID R. HOLBROOKE, M.D. Director March 31, 1997
- -----------------------------------------------------
David R. Holbrooke, M.D.
/s/ JOHN C. POPE Director March 31, 1997
- -----------------------------------------------------
John C. Pope
/s/ DENNIS A. PRYOR Director March 31, 1997
- -----------------------------------------------------
Dennis A. Pryor
34
37
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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 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 accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
6 to the consolidated financial statements, the Company's credit facility
requires significant reductions in the Company's borrowings by July 31, 1997,
which may be extended by the lenders to September 30, 1997. The Company does not
expect to generate sufficient cash flow from operations to meet this required
loan reduction. While the Company plans to divest of certain assets to generate
funds to meet this requirement, the Company does not have binding contracts to
dispose of these assets or to refinance or raise additional funds to otherwise
satisfy such required debt reduction. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to this matter also are described in Note 6. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
March 31, 1997
Atlanta, Georgia
F-1
38
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue..................................................... $ 608,313 $559,877 $398,934
--------- -------- --------
Salaries and wages.......................................... 398,573 325,868 227,109
Other operating expenses.................................... 163,677 140,296 95,195
Depreciation................................................ 28,276 14,487 9,430
Amortization................................................ 20,016 18,048 10,691
Interest expense, net....................................... 11,585 10,062 5,926
Restructuring and other charges............................. 179,768 54,950 1,905
--------- -------- --------
Total expenses.................................... 801,895 563,711 350,256
--------- -------- --------
Income (loss) before income taxes........................... (193,582) (3,834) 48,678
Income tax expense (benefit)................................ (68,961) 1,787 16,155
--------- -------- --------
Net income (loss)........................................... (124,621) (5,621) 32,523
========= ======== ========
Pro forma adjustments, principally income taxes............. 979 (2,883) (1,817)
--------- -------- --------
Pro forma net income (loss)................................. $(123,642) $ (8,504) $ 30,706
========= ======== ========
Pro forma net income (loss) per common share................ $ (1.74) $ (0.15) $ 0.51
========= ======== ========
Weighted average shares outstanding......................... 71,225 56,591 60,245
========= ======== ========
See notes to consolidated financial statements.
F-2
39
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT
PAR VALUE DATA)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,631 $ 19,270
Restricted cash........................................... 19,568 15,340
Accounts receivable, billed (net of allowance for doubtful
accounts of $13,260 and $6,225)........................ 99,823 84,256
Accounts receivable, unbilled............................. 94,057 89,429
Deferred income taxes..................................... 36,177 --
Other..................................................... 12,129 14,870
-------- --------
Total current assets.............................. 269,385 223,165
Property and equipment...................................... 97,850 97,895
Deferred income taxes....................................... 42,379 --
Intangible assets........................................... 389,033 455,611
Other....................................................... 16,977 18,935
-------- --------
$815,624 $795,606
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 11,765 $ 23,220
Accrued compensation...................................... 30,332 24,505
Accrued expenses.......................................... 95,680 69,529
Current portion of long-term debt......................... 55,975 10,681
-------- --------
Total current liabilities......................... 193,752 127,935
Long-term debt.............................................. 215,752 150,565
Other obligations........................................... 13,830 18,926
Deferred income taxes....................................... -- 13,499
Convertible subordinated debentures......................... -- 63,375
-------- --------
Total liabilities................................. 423,334 374,300
-------- --------
Stockholders' Equity:
Preferred stock........................................... -- 382
Common stock, voting, $.01 par value, 200,000 authorized
in 1996 and 100,000 in 1995; issued and outstanding
71,705 in 1996 and 58,917 in 1995...................... 717 589
Paid-in capital........................................... 522,491 426,387
Accumulated deficit....................................... (130,749) (6,052)
-------- --------
392,459 421,306
Less treasury stock, at cost -- 16 shares in 1996......... 169 --
-------- --------
Total stockholders' equity........................ 392,290 421,306
-------- --------
$815,624 $795,606
======== ========
See notes to consolidated financial statements.
F-3
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(124,621) $ (5,621) $ 32,523
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 48,292 32,535 20,121
Impairment loss on assets................................. 135,195 5,035 --
Deferred income taxes..................................... (71,939) 1,312 15,239
Other non-cash charges.................................... -- 417 1,208
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash............................ (6,152) (3,253) (1,963)
Increase in accounts receivable, billed................ (11,316) (21,549) (8,038)
Increase in accounts receivable, unbilled.............. (8,593) (9,714) (24,279)
Increase (decrease) in accounts payable................ (10,297) 4,738 5,341
Increase (decrease) in accrued compensation............ 5,277 (396) 5,704
Increase (decrease) in accrued expenses................ 26,870 25,725 (3,844)
Other, net............................................. 9,421 (5,841) 2,197
--------- -------- --------
Net cash provided by (used in) operating
activities...................................... (7,863) 23,388 44,209
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (18,200) (76,077) (153,385)
Purchases of property and equipment......................... (51,135) (50,986) (13,063)
Software development costs.................................. (37,946) (35,611) (9,519)
Other....................................................... -- 650 (1,969)
--------- -------- --------
Net cash used for investing activities............ (107,281) (162,024) (177,936)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 11,475 151,825 4,933
Proceeds from borrowings.................................... 129,155 140,780 122,100
Payments of long-term debt.................................. (36,511) (138,244) (6,108)
Dividends to shareholders of acquired companies............. (6) (6,751) (8,528)
Repurchase of stock and warrants............................ (5,591) -- --
Other....................................................... 5,274 (7,355) (675)
--------- -------- --------
Net cash provided by financing activities......... 103,796 140,255 111,722
--------- -------- --------
CASH AND CASH EQUIVALENTS
Net change.................................................. (11,348) 1,619 (22,005)
Balance at beginning of year (see Note 2)................... 18,979 17,651 39,656
--------- -------- --------
Balance at end of year...................................... $ 7,631 $ 19,270 $ 17,651
========= ======== ========
See notes to consolidated financial statements.
