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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-19480
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MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive
offices)
(770) 444-5300
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
SHARES OUTSTANDING
TITLE OF CLASS AT AUGUST 8, 1997
- -------------- ------------------
Common Stock $0.01 Par Value........................... 72,905,294 Shares
Non-voting Common Stock $0.01 Par Value................ 0 Shares
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MEDAPHIS CORPORATION
FORM 10-Q
JUNE 30, 1997
PAGE
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Part I: FINANCIAL INFORMATION
Consolidated Statements of Operations for the three and
six months ended June 30, 1997 and 1996................ 1
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996...................................... 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996........................... 3
Notes to Consolidated Financial Statements................ 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
Part II: OTHER INFORMATION
Legal Proceedings......................................... II-1
Changes in Securities..................................... II-4
Submission of Matters to a Vote of Security Holders....... II-5
Other Information......................................... II-5
Exhibits and Reports on Form 8-K.......................... II-6
Index to Exhibits......................................... II-9
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THIS FORM 10-Q 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 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FIFTEEN 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 99.1 TO THIS FORM 10-Q, AND ARE
HEREBY INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------------- -------- --------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 7) SEE NOTE 7)
Revenue......................................... $147,970 $169,719 $295,516 $331,968
-------- -------- -------- --------
Salaries and wages.............................. 92,386 95,222 185,964 186,952
Other operating expenses........................ 37,781 39,889 78,023 79,224
Depreciation.................................... 7,050 6,840 14,035 12,780
Amortization.................................... 4,665 5,108 9,355 10,217
Interest expense, net........................... 6,056 2,630 12,171 4,735
Restructuring and other charges................. 2,000 16,889 2,000 16,831
-------- -------- -------- --------
Total expenses........................ 149,938 166,578 301,548 310,739
Income (loss) before income taxes and
extraordinary item............................ (1,968) 3,141 (6,032) 21,229
Income tax (benefit) expense.................... (1,720) 6,238 (3,945) 13,667
-------- -------- -------- --------
Income (loss) before extraordinary item......... (248) (3,097) (2,087) 7,562
Extraordinary income on sale of HRI, net of
tax........................................... 76,391 -- 76,391 --
-------- -------- -------- --------
Net income (loss)..................... 76,143 (3,097) 74,304 7,562
Pro forma income tax adjustments................ -- -- -- 354
-------- -------- -------- --------
Pro forma net income (loss)........... $ 76,143 $ (3,097) $ 74,304 $ 7,916
======== ======== ======== ========
Pro forma net income (loss) per common share:
Pro forma net income (loss) before
extraordinary item......................... $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI........... 1.01 -- 1.02 --
-------- -------- -------- --------
Pro forma net income (loss)................... $ 1.01 $ (0.04) $ 0.99 $ 0.11
======== ======== ======== ========
Weighted average shares outstanding............. 75,149 71,167 74,983 74,786
======== ======== ======== ========
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
Current Assets:
Cash...................................................... $ 3,958 $ 7,631
Restricted cash........................................... 16,059 19,568
Accounts receivable, billed............................... 100,651 99,823
Accounts receivable, unbilled............................. 90,409 94,057
Deferred tax asset........................................ -- 36,177
Other..................................................... 12,086 12,129
-------- --------
Total current assets.............................. 223,163 269,385
Property and equipment...................................... 87,756 97,850
Deferred tax asset.......................................... 55,535 42,379
Intangible assets........................................... 379,895 389,033
Other....................................................... 19,188 16,977
-------- --------
$765,537 $815,624
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 11,880 $ 11,765
Accrued compensation...................................... 29,786 30,332
Accrued expenses.......................................... 76,752 95,680
Current portion of long-term debt......................... 150,224 55,975
Deferred tax liability.................................... 9,312 --
-------- --------
Total current liabilities......................... 277,954 193,752
Long-term debt.............................................. 8,993 215,752
Other obligations........................................... 8,215 13,830
-------- --------
Total liabilities................................. 295,162 423,334
-------- --------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized in 1997;
none issued............................................ -- --
Common stock, voting, $0.01 par value, 200,000 authorized
in 1997 and 1996; issued and outstanding 72,503 in 1997
and 71,705 in 1996..................................... 725 717
Common stock, non voting, $0.01 par value, 600 authorized
in 1997 and 1996; none issued.......................... -- --
Paid-in capital........................................... 526,187 522,491
Accumulated deficit....................................... (56,537) (130,749)
-------- --------
470,375 392,459
Less treasury stock, at cost -- 16 shares in 1996......... -- 169
-------- --------
Total stockholders' equity........................ 470,375 392,290
-------- --------
$765,537 $815,624
======== ========
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
-------- -------------
(AS RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 74,304 $ 7,562
Adjustments to reconcile net income (loss) to net cash
(used for) provided by operating activities:
Depreciation and amortization.......................... 23,390 22,997
Gain on sale of HRI.................................... (76,391) --
(Gain) loss on sale of property and equipment.......... (34) 343
Deferred income taxes.................................. (3,078) 13,666
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash.......................... (10,449) (958)
Increase in accounts receivable, billed.............. (3,148) (27,513)
Decrease (increase) in accounts receivable,
unbilled............................................ 3,647 (17,842)
Increase (decrease) in accounts payable.............. 828 (16,190)
Increase in accrued compensation..................... 1,602 1,472
Decrease in accrued expenses......................... (13,248) (6,173)
Other, net........................................... (3,024) 1,172
-------- -------
Net cash used for operating activities............ (5,601) (21,464)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired........................ (5,768) (12,737)
Purchases of property and equipment....................... (7,692) (34,541)
Proceeds from sale of HRI, net............................ 126,375 --
Proceeds from sale of property and equipment.............. 3,644 18
Software development costs................................ (2,877) (26,382)
-------- -------
Net cash provided by (used for) investing
activities...................................... 113,682 (73,642)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 3,651 9,673
Proceeds from borrowings.................................. 42,492 96,749
Principal payments of long-term debt...................... (154,889) (25,612)
Other..................................................... (3,008) 3,813
-------- -------
Net cash (used for) provided by financing
activities...................................... (111,754) 84,623
-------- -------
CASH:
Net change................................................ (3,673) (10,483)
Balance at beginning of period............................ 7,631 18,979
-------- -------
Balance at end of period.................................. $ 3,958 $ 8,496
======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest............................................... $ 7,128 $ 7,005
Income taxes........................................... 1,125 5,684
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.................... -- 2,700
Additions to capital lease obligations................. -- 12,620
Common stock issued upon conversion of subordinated
debentures............................................ -- 63,375
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1996 included in the Company's Annual Report on Form 10-K filed
March 31, 1997 ("Form 10-K").