F-4
41
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED
COMMON PREFERRED EARNINGS TREASURY TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN (ACCUMULATED STOCK STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) AMOUNT EQUITY
------ ------ --------- --------- -------- ------------- -------- -------------
(IN THOUSANDS)
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
(including tax benefit of
$7,901)......................... 557 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.......................... -- -- -- -- -- (5,621) -- (5,621)
Other............................. 767 8 -- -- 2,900 (752) -- 2,156
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1995...... 58,917 589 19,454 382 426,387 (6,052) -- 421,306
Changes in HDS's stockholders'
equity in the three months ended
March 31, 1996 (see Note 2)..... -- -- -- -- -- (382) -- (382)
Issuance of common stock in
acquisitions.................... 93 1 -- -- 3,823 249 -- 4,073
Exercise of stock options
(including tax benefit of
$21,012)........................ 1,593 16 -- -- 32,471 -- -- 32,487
Repurchase of stock and
warrants........................ (16) -- -- -- (5,422) -- (169) (5,591)
Conversion of preferred stock at
acquired companies.............. 6,528 65 (19,454) (382) 317 -- -- --
Conversion of subordinated
debentures...................... 4,527 45 -- -- 62,305 -- -- 62,350
Net loss.......................... -- -- -- -- (124,621) -- (124,621)
Other............................. 63 1 -- -- 2,610 57 -- 2,668
------ ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996...... 71,705 $717 -- $ -- $522,491 $(130,749) $ (169) $ 392,290
====== ==== ======= ===== ======== ========= ======= =========
See notes to consolidated financial statements.
F-5
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Medaphis Corporation and its subsidiaries ("Medaphis" or the
"Company"), including the retroactive effect of all mergers which have been
accounted for under the pooling-of-interests method of accounting.
The Company's consolidated financial statements, have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business and
consequently do not include any adjustments relating to the recoverability and
classification of liabilities that may be necessary should the Company be unable
to continue as a going concern. As discussed in Note 6, the Company's cash flow
from operations will not be sufficient to satisfy required reductions in the
Company's outstanding borrowings; however, the Company has adopted plans to
divest of certain assets which management believes will generate the necessary
cash flows to satisfy these required debt reductions.
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 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, class of customers or groups of customers in any
geographical area.
USE 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.
F-6
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, three to seven years for equipment, and 20
years for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
clients lists and software development costs.
Goodwill and Clients Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized using the straight line method,
generally over 40 years. Clients 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. Should the Company determine 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. During 1996, the Company adopted a plan to shut down its wholly-owned
operating subsidiary, Imonics Corporation ("Imonics"), and recorded a charge of
approximately $13.0 million for the write-off of the unamortized goodwill
associated with the purchase of Imonics. 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.
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 were approximately $37.9 million
and $36.3 million in 1996 and 1995, respectively. In 1996, the Company abandoned
its reengineering program and adopted a plan to shut down Imonics and, as a
result of these actions, Medaphis wrote off approximately $85.9 million of
capitalized software costs which had no future value to the Company. The Company
recorded research and development expenses of approximately $3.2 million, $2.8
million and $4.6 million in 1996, 1995 and 1994, respectively.
Software development costs are amortized using the straight line method
over the estimated economic lives of the assets, which are generally three to
five years. Amortization expense related to the Company's capitalized software
costs totaled $6.6 million, $5.1 million and $2.9 million in 1996, 1995 and
1994, respectively.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). Effective in 1996, the Company
implemented the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123").
SFAS No. 123 requires that companies which elect to not account for stock-based
compensation as prescribed by that statement shall disclose the pro forma
effects on earnings (loss) and earnings (loss) per share as if SFAS No. 123 had
been adopted. Additionally, certain other disclosures are required with respect
to stock compensation and the assumptions used to determine the pro forma
effects of SFAS No. 123.
F-7
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL COSTS. The Company records charges for the administrative fees,
costs and expenses it anticipates incurring in conjunction with its legal
matters when management can reasonably estimate these costs.
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. In 1995 and 1996, the Company
acquired the Automation Atwork Companies ("Atwork"), Medical Management
Sciences, Inc. ("MMS"), Rapid Systems Solutions, Inc. ("Rapid Systems") and BSG
Corporation ("BSG") in merger transactions accounted for as poolings-of-
interests. Prior to the mergers, Atwork, MMS, Rapid Systems and a company
acquired by BSG prior to the merger between BSG and the Company (the "BSG
Merger") had elected "S" corporation status for income tax purposes. As a result
of the mergers (or, in the case of the company acquired by BSG, its acquisition
by BSG), such entities terminated their "S" corporation elections. Pro forma
provision (benefit) for income taxes, taken together with reported income tax
expense (benefit), presents the combined pro forma tax expense (benefit) of such
entities as if they had been "C" corporations during the periods presented.
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE. Pro forma net income (loss)
per common share is based on the weighted average number of shares of common
stock and common stock equivalents outstanding 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 (loss) per common share
or it is antidilutive. The Company's convertible subordinated debentures were
not considered common stock equivalents at issuance and are included in the
computation of fully diluted pro forma net income (loss) per common share.
F-8
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS COMBINATIONS AND DIVESTITURES
From January 1, 1994 through December 31, 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:
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
- ---------------- ------------- ----------------
(IN THOUSANDS)
Sage Communication, Inc. ("Sage")....................... * October 1996
The Medico Group, Ltd................................... * April 1996
Medical Management Computer Sciences, Inc............... * February 1996
CBT Financial Services, Inc............................. * February 1996
The Receivables Management Division of MedQuist, Inc.... $ 17,300 December 1995
The Halley Exchange, Inc. ("Halley").................... * 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
The Decision Support Group, Inc......................... * 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
- ---------------
* 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 the 1996 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 operations from the
respective dates of acquisition. The pro forma impact of the foregoing
acquisitions not presented due to the immaterial effect these acquisitions have
on the Company's results of operations for 1996 and 1995.
F-9
46
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 ACQUISITION
COMPANY ACQUIRED EXCHANGED DATE
- ---------------- --------- ----------------
Health Data Sciences Corporation ("HDS").................... 6,215,000 June 1996
BSG......................................................... 7,539,000 May 1996
Rapid Systems............................................... 1,135,000 April 1996
Intelligent Visual Computing, Inc. ("IVC").................. * February 1996
MMS......................................................... 4,000,000 December 1995
Consort Technologies, Inc. ("Consort")...................... 825,000 November 1995
Healthcare Recoveries, Inc. ("HRI")......................... 3,265,000 August 1995
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.
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. Accordingly, HDS's operating results for
the three months ended March 31, 1996 were duplicated in each of the years ended
December 31, 1996 and 1995. HDS's revenues and net income for that three-month
period were $3,758,000 and $382,000, respectively. The beginning cash and cash
equivalents balance in the accompanying 1996 consolidated statement of cash
flows does not equal the December 31, 1995 cash and cash equivalents balance as
a result of the combination, in the 1995 consolidated balance sheet, of HDS's
financial position as of March 31, 1996 with the financial position of the
Company as of December 31, 1995.
F-10
47
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 previously reported, Rapid
Systems, BSG, HDS and combined, including the pro forma provision for Rapid
Systems and BSG income taxes, is as follows:
1995 1994
--------- ----------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenue:
Medaphis, as previously reported......................... $463,321 $319,138
Rapid Systems............................................ 14,722 8,558
BSG...................................................... 69,663 49,174
HDS...................................................... 12,171 22,064
-------- --------
Combined......................................... $559,877 $398,934
======== ========
Pro forma net income (loss):
Medaphis, as previously reported......................... $ (4,680) $ 22,935
Rapid Systems............................................ 972 773
BSG...................................................... (1,045) 1,329
HDS...................................................... (3,173) 6,037
Pro forma provision for Rapid Systems and BSG income
taxes................................................. (578) (368)
-------- --------
Combined......................................... $ (8,504) $ 30,706
======== ========
Pro forma net income (loss) per common share:
Medaphis, as previously reported......................... $ (0.09) $ 0.50
======== ========
Combined................................................. $ (0.15) $ 0.51
======== ========
A summary of revenue and pro forma net income for each of the three
pooling-of-interests transactions consummated after the first quarter of 1996
for interim year-to-date periods preceding the dates of consummation are as
follows (in thousands):
INTERIM PERIOD PRO FORMA
PRECEDING NET INCOME
COMPANY ACQUIRED CONSUMMATION REVENUE (LOSS)
- ---------------- -------------- ------- -----------------
Rapid Systems................................ March 31, 1996 $ 5,248 $ (498)
BSG.......................................... March 31, 1996 19,539 2,497
HDS.......................................... March 31, 1996 3,758 382
On March 14, 1997, the Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") relating to the planned
initial public offering of 100% of the common stock of HRI. This initial public
offering is subject to review by the Commission and the marketability of HRI.
The proceeds from this offering will be used to repay borrowings under the
Second Amended and Restated Agreement (the "Second Amended Facility") (see Note
6 where discussed). Because HRI is not a reportable segment for financial
reporting purposes, the Company has not reported the financial position, results
of operations and cash flows of HRI as discontinued operations.
Medaphis also is assessing alternatives for its BSG Group (BSG, Rapid
Systems and Sage). The alternatives include, but are not limited to, seeking a
buyer, a spin-off transaction or other capital raising alternatives.
F-11
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1996 1995
------- --------
(IN THOUSANDS)
Land........................................................ $ 2,873 $ 2,873
Buildings................................................... 8,105 9,839
Furniture and fixtures...................................... 23,276 19,485
Equipment................................................... 120,731 100,866
Other....................................................... 9,766 6,055
------- --------
164,751 139,118
Less accumulated depreciation............................... 66,901 41,223
------- --------
$97,850 $ 97,895
======= ========
4. INTANGIBLE ASSETS
Intangible assets consists of the following:
1996 1995
-------- --------
(IN THOUSANDS)
Goodwill.................................................... $355,074 $361,096
Client lists................................................ 57,203 51,862
Software development costs.................................. 34,982 82,219
Other....................................................... 1,000 2,159
-------- --------
448,259 497,336
Less accumulated amortization............................... 59,226 41,725
-------- --------
$389,033 $455,611
======== ========
5. ACCRUED EXPENSES
Accrued expenses consists of the following:
1996 1995
------- -------
(IN THOUSANDS)
Accrued costs of businesses acquired........................ $ 9,904 $13,582
Funds due clients........................................... 19,207 12,757
Deferred revenue............................................ 13,858 11,590
Accrued legal costs......................................... 15,173 8,264
Accrued restructuring and severance costs................... 18,080 7,801
Interest.................................................... 985 2,917
Other....................................................... 18,473 12,618
------- -------
$95,680 $69,529
======= =======
F-12
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
-------- --------
(IN THOUSANDS)
Borrowings under Senior Credit Facility..................... $242,730 $128,000
Capital lease obligations, weighted average effective
interest rates of 7.4% and 8.4%........................... 27,810 23,670
Other....................................................... 1,187 9,576
-------- --------
271,727 161,246
Less current portion........................................ 55,975 10,681
-------- --------
$215,752 $150,565
======== ========
At December 31, 1996, the Company had a $250 million revolving credit
agreement ("the Senior Credit Facility") which was composed of a $240 million
revolving credit line and a $10 million cash management line with a six-bank
syndicate to finance future acquisitions, working capital and other general
corporate needs. The Company had the option of making "LIBOR" based loans or
"base rate" loans under the Senior Credit Facility. LIBOR based loans bore
interest at LIBOR for the then current interest period plus amounts varying from
1.25% to 1.75% based on the Company's financial performance. Base rate loans
bore interest equal to prime. At December 31, 1996, the Company had LIBOR based
loans outstanding at interest rates ranging from 6.78% to 6.90%. The Senior
Credit Facility contained, among other things, financial covenants which
required the Company to maintain certain financial ratios. The Company was in
compliance with all covenants as of December 31, 1996.