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
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, liabilities, revenues
and expenses. Actual results could differ from those estimates.
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. On
March 31, 1997, the Company's independent auditors noted in a modifying fourth
paragraph to their unqualified independent report on the Company's financial
statements included in the Form 10-K that, because the Company's plans to divest
of certain assets to generate funds to meet scheduled 1997 amortization
requirements did not then include binding contracts to dispose of these assets,
and because no other contractual arrangements were in place to refinance or
raise additional funds to otherwise satisfy such required debt reduction,
substantial doubt was raised about the Company's ability to continue as a going
concern. As previously discussed in the Company's Form 10-K, the Company and its
current lenders contemplated that the contractual amortization of loan
commitments under the Second Amended and Restated Loan Facility (the "Second
Amended Facility") would be accomplished through asset divestitures or a
refinancing since operating cash flow was never intended to be utilized for this
purpose and would be insufficient to meet these obligations. On May 28, 1997,
Medaphis reduced the Company's loan commitment under the Second Amended Facility
to $170 million, which more than satisfied the required loan commitment
reduction for July 31, 1997.
The Company's consolidated financial statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that may be necessary should the Company, contrary to plans and
expectations, be unable to continue as a going concern.
2. LONG-TERM DEBT
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement and increased
the revolving line of credit from $250 million to $285 million. The Second
Amended Facility matures on June 30, 1998 and, as such, all amounts outstanding
under the Second Amended Facility have been classified as current in the
accompanying June 30, 1997 balance sheet. The Second Amended Facility 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
Company's previous 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, capital expenditures and the Company's
ability to declare or pay cash dividends on its common stock. The Second Amended
Facility provides for "base rate" loans that bear interest equal to prime plus
1% as long as certain financial covenants are met. The Second Amended Facility
required mandatory loan commitment reductions to $200 million and $150 million
on July 31, 1997 and January 31,
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
1998, respectively. 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 had adopted a plan to divest
Healthcare Recoveries, Inc. ("HRI") and to evaluate alternatives for its
client/server integration businesses (the "BSG Group"). On May 28, 1997, the
Company was successful in divesting HRI through an initial public offering of
100% of its stock. This sale generated approximately $115 million of net
proceeds that were used to reduce the Company's borrowings under the Second
Amended Facility and it also reduced the loan commitment under the Second
Amended Facility to $170 million, which more than satisfied the required
reduction for July 31, 1997. At June 30, 1997, the Company had $137 million in
borrowings outstanding under the Second Amended Facility that bore interest at
9.5%.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of the voting common stock (the "Common
Stock") of the Company on each of January 1, 1998 and April 1, 1998, provided
that the Second Amended Facility has not been repaid and terminated prior to
such vesting dates. The Company has not allocated any value to these warrants
because the warrants only vest if amounts are outstanding or commitments are not
terminated under the Second Amended Facility on December 31, 1997. Management
believes the Company will generate sufficient cash flows from the refinancing of
the Second Amended Facility or from asset sales to repay all borrowings under
and terminate the Second Amended Facility by December 31, 1997.
3. LEGAL MATTERS
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.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Although the
precise scope of the 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 billing and collection
practices in the Designated Offices. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance that the
investigation will be resolved promptly, that additional subpoenas or search
warrants will not be received by Medaphis or MPSC or that the investigation will
not have a material adverse effect on 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 administrative fees, costs and expenses it anticipates
incurring in connection with the investigation and the putative class action
lawsuits described below which were filed in 1995 following the Company's
announcement of the investigation. The charges are intended to cover only the
anticipated expenses of the 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 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
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
"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 Securities Act of 1933, as amended (the "1933
Act"), and the Company's underwriters and outside directors are no longer named
as defendants. The plaintiffs and the defendants have reached an agreement to
settle this action on a class-wide basis for $4.75 million, subject to court
approval (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
court conditionally has certified a class for settlement purposes and has
scheduled a hearing for October 6, 1997 to determine whether to approve the
settlement and enter final judgment dismissing the action with prejudice. The
Company has reached agreement with one of its directors and officers' liability
insurance carriers to fund $3.7 million of the 1995 Class Action Settlement. The
Company 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
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. Plaintiffs seek
compensatory damages and costs. To date, defendants have not been served with
this complaint. Pursuant to the consummation of the 1995 Class Action
Settlement, the claims in this state action also will be settled. Pursuant to
the settlement agreement, plaintiffs have filed a motion to dismiss this action
without prejudice.
As originally disclosed in the Form 10-K, the Company learned in March 1997
that the government is investigating allegations concerning the Company's wholly
owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993, Medaphis
acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual revenue. During that year, GFS processed approximately 5.6
million claims, approximately 2 million of which were made to government
programs. The government has requested that GFS voluntarily produce records, and
GFS is complying with that request. Although the precise scope and subject
matter of the investigation are not known, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for administrative fees, costs and expenses in connection with the
investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
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.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then 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. On February 3, 1997, the plaintiffs filed a Consolidated
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Second Amended Complaint (the "Consolidated Second Amended Complaint"). In
general, the Consolidated Second Amended Complaint alleges violations of the
federal securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between January 6, 1996 and October 21, 1996. The
Consolidated Second Amended 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 Health Data Sciences Corporation ("HDS"). On
February 14, 1997, the defendants moved to dismiss the Consolidated Second
Amended Complaint in its entirety. On May 27, 1997, the court denied defendants'
motion to dismiss. Discovery currently is proceeding. 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 such 1933 Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (payable
by the Company's insurance carriers), 3,355,556 shares of Medaphis Common Stock,
and warrants to purchase 5,309,523 shares of Medaphis Common Stock at $12 per
share for a five-year period. The Memorandum of Understanding also includes: (i)
an obligation on the part of Medaphis to contribute up to 600,000 additional
shares of Common Stock to the settlement under certain conditions if the
aggregate value of the Medaphis Common Stock proposed to be issued in the
settlement falls below $30.2 million during a specified time period; and (ii)
certain anti-dilution rights to plaintiffs with respect to certain future
issuances of shares of Medaphis Common Stock or warrants or rights to acquire
Medaphis Common Stock to settle existing civil litigation and claims currently
pending against the Company, subject to a 5.0 million share basket below which
there will be no dilution adjustments. The Memorandum of Understanding also
contains other customary terms and conditions including, but not limited to,
consent and approval of the Company's insurance carriers and the insurance
carriers' payment of the cash portion of the settlement, the Company's receiving
assurances from its independent accountants that the treatment of class members
in connection with the proposed settlement will not jeopardize
pooling-of-interests accounting treatment on previous acquisitions, the
execution of mutually acceptable settlement papers and the approval of the
settlement by the court. While the Company is presently unable to determine
when, or if, the contingencies in the Memorandum of Understanding may be
resolved and a charge recorded, management presently anticipates that the
Memorandum of Understanding should not have a material adverse effect on: (i)
the Company's current efforts to refinance the Second Amended Facility; or (ii)
the Company's operating cash flow or liquidity position, provided that any such
charge, if and when recorded, does not then violate the covenants of the Second
Amended Facility or any then applicable debt facility or such covenant
violations, if any, are waived.