On February 4, 1997, the Company entered into the Second Amended Facility.
This agreement replaced the Senior Credit Facility and increased the revolving
line of credit to $285 million. The Second Amended Facility is composed of a
$275 million revolving line of credit and a $10 million cash management swing
loan line with lenders from a six-bank syndicate. The Second Amended Facility
effectively refinanced the loans outstanding under the Senior Credit Facility
and can be used to finance working capital and other general corporate needs.
The Second Amended Facility provides for "base rate" loans which bear interest
equal to prime plus 1% as long as certain financial covenants are met. The loan
commitments under the Second Amended Facility will reduce to $200 million and
$150 million on July 31, 1997 (unless extended by the lenders until September
30, 1997) and January 31, 1998, respectively. The Company does not and did not
expect to generate sufficient cash flow from operations to satisfy the required
reductions in debt. Management of the Company has adopted plans to divest HRI
and is seeking alternatives for the BSG Group, which management believes will
generate sufficient net proceeds to meet the reduction in the loan commitments
required by the Second Amended Facility. The Company has retained an investment
banking firm to advise it on the divestiture of HRI as well as to assist in the
evaluation of alternatives for the BSG Group. While management is confident the
Company will be able to meet its debt service obligations, there can be no
assurance that the Company will be successful in its efforts to divest HRI or
the BSG Group. If the Company is unable to dispose of HRI or the BSG Group or
through other means generate sufficient net proceeds to satisfy the required
reductions in the loan commitments, the Company's lenders can cause the
borrowings under the Second Amended Facility to become immediately due and
payable. The Second Amended Facility also contains restrictions on the Company's
ability to declare or pay cash dividends on its common stock.
As part of the consideration paid to the six-bank syndicate for the Second
Amended Facility, the Company issued the lenders warrants with vesting for 1% of
the common stock of the Company on each of January 1, 1998 and April 1, 1998.
The warrants terminate if the Company has no outstanding borrowings on the line
of credit on December 31, 1997. The Company has not allocated any value to these
warrants because management believes the Company will realize sufficient net
proceeds from the divestiture of HRI and the potential alternatives for the BSG
Group or the refinancing of any remaining borrowings under the Second
F-13
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amended Facility to enable the Company to repay all borrowings under the Second
Amended Facility by December 31, 1997.
The Second Amended Facility expires on June 30, 1998 but may be extended,
or otherwise amended, pursuant to agreement between the Company and the lenders
under the Second Amended Facility. Borrowings under the Second Amended Facility
are secured by substantially all of the Company's assets and are guaranteed by
substantially all 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, 1996 and 1995, the net book value of equipment subject to
capital leases totaled $26.6 million and $20.3 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):
1997........................................................ $ 55,975
1998........................................................ 211,403
1999........................................................ 3,306
2000........................................................ 74
2001........................................................ 69
Thereafter.................................................. 900
--------
$271,727
========
7. CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $63.4 million of 6.5% convertible subordinated
debentures to finance the acquisition of CompMed, Inc. The debentures were due
on January 1, 2000. The debenture holders had the right to convert the
debentures into shares of the Company's common stock at a conversion price of
$14.00 per share. In 1995, the 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 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 for 1995, 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 $25.6
million, $22.4 million and $13.3 million for the years ended December 31, 1996,
1995 and 1994, respectively.
F-14
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
1997........................................................ $ 26,019
1998........................................................ 24,087
1999........................................................ 21,497
2000........................................................ 10,367
2001........................................................ 6,566
Thereafter.................................................. 15,336
--------
$103,872
========
9. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
Current:
Federal........................................... $ 634 $ 66 $ 264
State............................................. 2,533 1,795 439
Deferred:
Federal........................................... (63,137) 413 13,977
State............................................. (8,948) (928) 1,988
Foreign........................................... 146 -- --
Valuation allowance................................. (189) 441 (513)
-------- ------- --------
Income tax expense (benefit)........................ (68,961) 1,787 16,155
Pro forma adjustments for income taxes.............. (979) 3,389 1,817
-------- ------- --------
$(69,940) $ 5,176 $ 17,972
======== ======= ========
In 1995 and 1996, the Company acquired Atwork, Consort, MMS, IVC, Rapid
Systems and BSG in merger transactions accounted for as poolings-of-interests.
Prior to the mergers, Atwork, Consort, MMS, IVC, Rapid Systems and a company
acquired by BSG prior to the BSG Merger had elected "S" corporation status for
income tax purposes. As a result of the 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 in the consolidated statements of
operations as if each of these entities had been a "C" corporation during the
periods presented.
A reconciliation between the amount determined by applying the federal
statutory rate to income before income taxes and income tax expense is as
follows:
1996 1995 1994
-------- ------- --------
(IN THOUSANDS)
Income tax expense at federal statutory rate........ $(67,753) $(1,342) $ 17,037
State taxes, net of federal benefit................. (7,074) 361 2,475
Nondeductible goodwill amortization................. 1,491 1,298 380
Nondeductible deal costs of business combinations... 3,314 5,623 --
Other items not deductible for tax purposes......... 1,051 371 272
Research and development tax credits................ -- -- (596)
Valuation allowance................................. (189) 441 (513)
Foreign............................................. 146 -- --
Other............................................... (926) (1,576) (1,083)
-------- ------- --------
$(69,940) $ 5,176 $ 17,972
======== ======= ========
F-15
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996 and 1995
are as follows:
1996 1995
-------- --------
(IN THOUSANDS)
Net operating loss carryforwards............................ $122,424 $ 58,888
Research and development credits............................ -- 1,078
Valuation allowance......................................... (18,334) (18,310)
Accounts receivable......................................... (40,125) (31,841)
Depreciation and amortization............................... (15,318) (37,674)
Accrued expenses............................................ 34,268 21,166
Other deferred tax liabilities.............................. (4,359) (6,806)
-------- --------
$ 78,556 $(13,499)
======== ========
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 1996 relates
primarily to the finalization of the purchase price allocation of an entity
acquired in 1995.
As of December 31, 1996, the Company had federal net operating loss
carryforwards for income tax purposes of approximately $315 million which expire
at various dates between 1997 and 2011. The Internal Revenue Code of 1986, as
amended, 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 ("NOLs"), the Company has approximately $250 million in
cumulative unutilized NOLs available in 1997. In future years, currently
unavailable NOLs will become available to offset income prior to the date of
their expiration. Management expects to utilize a significant portion of the
currently available NOLs with the anticipated taxable gain from the divestiture
of HRI. As of December 31, 1996, the Company has recorded a deferred tax asset
of $78.6 million reflecting primarily the benefit of $122.4 million in loss
carryforwards. Realization is dependent on generating sufficient taxable income
prior to expiration of the loss carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced if estimates of future taxable income
during the carryforward period are reduced.
10. CAPITAL STOCK
On May 1, 1996, 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 100 million to 200 million shares.
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.
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.
Prior to the BSG Merger, 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
F-16
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the BSG Merger 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.
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, a Non-Qualified Stock Option Plan for Non-executive Employees and
several stock option plans assumed as a result of the BSG Merger (collectively
the "Stock Option Plans"). Granted options expire 10 to 11 years after the date
of grant and generally vest over a three-to-five-year period. In connection with
the BSG Merger, the Company 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.
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.
The Company has a Senior Executive Non-Qualified Stock Option Plan which
permits certain of the Company's former 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, 1996, 347,960 options
issued under this plan have been exercised (117,960 during 1996 and zero during
1995).
F-17
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity related to the Stock Option Plans is summarized as follows:
1996 1995 1994
------------------------- ------------------------- -------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------ ----------------
Options outstanding as of
January 1.................. 9,559 $12.27 6,447 $ 8.38 5,680 $ 6.46
Granted...................... 7,021 11.56 4,109 17.75 1,730 12.95
Canceled..................... (3,947) 22.17 (440) 7.79 (378) 8.70
Exercised.................... (1,536) 7.95 (557) 11.24 (585) 3.02
------ ------- ----- ------- ----- -------
Options outstanding as of
December 31................ 11,097 $ 8.91 9,559 $12.27 6,447 $ 8.38
====== ======= ===== ======= ===== =======
Options exercisable as of
December 31................ 3,022 2,620 1,927
====== ===== =====
Weighted-average fair value
of options granted during
the year................... $ 4.18 $2.87
====== =====
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE AT
DECEMBER 31, REMAINING WEIGHTED- DECEMBER 31,
1996 CONTRACTUAL AVERAGE 1996 WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------ -------------- ----------- -------------- -------------- ----------------
$0.08 to $7.75................... 2,655 7.42 $ 3.32 1,499 $ 3.13
$8.25 to $8.50................... 3,795 10.88 8.50 6 8.33
$8.70 to $13.50.................. 3,534 8.27 9.83 1,110 9.69
$13.56 to $21.06................. 627 7.97 14.18 259 14.30
$21.75 to $52.01................. 486 9.76 29.08 148 25.25
------ ----- ------ ----- -------
$0.08 to $52.01.................. 11,097 9.00 $ 8.91 3,022 $ 7.55
====== ===== ====== ===== =======
On October 25, 1996, the Company changed the exercise price of
approximately 2.0 million of its then outstanding stock options which had an
exercise price of $15 or greater. These options have a new exercise price of
$9.875. No other terms of these options were changed.
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 stockholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value common stock to certain executive
officers who have since resigned from 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 the Restricted Plan have vested.
In 1996, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Reengineering, Consolidation and Business
Improvement Cash Incentive Plan ("Reengineering Incentive Plan") and the Company
granted 155,749 units pursuant to the provisions of the plan to certain key
employees of the Company. The Reengineering Incentive Plan provides for the
payment of cash bonuses to participants if certain performance goals related to
the Company's reengineering 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 Reengineering Incentive Plan
F-18
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Reengineering
Incentive Plan, to the extent they remain unvested, terminate on December 31,
1997. Because of the Company's decision to abandon the reengineering program,
certain of the performance goals and milestones will not be met prior to
December 31, 1997, therefore all grants pursuant to the Reengineering Incentive
Plan will terminate unvested.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted with an exercise price equal to the quoted market price of the
Company's common stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the fair value of each option grant and stock based award has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1996 1995
----- -----
Expected life (years)....................................... 4.16 3.84
Risk-free interest rate..................................... 5.06% 6.18%
Dividend rate............................................... 0.00% 0.00%
Expected volatility......................................... 48.83% 18.81%
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's pro forma net loss and
pro forma loss per share would have increased to the following pro forma
amounts:
1996 1995
--------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Pro forma net loss:
As reported -- pro forma for income taxes................. $(123,642) $(8,504)
Pro forma -- for SFAS No. 123............................. $(126,659) $(9,538)
Pro forma net loss per share:
As reported -- pro forma for income taxes................. $ (1.74) $ (0.15)
Pro forma -- for SFAS No. 123............................. $ (1.78) $ (0.17)
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
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 $3.5 million, $3.3 million and $1.9 million for the
years ended December 31, 1996, 1995 and 1994, 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 $1.2 million in 1996, $1.0
million in 1995 and $0.7 million in 1994.