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 behalf of the Company. 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. On April 23, 1997,
Medaphis and certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in a motion to dismiss 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
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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, making material misstatements and
omissions in public and private disclosures in connection with the acquisition
of HDS. 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. On July 16, 1997, plaintiff filed an amended complaint adding
several new parties, including current and former directors and former officers
of Medaphis. These newly added defendants have not yet responded to the amended
complaint. 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 such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger 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 Corporation ("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 April 18,
1997, the Medaphis defendants and BSG defendants filed motions to dismiss the
complaint. On or about July 3, 1997, in lieu of responding to these motions, the
plaintiffs filed an amended complaint, adding new claims under the 1933 Act and
new parties, including former officers of Medaphis. Defendants have not yet
responded to the amended complaint.
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. The indemnification demand claims damages of $35 million (the maximum
damages payable by Medaphis under the indemnification agreement) for the alleged
breach by Medaphis of its representations and warranties made in the merger
agreement between Medaphis and BSG.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
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. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, 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
8
11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Company's loss for the quarter ending September 30, 1996 and its restated
consolidated financial statements for the three months and year ending 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. Further, there can be no assurance 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 or
that the resolution of the lawsuits, the written demands and the pending
governmental investigations will not have a material adverse effect upon the
Company.
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
------- -------- ------ -------
(IN THOUSANDS)
Restructuring charges......................... $ -- $ 4,250 $ -- $ 6,349
Legal costs................................... 2,000 -- 2,000 --
Pooling charges............................... -- 12,364 -- 10,207
Other......................................... -- 275 -- 275
------ ------- ------ -------
$2,000 $16,889 $2,000 $16,831
====== ======= ====== =======
Restructuring Charges. During the three and six months ended June 30,
1996, the Company incurred approximately $4.3 million and $6.3 million,
respectively, of costs that were related to the Company's reengineering and
consolidation project, which had not previously been accrued.
Legal Costs. In June 1997, the Company recorded a charge of $2.0 million
for the administrative fees, costs and expenses it has incurred and plans to
incur in connection with the federal inquiry of the billing procedures at GFS.
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
Automation Atwork Companies............................... $ -- $ -- $ -- $ (408)
HRI....................................................... -- -- -- (765)
Consort Technologies, Inc................................. -- -- -- (526)
MMS....................................................... -- -- -- (658)
Intelligent Visual Computing, Inc. ("IVC")................ -- -- -- 200
Rapid Systems Solutions, Inc. ("Rapid Systems")........... -- 900 -- 900
BSG....................................................... -- 6,214 -- 6,214
HDS....................................................... -- 5,250 -- 5,250
------- ------- ------- -------
$ -- $12,364 $ -- $10,207
======= ======= ======= =======
9
12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
A description of the type and amount of exit costs paid in the six months
ended June 30, 1997 is as follows:
RESERVE PAID RESERVE
BALANCE THROUGH BALANCE
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
------------ -------- --------
(IN THOUSANDS)
Lease termination costs.................................. $ 7,514 $2,635 $4,879
Severance................................................ 2,748 1,831 917
Other.................................................... 1,222 876 346
------- ------ ------
$11,484 $5,342 $6,142
======= ====== ======
5. INCOME TAXES
In 1996, Medaphis acquired IVC, Rapid Systems and BSG in merger
transactions, which were accounted for as pooling-of-interests. Prior to such
mergers, 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 such mergers (or, in the case of the company acquired by BSG, its acquisition
by BSG), such entities terminated their "S" corporation elections. Pro forma net
loss and pro forma net loss per common share are presented as if the entities
had been "C" corporations during the six months ended June 30, 1996.
6. LINES OF BUSINESS
The Company operates in three major lines of business: Services (providing
healthcare transaction processing services to physicians, hospitals and payors),
BSG Group (client/server information technology services), and HIT (healthcare
information technology and hardware sales). Total revenue includes only sales to
unaffiliated customers as reported in the Company's consolidated statements of
operations. Operating profit (loss) represents total revenue less operating
expenses excluding interest and restructuring and other charges. Corporate items
include general corporate expenses. Corporate assets consist primarily of cash,
deferred income taxes, deferred financing costs, fixed assets, miscellaneous
prepaids and receivables. Information concerning operations in these lines of
business is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
Revenue:
Services.................................... $105,618 $105,919 $209,701 $211,553
BSG Group................................... 21,888 35,376 45,698 76,639
HIT......................................... 20,486 28,796 40,176 45,008
Corporate and eliminations.................. (22) (372) (59) (1,232)
-------- -------- -------- --------
$147,970 $169,719 $295,516 $331,968
======== ======== ======== ========
10
13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS)
Operating profit (loss):
Services.................................... $ 11,513 $ 7,173 $ 18,915 $ 14,391
BSG Group................................... (765) 4,924 (491) 19,165
HIT......................................... 5,377 15,743 8,195 19,340
Corporate................................... (10,037) (5,180) (18,480) (10,101)
-------- -------- -------- --------
$ 6,088 $ 22,660 $ 8,139 $ 42,795
======== ======== ======== ========
Interest expense, net......................... 6,056 2,630 12,171 4,735
-------- -------- -------- --------
Restructuring and other charges:
Services.................................... 2,000 3,323 2,000 3,999
BSG Group................................... -- 8,316 -- 8,516
HIT......................................... -- 5,250 -- 4,316
Corporate................................... -- -- -- --
-------- -------- -------- --------
2,000 16,889 2,000 16,831
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.......................... $ (1,968) $ 3,141 $ (6,032) $ 21,229
======== ======== ======== ========
Depreciation and amortization:
Services.................................... $ 8,956 $ 8,263 $ 17,548 $ 15,749
BSG Group................................... 1,129 1,956 2,174 3,700
HIT......................................... 1,259 1,358 2,969 2,844
Corporate................................... 371 371 699 704
-------- -------- -------- --------
$ 11,715 $ 11,948 $ 23,390 $ 22,997
======== ======== ======== ========
Capital expenditures:
Services.................................... $ 2,807 $ 8,430 $ 4,916 $ 23,004
BSG Group................................... 487 5,042 1,096 8,379
HIT......................................... 646 897 1,311 1,863
Corporate................................... 352 705 369 1,295
-------- -------- -------- --------