F-19
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
Restructuring charges....................................... $ 14,076 $15,000 $ --
Software abandonment........................................ 86,088 1,800 --
Property and equipment impairment........................... 35,592 5,000 --
Intangible asset impairment................................. 13,048 -- 1,905
Legal costs................................................. 12,800 12,000 --
Pooling charges............................................. 8,953 11,700 --
Severance costs............................................. 3,913 5,000 --
Other....................................................... 5,298 4,450 --
-------- ------- ------
$179,768 $54,950 $1,905
======== ======= ======
Restructuring Charges. In 1995, Management approved a restructuring plan
relating to the consolidation of the Company's data processing function in its
wholly owned operating subsidiary, Medaphis Physician Services Corporation
("MPSC"). The Company recorded a reserve for the exit costs associated with the
restructuring plan of approximately $15.0 million.
During 1996, the Company revised its original plan of consolidating into
ten regional information processing centers ("IPCs") and reduced these reserves
by approximately $1.8 million. The Company has adopted a plan to downsize
certain of the existing IPCs and the costs associated with exiting these
facilities will be charged against the restructuring reserves established in
1995. The Company also incurred approximately $5.2 million of costs which were
related to MPSC's reengineering and consolidation project which had not
previously been accrued.
Also during 1996, the Company restructured its client/server system
integration businesses and consolidated Rapid Systems into BSG and adopted a
plan to shut down Imonics. In connection with this restructuring, the Company
recorded charges of approximately $3.0 million for the costs associated with the
termination of certain leases, approximately $6.5 million for severance costs
for all notified employees of Imonics and approximately $1.2 million for other
exit activities.
Software Abandonment. In June 1996, the Company began a comprehensive
assessment of the reengineering program for the Company's Services division
which was begun in 1994. The comprehensive review was completed and management
came to the conclusion that it was not cost effective to continue the
development and deployment of the software and technology upon which the
reengineering program was based and that the reengineering software and
technology had no alternative useful application in the Company's operations. In
connection with abandonment of its reengineering program and the shutdown of
Imonics, the Company abandoned certain software development projects and
recorded charges for the write-off of approximately $86.1 million of capitalized
software development costs related to these projects.
In connection with the Halley acquisition in 1995, 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.
Property and Equipment Impairment. In connection with the abandonment of
the reengineering project and the shutdown of Imonics in 1996 and the
restructuring of MPSC in 1995, the Company assessed the recoverability of
certain of its long lived assets and recorded impairment losses of approximately
$35.6 million and $5.0 million in 1996 and 1995, respectively.
Intangible Asset Impairment. In 1996, the Company adopted a plan to shut
down Imonics and recorded a charge of approximately $13 million for the
write-off of the unamortized goodwill associated with the purchase of Imonics.
In 1994, a charge of approximately $1.9 million, associated with the write-off
of a non-
F-20
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Legal Costs. In 1996, the Company recorded a charge of $5.0 million for
the administrative fees, costs and expenses it anticipates incurring in
connection with various putative class action lawsuits which have been filed
since August 14, 1996 against the Company and certain of its former officers,
one of whom was also a director. The Company also accrued $4.6 million for the
legal costs and other fees the Company has or plans to incur in connection with
the turnaround effort undertaken by the new management team and various other
legal matters.
The Company recorded charges of $2.0 million and $12.0 million in 1996 and
1995, respectively, for the administrative fees, costs and expenses it
anticipates incurring in connection with the Federal Investigation (as defined
in Note 14) and various putative class action lawsuits which are based on the
Federal Investigation. In 1996, the Company reached an agreement in principle to
settle the class action lawsuits which are based on the Federal Investigation
for $4.75 million. Also in 1996, the Company has recorded a $1.2 million charge
for its portion of this settlement (the Company expects the remainder of the
settlement to be funded by insurance) (See Note 14 for more detail on the
Federal investigation and the settlement of the lawsuits).
Pooling Charges. In connection with the following mergers, the Company
incurred transaction fees, costs and expenses. In accordance with the
requirements of pooling-of-interests accounting, these costs have been reflected
in the operating results for 1996 and 1995.
1996 1995
------ -------
(IN THOUSANDS)
Atwork...................................................... $ (430) $ 6,000
HRI......................................................... (778) 2,000
Consort..................................................... (529) 1,200
MMS......................................................... (845) 2,500
IVC......................................................... 169 --
Rapid Systems............................................... 584 --
BSG......................................................... 6,094 --
HDS......................................................... 4,688 --
------ -------
$8,953 $11,700
====== =======
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $0.9 and
$5.0 million in 1996 and 1995, respectively, 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. Also, in
1996 the Company recorded a charge of $3.0 million for severance costs
associated with former executive management.
Other Costs. During 1996, the Company canceled an initiative to develop an
on-line practice management system. The Company recorded a charge of
approximately $2.0 million relating to the deferred costs associated with this
project. The Company also accrued $1.3 million for certain liabilities
associated with the Company's billing and accounts receivable management
services operations. In addition, the Company also recorded a charge of
approximately $2.0 million for miscellaneous asset write-offs.
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. In addition,
in 1995 the Company recorded a charge of $750,000 for certain amounts paid to
the former owners of an acquired company.
During the fourth quarter of 1996, the Company recorded charges of $138.6
million related to the abandonment of the reengineering program, the shut down
of Imonics and other charges as discussed above.