$ 4,292 $ 15,074 $ 7,692 $ 34,541
======== ======== ======== ========
AS OF
-----------------------
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
Identifiable assets:
Services.................................................. $553,676 $594,738
BSG Group................................................. 40,520 51,972
HIT....................................................... 97,179 84,298
Corporate................................................. 74,162 84,616
-------- --------
$765,537 $815,624
======== ========
11
14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
7. RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE- AND
SIX-MONTH PERIODS ENDED JUNE 30, 1996
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors 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. These errors and irregularities 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. All adjustments were for inter-period
transactions and had no effect on the Company's 1996 annual pro forma net loss.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue........................................ $175,193 $169,719 $338,820 $331,968
Salaries and wages............................. 92,663 95,222 183,228 186,952
Other Operating expenses....................... 38,799 39,889 78,153 79,224
Depreciation................................... 5,324 6,840 10,275 12,780
Amortization................................... 4,826 5,108 9,735 10,217
Income before income taxes..................... 13,776 3,141 35,369 21,229
Net income (loss).............................. 3,337 (3,097) 16,062 7,562
Pro forma net income (loss).................... 3,337 (3,097) 16,416 7,916
Pro forma net income (loss) per common share... $ 0.04 $ (0.04) $ 0.22 $ 0.11
12
15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
8. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 provides for new accounting principles used in the
calculation of earnings per share and shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This pronouncement cannot be adopted early. The following table presents basic
and diluted weighted average shares outstanding and a calculation of the pro
forma net income (loss) per share using the guidelines of SFAS No. 128.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Basic weighted average shares outstanding.............. 72,443 71,167 72,339 70,795
======= ======= ======= =======
Shares of common stock assumed issued upon exercise of
stock options using the treasury stock method as it
applies to the computation of diluted earnings per
share................................................ -- -- -- 3,991
------- ------- ------- -------
Diluted weighted average shares outstanding............ 72,443 71,167 72,339 74,786
======= ======= ======= =======
Pro forma net income (loss) before extraordinary
item................................................. $ (248) $(3,097) $(2,087) $ 7,916
Extraordinary income on sale of HRI.................... 76,391 -- 76,391 --
------- ------- ------- -------
Pro forma net income (loss)............................ $76,143 $(3,097) $74,304 $ 7,916
======= ======= ======= =======
Basic earnings per share:
Pro forma net income (loss) before extraordinary
item............................................ $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI............... 1.05 -- 1.06 --
------- ------- ------- -------
Pro forma net income (loss)....................... $ 1.05 $ (0.04) $ 1.03 $ 0.11
======= ======= ======= =======
Diluted earnings per share:
Pro forma net income (loss) before extraordinary
item............................................ $ (0.00) $ (0.04) $ (0.03) $ 0.11
Extraordinary income on sale of HRI............... 1.05 -- 1.06 --
------- ------- ------- -------
Pro forma net income (loss)....................... $ 1.05 $ (0.04) $ 1.03 $ 0.11
======= ======= ======= =======
13
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 20,700 physicians and over
2,700 hospitals throughout the United States and systems integration and
services in the United States and abroad.
In February 1997, Medaphis announced the implementation of its 1997 fiscal
year business plan which is focused on Medaphis' core business and comprised of
the five following components: (1) exiting non-core businesses, such as
Healthcare Recoveries, Inc. ("HRI"), which Medaphis completed on May 28, 1997
through an initial public offering of 100% of HRI's stock; (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, among other things, 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 government agencies 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 government
agencies and others but not paid by them (i.e., "cost shifting"). The increasing
complexity in the reimbursement system and assumption of greater payment
responsibility by individuals have caused healthcare providers to experience
increased receivables and bad debt levels and higher business office costs.
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 these 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 and could continue to adversely affect the rate of the revenue
growth and profit margins of the Company's operations.
14
17
RESULTS OF OPERATIONS
The following table presents certain items reflected in the Company's
statements of operations as a percentage of revenue:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1997 1996 1997 1996
----- ----------- ----- -----------
Revenue......................................... 100.0% 100.0% 100.0% 100.0%
Salaries and wages.............................. 62.4 56.1 62.9 56.3
Other operating expenses........................ 25.5 23.5 26.4 23.9
Depreciation.................................... 4.8 4.0 4.7 3.8
Amortization.................................... 3.2 3.0 3.2 3.1
Interest expense, net........................... 4.1 1.5 4.1 1.4
Restructuring and other charges................. 1.4 10.0 0.7 5.1
----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item............................ (1.4) 1.9 (2.0) 6.4
Income tax (benefit) expense.................... (1.2) 3.7 (1.3) 4.1
----- ----- ----- -----
Income (loss) before extraordinary item......... (0.2) (1.8) (0.7) 2.3
Extraordinary income on sale of HRI, net of
tax........................................... 51.6 -- 25.9 --
----- ----- ----- -----
Net income (loss)............................... 51.4 (1.8) 25.2 2.3
Pro forma adjustments........................... -- -- -- 0.1
----- ----- ----- -----
Pro forma net income (loss)..................... 51.4% (1.8)% 25.2% 2.4%
===== ===== ===== =====
Revenue. Revenue classified by the Company's different operating segments
is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
-------- ------------- -------- -------------
(IN THOUSANDS)
Services........................ $105,618 $105,919 $209,701 $211,553
BSG Group....................... 21,888 35,376 45,698 76,639
HIT............................. 20,486 28,796 40,176 45,008
Corporate and eliminations...... (22) (372) (59) (1,232)
-------- -------- -------- --------
$147,970 $169,719 $295,516 $331,968
======== ======== ======== ========
Services' revenue for both the three- and six-month periods ended June 30,
1997 has remained at relatively the same level from the comparable periods in
1996 due to the industry conditions and revenue pressures on the operations
described above. The 1997 Services amounts only include the results of HRI
through May 28, 1997, the date of the divestiture, thus negatively impacting the
1997 revenue amount by $3.4 million.
The 1996 client/server integration business (the "BSG Group") results
include the results of the Company's wholly owned operating subsidiary, Imonics
Corporation ("Imonics"), which was shut down at the end of 1996. Imonics
generated $5.8 million and $22.3 million of revenue during the three- and
six-month periods ended June 30, 1996, respectively. Excluding the Imonics
revenue, the BSG Group's revenue decreased 26.0% and 15.9% for the three- and
six-month periods ended June 30, 1997, as compared with the three- and six-month
periods ended June 30, 1996, respectively. Over the past year, the BSG Group has
experienced higher than normal attrition and turnover among its personnel. This
attrition and turnover has hindered the BSG Group's ability to sell new
client/server system integration services as well as its ability to provide
their services in the most cost efficient manner.
HIT's revenue decreased 28.9% and 10.7% for the three- and six-month
periods ended June 30, 1997, as compared with the three- and six-month periods
ended June 30, 1996, respectively. These decreases are primarily the result of
Health Data Sciences, Inc. ("HDS") recording $14.5 million of license fees in
the
15
18
quarter ended June 30, 1996 from the sale of four large Ulticare licenses. The
decreases in the license fees generated by HDS were partially offset by stronger
sales of the Automation Atwork Companies' ("Atwork") information systems.
Salaries and Wages. Salaries and wages increased to 62.4% of revenue in
the second quarter of 1997 from 56.1% in the second quarter of 1996 and
increased to 62.9% of revenue in the six-month period ended June 30, 1997 from
56.3% in the same period of 1996. The increases in salaries and wages, as a
percentage of revenue, are primarily due to the decreases in the Company's
revenue. The Company has not reduced its employment levels to coincide with the
decrease in revenue growth because of a renewed emphasis on client service and
expected growth in its technology divisions.
Other Operating Expenses. Other operating expenses increased to 25.5% of
revenue in the second quarter of 1997 compared to 23.5% in the second quarter of
1996 and increased to 26.4% for the six-month period ended June 30, 1997 from
23.9% in the same period of 1996. The increase in other operating expenses as a
percentage of revenue for 1997, as compared with 1996, is due to the previously
mentioned decreases in the Company's revenue. These increases are also
attributable to professional fees the Company has incurred to assist with a
variety of operational and organizational projects undertaken by current
management. The Company anticipates it will continue to incur these professional
fees for the remainder of 1997, but at decreasing levels. Other operating
expenses are primarily comprised of postage, facility and equipment rental,
telecommunications, travel, outside consulting services and office supplies.
Depreciation. Depreciation expense was $7.1 million in the second quarter
of 1997 as compared with $6.8 million in the second quarter of 1996 and $14.0
million in the six-month period ended June 30, 1997 as compared with $12.8
million in the same period of 1996. These increases reflect the Company's
investment in property and equipment to support growth in its business.
Amortization. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $4.7 million in the second quarter of 1997 as compared with $5.1 million in
the second quarter of 1996 and $9.4 million in the six-month period ended June
30, 1997 as compared with $10.2 million in the same period of 1996. The
decreases are primarily due to the 1996 abandonment of the Company's internally
developed software associated with the Company's reengineering program and the
write-offs associated with the shut down of Imonics, which combined totaled
approximately $99 million.
Interest. Net interest expense was $6.1 million in the second quarter of
1997 as compared with $2.6 million in the second quarter of 1996 and $12.2
million in the six-month period ended June 30, 1997 as compared with $4.7
million in the same period of 1996. The increases in interest expense were due
to increased borrowing under the Company's credit facilities to fund the
Company's reengineering program in 1996, which was subsequently abandoned, and
its working capital needs in both 1996 and 1997, and increased interest rates.
Management expects to receive approximately $11 million in annualized interest
expense savings as a result of the pay down of the Second Amended Facility with
the net proceeds from the sale of HRI. Management also anticipates that interest
rate fluctuations and changes in the amount of borrowings under its Second
Amended and Restated Loan Facility (the "Second Amended Facility") will impact
future interest expense.
Restructuring and Other Charges. Components of restructuring and other
charges are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
------- -------- ------ -------
(IN THOUSANDS)
Restructuring charges........................... $ -- $ 4,250 $ -- $ 6,349
Legal costs..................................... 2,000 -- 2,000 --
Pooling charges................................. -- 12,364 -- 10,207
Other........................................... -- 275 -- 275
------ ------- ------ -------
$2,000 $16,889 $2,000 $16,831
====== ======= ====== =======
16
19
Restructuring Charges. During the three and six months ended June 30,
1996, the Company incurred approximately $4.3 million and $6.3 million,
respectively, of costs that were related to the Company's reengineering and
consolidation project, which had not previously been accrued.
Legal Costs. In June 1997, the Company recorded a charge of $2.0 million
for administrative fees, costs and expenses it has incurred and plans to incur
in connection with the federal inquiry of the billing procedures at the
Company's wholly owned operating subsidiary, Gottlieb's Financial Services.
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.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------ ------- ------ -------
(IN THOUSANDS)
Atwork........................................... $ -- $ -- $ -- $ (408)
HRI.............................................. -- -- -- (765)
Consort Technologies, Inc........................ -- -- -- (526)
Medical Management Sciences, Inc................. -- -- -- (658)
Intelligent Visual Computing, Inc................ -- -- -- 200
Rapid Systems Solutions, Inc..................... -- 900 -- 900
BSG Corporation.................................. -- 6,214 -- 6,214
HDS.............................................. -- 5,250 -- 5,250
------ ------- ------ -------
$ -- $12,364 $ -- $10,207
====== ======= ====== =======
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. 1996 pro forma adjustments for income taxes have been
provided for companies, which had elected to be treated as "S" Corporations
under the Internal Revenue Code of 1986, as amended, prior to merging with the
Company.
Extraordinary Item. On May 28, 1997, Medaphis sold HRI through an initial
public offering of 100% of its stock, which generated net proceeds to the
Company of approximately $115 million. Medaphis had acquired HRI on August 28,
1995 through a business combination accounted for as a pooling-of-interests.
LIQUIDITY AND CAPITAL RESOURCES
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement and increased
the revolving line of credit from $250 million to $285 million. The Second
Amended Facility matures 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 Company's previous 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, capital expenditures and the Company's ability to declare
or pay cash dividends on its common stock. The Second Amended Facility provides
for "base rate" loans that bear interest equal to prime plus 1% as long as
certain financial covenants are met. The Second Amended Facility required
mandatory loan commitment reductions to $200 million and $150 million on July
31, 1997 and January 31, 1998, respectively. In developing its 1997 business
plan, the Company did not expect to generate sufficient cash flows from
operations to meet the required debt reduction and, therefore, management had
adopted a plan to divest HRI and it was seeking alternatives for the BSG Group.
On May 28, 1997, the Company was successful in divesting HRI through an initial
public offering of 100% of its stock. This sale generated approximately $115
million of net proceeds that were used to reduce the Company's borrowings under
the Second Amended Facility and it also reduced the loan commitment under the
Second Amended Facility to $170 million, which more than satisfied the required
reduction for July 31,
17
20
1997. At June 30, 1997, the Company had $137 million in borrowings outstanding
under the Second Amended Facility that bore interest at 9.5%.