F-21
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for both the restructuring of Imonics
and MPSC are as follows:
1995 COSTS RESERVE COSTS RESERVE
INITIAL APPLIED BALANCE APPLIED BALANCE
RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31,
CHARGE RESERVE 1995 ADJUSTMENTS RESERVES 1996
------- ------- ------------ ----------- -------- ------------
Lease termination costs......... $ 6,726 $ (736) $ 5,990 $ 5,017 $ (3,493) $ 7,514
Incremental costs associated
with discontinued client
contracts..................... 5,488 (797) 4,691 (2,690) (2,001) --
Severance....................... -- -- -- 6,541 (3,793) 2,748
Other........................... 2,823 (1,035) 1,788 5,208 (5,774) 1,222
------- ------- ------- ------- -------- -------
$15,037 $(2,568) $12,469 $14,076 $(15,061) $11,484
======= ======= ======= ======= ======== =======
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 search 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 charges of $12 million in the third quarter of 1995 and $2
million in the fourth quarter of 1996 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 which were
filed following the Company's announcement of the Federal Investigation. The
charges are intended to cover only the anticipated expenses of the Federal
Investigation and the related lawsuits and do 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 current and former 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' public statements and 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 defendant's
motion to dismiss the Consolidated Complaint. 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 1933 Act 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 plaintiffs and the defendants have reached an agreement in principle
to settle this action on a class-wide basis for $4.75 million, subject to court
approval and other customary conditions (the "1995 Class Action Settlement").
The 1995 Class Action Settlement would also include the related putative class
action lawsuit currently pending in the Superior Court of Cobb County,
F-22
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Georgia, described more fully below. The Company expects to receive
approximately $3.7 million from insurance to fund a portion of the 1995 Class
Action Settlement and accrued approximately $1.2 million in the quarter ending
December 31, 1996 to fund the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto.
On November 5, 1996, Medaphis, Randolph G. Brown, Michael R. Cote and James
S. Douglass were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of Georgia securities laws based on the same public
statements and filings generally described above. The lawsuit is brought on
behalf of a putative class of purchasers of Medaphis Common Stock during the
period from March 29, 1995 through June 15, 1995. The plaintiffs seek
compensatory damages and costs. As noted above, it is currently contemplated
that this action will be settled as part of the 1995 Class Action Settlement.
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In March 1997, the Company was informed by the
Civil Division of the Department of Justice that it is investigating allegations
concerning the Company's Gottlieb's Financial Services, Inc. ("GFS") subsidiary.
No subpoenas or other process have been issued to the Company or to GFS in
connection with the investigation. There can be no assurance that this matter
will be resolved promptly, that subpoenas will not be received by Medaphis or
that the investigation will not have a material adverse effect upon Medaphis.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its current and former
officers, one of whom was also a director, were named as defendants in nineteen
putative shareholder class action lawsuits filed in the United States District
Court for the Northern District of Georgia. On November 22, 1996, the plaintiffs
in these lawsuits filed a Consolidated Amended Class Action Complaint (the "1996
Consolidated Complaint"). In general, the 1996 Consolidated Complaint alleges
violations of the federal securities laws in connection with Medaphis' filings
under the federal securities acts and public disclosures. The 1996 Consolidated
Complaint is brought on behalf of a class of all persons who purchased or
otherwise acquired Medaphis Common Stock between January 6, 1996 and October 21,
1996. The 1996 Consolidated Complaint also asserts claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. On December 30, 1996, the defendants filed a
motion to dismiss most of the 1996 Consolidated Complaint. On February 3, 1997,
the plaintiffs filed a Consolidated Second Amended Complaint. On February 14,
1997, the defendants moved to dismiss the Consolidated Second Amended Complaint
in its entirety.
On November 1, 1996, Thomas W. Brown, Administrator, Thomas W. Brown Profit
Sharing Plan filed a shareholder derivative lawsuit in the United States
District Court for the Northern District of Georgia alleging that certain of
Medaphis' current and former directors breached their fiduciary duties, were
grossly negligent, and breached various contractual obligations to Medaphis by
allegedly failing to implement and maintain an adequate system of internal
accounting controls, allowing Medaphis to commit securities law violations and
damaging Medaphis' reputation. The plaintiff seeks compensatory damages and
costs. On January 28, 1997, Medaphis and certain individual defendants filed a
motion to dismiss the complaint. On February 11, 1997, the plaintiff filed an
amended complaint adding as defendants additional current and former directors
and officers of Medaphis. Medaphis has not yet responded to the amended
complaint.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of HDS. The plaintiff seeks rescissory, compensatory and
punitive damages, rescission, injunctive relief and costs. On January 10, 1997,
the defendants filed a demurrer to the complaint. The
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60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
demurrer was denied on February 5, 1997. On March 18, 1997, the court denied the
plaintiff's motion for a preliminary injunction. As a result of the Company's
restatement of its fiscal 1995 financial statements, the Company may not be able
to sustain a defense to strict liability on certain claims under the 1933 Act,
but the Company believes that it has substantial defenses to the alleged damages
relating to the 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG common stock were converted to Medaphis
stock options in connection with Medaphis' acquisition of BSG. The plaintiffs
allege failure to perform diligence, breaches of fiduciary duties of candor,
loyalty and fair dealing and negligence against the BSG defendants (Papermaster,
Pickering, Lundeen, Smith, Noorda and Grosh) and fraud and deceit against the
Medaphis defendants (Medaphis and Brown).
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control made a demand for indemnification under an indemnification
agreement executed by Medaphis in connection with its acquisition of BSG in May
1996. On the date of the demand, Mr. Papermaster was an executive officer and a
director of Medaphis. Mr. Papermaster resigned such positions on March 21, 1997,
although he remains a director and executive officer of BSG. The indemnification
demand claims damages of $35 million (the maximum damages payable by Medaphis
under the indemnification agreement) for the alleged breach by the Company of
its representations and warranties made in the merger agreement between Medaphis
and BSG. The Company believes it has meritorious defenses to the indemnification
claim.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it is conducting a non-public
investigation into, among other things, certain trading and other issues related
to Medaphis' August 14, 1996 and October 22, 1996 announcements of the Company's
loss for the quarter ending September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996.
The Company intends to cooperate fully with the Commission in its investigation.
Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against, and written demands
placed upon, the Company, there can be no assurance that additional lawsuits
will not be filed against the Company, that the lawsuits, the written demands
and the pending governmental investigations will not have a disruptive effect
upon the operations of the business, that the written demands, the defense of
the lawsuits and the pending investigations will not consume the time and
attention of the senior management of the Company and that the resolution of the
lawsuits, the written demands and the pending governmental investigations will
not have a material adverse effect upon the Company.