Since the Second Amended Facility matures on June 30, 1998, all amounts
outstanding under the Second Amended Facility have been classified as current in
the June 30, 1997 balance sheet. Excluding the borrowings under the Second
Amended Facility, the Company had approximately $82 million of working capital,
which included $4.0 million of cash at June 30, 1997. Also at June 30, 1997, the
Company had approximately $33 million available under the Second Amended
Facility, which management believes is adequate to fund its current operating
cash requirements. The Company used $5.6 million of cash for operating
activities during the six months ended June 30, 1997 as compared with $21.5
million during the six months ended June 30, 1996. The increase in the Company's
operating cash flow resulted primarily from the collection of outstanding
receivables and management's cash control initiatives.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of Medaphis' voting common stock (the
"Common Stock") on each of January 1, 1998 and April 1, 1998, provided that the
Second Amended Facility has not been repaid and terminated prior to such vesting
dates. The Company has not allocated any value to these warrants because the
warrants only vest if amounts are outstanding or commitments are not terminated
under the Second Amended Facility on December 31, 1997. Although the Company can
give no assurance that it will be able to refinance or otherwise pay in full the
amounts owed under the Second Amended Facility, it is the Company's present
expectation to refinance the Second Amended Facility on or prior to December 31,
1997 in order to provide longer term liquidity on more customary market terms
and conditions and to assure that these warrants will not vest. If the Company
is unsuccessful in refinancing the Second Amended Facility, the Company will
attempt to generate the cash needed to reduce the borrowings under the Second
Amended Facility to zero by December 31, 1997 through the sale of one or more of
its assets.
If the Company is unable to obtain alternative debt financing or generate
sufficient net proceeds through the sale of one of its assets by January 31,
1998 or to otherwise satisfy the commitment reduction required by January 31,
1998 through various management cash control initiatives, the Company's lenders
can cause the borrowings under the Second Amended Facility to become immediately
due and payable.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then 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. A consolidated class action
compliant was filed on November 22, 1996 and was amended on February 3, 1997. On
August 14, 1997, the parties entered into a memorandum of understanding (the
"Memorandum of Understanding") to settle this action on a class-wide basis for
$20 million in cash (payable by the Company's insurance carriers), 3,355,556
shares of Medaphis Common Stock and warrants to purchase 5,309,523 shares of
Medaphis Common Stock at $12 per share for a five-year period. The Memorandum of
Understanding also contains other material provisions as well as conditions
including, but not limited to, consent of the Company's insurance carriers and
the insurance carriers' payment of the cash portion of the settlement, the
Company's receiving assurances from its independent accountants that the
proposed settlement will not jeopardize pooling-of-interests accounting
treatment on previous acquisitions, the execution of mutually acceptable
settlement papers and the approval of the settlement by the court.
While the Company is presently unable to determine when, or if, the
contingencies in the Memorandum of Understanding may be resolved and a charge
recorded, management presently anticipates that the proposed Memorandum of
Understanding should not have a material adverse effect on: (i) the Company's
current efforts to refinance the Second Amended Facility; or (ii) the Company's
operating cash flow or liquidity position, provided that any such charge, if and
when recorded, does not then violate the covenants of the Second Amended
Facility or any then applicable debt facility or such covenant violation, if
any, or waived.
OTHER MATTERS
As a result of a review initiated by senior management and the Audit
Committee of the Board of Directors in March 1997 prior to completion of the
audit process for the Company's 1996 fiscal year,
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21
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 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. All adjustments were for inter-period
transactions and had no effect on the Company's 1996 annual pro forma net loss.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
--------------------------- ---------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue.......................................... $175,193 $169,719 $338,820 $331,968
Salaries and wages............................... 92,663 95,222 183,228 186,952
Other Operating expenses......................... 38,799 39,889 78,153 79,224
Depreciation..................................... 5,324 6,840 10,275 12,780
Amortization..................................... 4,826 5,108 9,735 10,217
Income before income taxes....................... 13,776 3,141 35,369 21,229
Net income (loss)................................ 3,337 (3,097) 16,062 7,562
Pro forma net income (loss)...................... 3,337 (3,097) 16,416 7,916
Pro forma net income (loss) per common share..... $ 0.04 $ (0.04) $ 0.22 $ 0.11
19
22
PART II:
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
The United States Attorney's Office for the Central District of California
is conducting an investigation of the billing and collection practices in two
offices of the Company's wholly owned subsidiary, Medaphis Physician Services
Corporation ("MPSC"), which offices are located in Calabasas and Cypress,
California (the "Designated Offices"). Medaphis first became aware of the
investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Although the
precise scope of the 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 billing and collection
practices in the Designated Offices. Although the Designated Offices represent
approximately 2% of Medaphis' annual revenue, there can be no assurance that the
investigation will be resolved promptly, that additional subpoenas or search
warrants will not be received by Medaphis or MPSC or that the investigation will
not have a material adverse effect on 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 administrative fees, costs and expenses it anticipates
incurring in connection with the investigation and the putative class action
lawsuits described below which were filed in 1995 following the Company's
announcement of the investigation. The charges are intended to cover only the
anticipated expenses of the 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 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 voting common stock (the "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 April 11, 1996, certain of
the named plaintiffs to the Consolidated Complaint voluntarily dismissed with
prejudice all of their claims. As a result of these dismissals, the Consolidated
Complaint no longer contains any claims based on the Securities Act of 1933, as
amended (the "1933 Act"), and the Company's underwriters and outside directors
are no longer named as defendants. The plaintiffs and the defendants have
reached an agreement to settle this action on a class-wide basis for $4.75
million, subject to court approval (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 court conditionally has certified a class for
settlement purposes and has scheduled a hearing for October 6, 1997 to determine
whether to approve the settlement and enter final judgment dismissing the action
with prejudice. The Company has reached agreement with one of its directors and
officers' liability insurance carriers to fund $3.7 million of the 1995 Class
Action Settlement. The Company 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
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. Plaintiffs seek
compensatory damages
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and costs. To date, defendants have not been served with this complaint.
Pursuant to the consummation of the 1995 Class Action Settlement, the claims in
this state action also will be settled. Pursuant to the settlement agreement,
plaintiffs have filed a motion to dismiss this action without prejudice.
As originally disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, filed March 31, 1997, the Company learned in March
1997 that the government is investigating allegations concerning the Company's
wholly owned subsidiary, Gottlieb's Financial Services, Inc. ("GFS"). In 1993,
Medaphis acquired GFS, an emergency room physician billing company located in
Jacksonville, Florida, which had developed a computerized coding system. In
1994, Medaphis acquired and merged into GFS another emergency room physician
billing company, Physician Billing, Inc., located in Grand Rapids, Michigan. For
the calendar year ended December 31, 1996, GFS represented approximately 7% of
Medaphis' annual revenue. During that year, GFS processed approximately 5.6
million claims, approximately 2 million of which were made to government
programs. The government has requested that GFS voluntarily produce records, and
GFS is complying with that request. Although the precise scope and subject
matter of the investigation are not known, Medaphis believes that the
investigation, which is being participated in by federal law enforcement
agencies having both civil and criminal authority, involves GFS's billing
procedures and the computerized coding system used in Jacksonville and Grand
Rapids to process claims and may lead to claims of errors in billing. There can
be no assurance that the investigation will be resolved promptly or that the
investigation will not have a material adverse effect upon Medaphis. Currently,
the Company has recorded charges of $2 million in the second quarter of 1997,
solely for administrative fees, costs and expenses in connection with the
investigation, which charges do not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of this matter.
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.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis and certain of its then 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. On February 3, 1997, the plaintiffs filed a Consolidated Second
Amended Complaint (the "Consolidated Second Amended Complaint"). In general, the
Consolidated Second Amended Complaint alleges violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint is brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between January 6, 1996 and October 21, 1996. The
Consolidated Second Amended 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 Health Data Sciences Corporation ("HDS"). On
February 14, 1997, the defendants moved to dismiss the Consolidated Second
Amended Complaint in its entirety. On May 27, 1997, the court denied defendants'
motion to dismiss. Discovery currently is proceeding. 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 such 1933 Act claims.
The parties have entered into a memorandum of understanding dated August
14, 1997 (the "Memorandum of Understanding") to settle the 1996 putative
shareholder class action litigation which is the subject of the Consolidated
Second Amended Complaint on a class-wide basis for $20 million in cash (payable
by the Company's insurance carriers), 3,355,556 shares of Medaphis Common Stock,
and warrants to purchase 5,309,523 shares of Medaphis Common Stock at $12 per
share for a five-year period. The Memorandum of Understanding also includes: (i)
an obligation on the part of Medaphis to contribute up to 600,000 additional
shares of Common Stock to the settlement under certain conditions if the
aggregate value of the Medaphis Common Stock proposed to be issued in the
settlement falls below $30.2 million during a specified time period; and (ii)
certain anti-dilution rights to plaintiffs with respect to certain future
issuances of shares of
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24
Medaphis Common Stock or warrants or rights to acquire Medaphis Common Stock to
settle existing civil litigation and claims currently pending against the
Company, subject to a 5.0 million share basket below which there will be no
dilution adjustments. The Memorandum of Understanding also contains other
customary terms and conditions including, but not limited to, consent and
approval of the Company's insurance carriers and the insurance carriers' payment
of the cash portion of the settlement, the Company's receiving assurances from
its independent accountants that the treatment of class members in connection
with the proposed settlement will not jeopardize pooling-of-interests accounting
treatment on previous acquisitions, the execution of mutually acceptable
settlement papers and the approval of the settlement by the court. While the
Company is presently unable to determine when, or if, the contingencies in the
Memorandum of Understanding may be resolved and a charge recorded, management
presently anticipates that the Memorandum of Understanding should not have a
material adverse effect on: (i) the Company's current efforts to refinance the
Second Amended Facility; or (ii) the Company's operating cash flow or liquidity
position, provided that any such charge, if and when recorded, does not then
violate the covenants of the Second Amended Facility or any then applicable debt
facility or such covenant violations, if any, are waived.
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 behalf of the Company. 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. On April 23, 1997,
Medaphis and certain of the defendants filed a motion to dismiss the amended
complaint. All defendants have joined in a motion to dismiss 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, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of HDS. 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. On July 16,
1997, plaintiff filed an amended complaint adding several new parties, including
current and former directors and former officers of Medaphis. These newly added
defendants have not yet responded to the amended complaint. 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 such 1933 Act claims.
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberger 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 Corporation ("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 April 18,
1997, the Medaphis defendants and BSG defendants filed motions to dismiss the
complaint. On or about July 3, 1997, in lieu of responding to these motions, the
plaintiffs filed an amended complaint, adding new claims under the 1933 Act and
new parties, including former officers of Medaphis. Defendants have not yet
responded to the amended complaint.
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
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acquisition of BSG in May 1996. The indemnification demand claims damages of $35
million (the maximum damages payable by Medaphis under the indemnification
agreement) for the alleged breach by Medaphis of its representations and
warranties made in the merger agreement between Medaphis and BSG.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint is brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Medaphis Common Stock. In general, the complaint alleges
both common law fraud and violations of the federal securities laws in
connection with the merger. In addition, the complaint alleges breaches of
contract relating to the merger agreement and a registration rights agreement,
as well as tortious interference with economic advantage. The plaintiffs seek
rescission of the merger agreement and the return of all MMS shares, as well as
damages in excess of $100 million. Additionally, plaintiffs seek to void various
noncompete covenants and contract provisions between Medaphis and plaintiffs. On
June 6, 1997, defendants served their motion to dismiss on the plaintiffs.
Discovery has been stayed pending resolution of the motion to dismiss.
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. The Company has entered into
standstill and tolling agreements with these and certain other stockholders of
recently acquired companies.
On January 8, 1997, the Securities and Exchange Commission (the
"Commission") notified the Company that it was conducting a formal, 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 ending 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. Further, there can be no assurance 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 or
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 2. CHANGES IN SECURITIES.
On June 17, 1997, the Company's stockholders approved an amendment to the
Company's Amended and Restated Certificate of Incorporation to authorize the
Board of Directors to issue from time to time, without further stockholder
action (unless required in a specific case by applicable Nasdaq National Market
rules), 20 million shares of one or more series of preferred stock (the
"Preferred Stock"), with such terms and for such consideration as the Board of
Directors may determine.