F-24
61
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:
1996 1995 1994
------- ------- --------
(IN THOUSANDS)
Non-cash investing and financing activities:
Liabilities assumed in acquisitions................ $ 3,436 $11,454 $108,781
Additions to capital lease obligations............. 15,705 17,646 5,356
Common stock issued in conjunction with
acquisitions.................................... -- 459 38,796
Cash paid for:
Interest (net of amounts capitalized of $4,092,
$2,359 and $0 for 1996, 1995 and 1994,
respectively)................................... 14,762 11,129 6,796
Income taxes....................................... 7,314 3,155 517
16. LINES OF BUSINESS
The Company operates in three major lines of business: Services (providing
healthcare business management services to physicians, hospitals and payors),
BSG Group (client/server information technology services) and HIT (healthcare
information technology and hardware sales). 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 income taxes, deferred financing costs, fixed assets,
and miscellaneous prepaids and receivables. Information concerning operations in
these lines of business is as follows:
1996 1995 1994
--------- -------- --------
Revenue:
Services............................................ $ 415,328 $402,467 $291,536
BSG Group........................................... 113,988 98,615 57,732
HIT................................................. 81,646 60,521 50,387
Corporate and eliminations.......................... (2,649) (1,726) (721)
--------- -------- --------
$ 608,313 $559,877 $398,934
========= ======== ========
Operating profit (loss) (1):
Services............................................ $ 14,454 $ 52,136 $ 47,979
BSG Group........................................... (14,982) 5,249 1,885
HIT................................................. 25,649 15,024 13,342
Corporate and eliminations.......................... (27,350) (11,231) (6,697)
--------- -------- --------
$ (2,229) $ 61,178 $ 56,509
========= ======== ========
Interest expense, net................................. $ 11,585 $ 10,062 $ 5,926
Restructuring and other charges:
Services............................................ $ 97,692 $ 47,000 $ 1,905
BSG Group........................................... 60,882 -- --
HIT................................................. 3,957 7,950 --
Corporate........................................... 17,237 -- --
--------- -------- --------
179,768 54,950 1,905
--------- -------- --------
Income (loss) before income taxes..................... $(193,582) $ (3,834) $ 48,678
========= ======== ========
F-25
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 1995 1994
--------- -------- --------
Identifiable Assets:
Services............................................ $ 594,738 $628,522 $521,102
BSG Group........................................... 51,972 70,807 48,282
HIT................................................. 84,298 86,029 55,142
Corporate........................................... 84,616 10,248 2,625
--------- -------- --------
$ 815,624 $795,606 $627,151
========= ======== ========
Depreciation and amortization:
Services............................................ $ 32,498 $ 22,015 $ 14,606
BSG Group........................................... 7,980 5,842 1,974
HIT................................................. 6,135 4,153 3,356
Corporate........................................... 1,679 525 185
--------- -------- --------
$ 48,292 $ 32,535 $ 20,121
========= ======== ========
Capital expenditures:
Services............................................ $ 31,432 $ 34,648 $ 9,799
BSG Group........................................... 13,376 12,927 2,271
HIT................................................. 3,204 1,847 267
Corporate........................................... 3,123 1,564 726
--------- -------- --------
$ 51,135 $ 50,986 $ 13,063
========= ======== ========
- ---------------
(1) Excludes restructuring and other charges and interest expense.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 (AS PREVIOUSLY REPORTED)
Revenue........................................... $163,627 $175,193 $126,731 $ 142,937
Pro forma net income (loss)....................... 13,079 3,337 (36,370) (103,688)
Pro forma net income (loss) per common share...... $ 0.17 $ 0.04 $ (0.51) $ (1.45)
Weighted average shares outstanding............. 75,704 75,006 71,665 71,695
1996 (AS RESTATED)
Revenue........................................... $162,249 $169,719 $132,874 $ 143,471
Pro forma net income (loss)....................... 11,013 (3,097) (31,502) (100,056)
Pro forma net income (loss) per common share...... $ 0.15 $ (0.04) $ (0.44) $ (1.40)
Weighted average shares outstanding............. 75,704 71,167 71,665 71,695
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
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors (the "Audit Committee") in March 1997 prior
to completion of the audit process for the Company's 1996 fiscal year,
information was developed that certain revenues and expenses may have been
recorded incorrectly between certain quarters during 1996. At the conclusion of
the review, the Company determined that there were certain accounting errors and
irregularities and that its interim financial statements for each fiscal quarter
of 1996 required restatement as set forth herein. These errors and
irregularities
F-26
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consisted primarily of the following: (1) incorrect quarterly recording of
revenues and the related costs and expenses for certain contracts; (2) incorrect
quarterly recording of certain liabilities for employee bonuses and related
expenses; (3) certain costs and expenses of certain acquired companies, which
were later determined not to be properly recordable, were recognized by those
companies in periods prior to their acquisitions, resulting in an overstatement
of the Company's earnings subsequent to those acquisitions; and (4) incorrect
depreciation of certain assets related to the Company's comprehensive
reengineering and consolidation project.
The Company has determined that all appropriate adjustments have been made
to its interim financial statements and that its consolidated financial
statements, taken as a whole, present fairly in all material respects the
Company's financial position, results of operations and cash flows for its
fiscal year ended December 31, 1996 in conformity with generally accepted
accounting principles. All adjustments were for inter-period transactions and
had no effect on the Company's 1996 annual proforma net loss as previously
reported and as set forth herein.
F-27
64
MEDAPHIS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONS
-----------------------
CHARGED
BALANCE AT CHARGED TO TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts..... $6,225 $16,657 $ -- $(9,622)(2) $13,260
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts..... $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
- ---------------
(1) Represents the allowance recorded in conjunction with acquired companies.
(2) Represents write-off of uncollectible accounts receivable.
F-28