The flexibility to issue shares of one or more series of Preferred Stock,
in general, may have the effect of discouraging an attempt to assume control of
a Company by a present or future stockholder or of hindering an attempt to
remove the Company's incumbent management. Stockholders of the Company do not
have preemptive rights to subscribe for or purchase any shares of Preferred
Stock that may be issued in the future. Upon issuance, outstanding Preferred
Stock would rank senior to the Company's Common Stock and non-voting common
stock (the "Non-voting Common Stock") with respect to dividends and liquidation
rights. Depending on the voting rights applicable to each series of Preferred
Stock, the issuance of shares of Preferred Stock could dilute the voting power
of the holders of the Common Stock.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 19, 1997. The
following directors were elected at such meeting:
NOMINEE BOARD TERM VOTES FOR VOTES AGAINST VOTES WITHHELD
------- ------------- ---------- ------------- --------------
Robert C. Bellas, Jr..................... Through 1997 51,433,791 -- 1,220,856
David R. Holbrooke, M.D.................. Through 1997 51,459,845 -- 1,194,802
David E. McDowell........................ Through 1997 51,459,567 -- 1,195,080
John C. Pope............................. Through 1997 51,406,073 -- 1,248,574
Dennis A. Pryor.......................... Through 1997 51,477,267 -- 1,177,380
No other matters were voted upon at the Annual Meeting of Stockholders on
May 19, 1997; however, the meeting was adjourned until 10:00 a.m. on June 17,
1997, at which time the stockholders approved an amendment of the Company's
Amended and Restated Certificate of Incorporation to provide that the aggregate
number of shares of all classes of stock which the Company has authority to
issue is 220,600,000, consisting of 200,000,000 shares of Common Stock, 600,000
shares of Non-voting Common Stock, and 20,000,000 shares of Preferred Stock,
which Preferred Stock may be issued by the Board of Directors at any time with
such rights, designations and preferences as the Board of Directors may
determine. Votes cast were 38,838,042 for, 3,432,391 against and 243,064
withheld.
ITEM 5. OTHER INFORMATION.
On April 25, 1997, the Compensation Committee of the Board of Directors of
the Company approved an adjustment of the exercise price for certain outstanding
employee stock options, which have an exercise price of $5.50 and above. The
revised exercise price of $5.375 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by current executive officers of the Company were adjusted as part of such
option restrike, but no adjustments were made to any options held by directors
or former employees of the Company. In approving the adjustment, the
Compensation Committee relied upon the views of its outside advisors with
respect to the legal, accounting and compensation issues associated with the
action and took into consideration, among other things, the following factors:
(i) the Company historically had paid salaries which were at or below market
levels and had made up for lower salaries through stock option grants to
employees; (ii) the Company historically had used stock options as its principal
long-term incentive program; (iii) the highly skilled employees of the Company
possessed marketable skills; and (iv) senior management of the Company believed
that there was potential for increased attrition among its key employees and
that adjustment of the exercise price of the outstanding options would
significantly help to mitigate such risk.
On May 19, 1997, in accordance with the Company's Amended and Restated
By-laws, the Board of Directors took action to expand the size of the Board to
six members and to fill the vacancy created thereby through the appointment of
C. Christopher Trower. Mr. Trower is a former partner of the Atlanta law firm,
Sutherland, Asbill & Brennan. Mr. Trower has wide-ranging experience with both
public and private companies in corporate, partnership, and tax matters,
including acquisitions/divestitures, securities offerings, and tax planning and
tax disputes.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.1 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, file No. 333-2506).
2.2 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the year ended December 31, 1995, File No.
000-19480).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, File No.
33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form 8-A/A, filed on
March 28, 1995).
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8, File
No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant.
3.6 -- Amended and Restated By-Laws of Registrant.
10.1 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 of the Annual
Report on Form 10-K for the year ended December 31, 1995,
File No. 000-19480).
10.2 -- Fourth Modification of Amended and Restated Credit Agreement
among the Registrant and the Lenders named therein, dated
January 31, 1996 (incorporated by reference to Exhibit 10.34
of the Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 000-19480).
10.3 -- Equipment Lease, dated January 31, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480).
10.4 -- Equipment Lease dated February 29, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480).
10.5 -- 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. 333-2506).
10.6 -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH
& Co. KG, dated March 13, 1996 (incorporated by reference to
Exhibit 10.65 of the Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480).
10.7* -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996.
10.8* -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996.
11 -- Statement regarding Computation of Earnings Per Share.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements
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- ---------------
* Previously filed with the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996.
(b) Reports on Form 8-K.
The Company has filed the following reports on Form 8-K or 8-K/A during the
quarter ended June 30, 1997:
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -----------
Amendment of 1996 Year end press release, second
amended and restated loan agreement........... Yes(1) December 31, 1996 April 28, 1997
Press release of SEC effectiveness on IPO of
Healthcare Recoveries, Inc.................... No May 21, 1997 May 22, 1997
- ---------------
(1) Consolidated statement of operations for the three months and year ended
December 31, 1996, condensed consolidated balance sheets as of December 31,
1996 and 1995 and supplemented consolidated segment data for the quarterly
periods ended March 31, June 30, September 30 and December 31, 1996 and
1995.
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SIGNATURES
Pursuant to the requirements of the Securities and 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
By: /s/ JEROME H. BAGLIEN
------------------------------------
Jerome H. Baglien
Senior Vice President,
Chief Financial Officer and
Assistant Secretary
Date: August 14, 1997
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30
INDEX TO EXHIBITS
EXHIBIT
- -------
2.1 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, file No. 333-2506)................................
2.2 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the year ended December 31, 1995, File No.
000-19480)
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, File No.
33-42216)...................................................
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 of
Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1993)................................
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form 8-A/A, filed on
March 28, 1995).............................................
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to the Registration Statement on Form S-8, File
No. 333-03213)..............................................
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant..............................
3.6 -- Amended and Restated By-Laws of Registrant..................
10.1 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 of the Annual
Report on Form 10-K for the year ended December 31, 1995,
File No. 000-19480).........................................
10.2 -- Fourth Modification of Amended and Restated Credit Agreement
among the Registrant and the Lenders named therein, dated
January 31, 1996 (incorporated by reference to Exhibit 10.34
of the Annual Report on Form 10-K for the year ended
December 31, 1995, File No. 000-19480)......................
10.3 -- Equipment Lease, dated January 31, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480)...............................
10.4 -- Equipment Lease dated February 29, 1996, by and between
Nationsbanc Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 of
the Annual Report on Form 10-K for the year ended December
31, 1995, File No. 000-19480)...............................
10.5 -- 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. 333-2506)......
10.6 -- Limited Partnership Agreement of Bertelsmann -- Imonics GMBH
& Co. KG, dated March 13, 1996(incorporated by reference to
Exhibit 10.65 of the Annual Report on Form 10-K for the year
ended December 31, 1995, File No. 000-19480)................
10.7* -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996...........
10.8* -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996.....................
11 -- Statement regarding Computation of Earnings Per Share.......
27 -- Financial Data Schedule (for SEC use only)..................
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements..................................................
- ---------------
* Previously filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996.
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