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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 58-1651222
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(770) 444-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of January 23, 1998 was approximately $507,852,618 calculated
using the closing price on such date of $6.938. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of January 23, 1998 was
73,203,981.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held in May 1998 are incorporated herein by reference in Part III.
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MEDAPHIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PAGE OF
FORM 10-K
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ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 8
ITEM 3. LEGAL PROCEEDINGS.................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 13
EXECUTIVE OFFICERS OF THE REGISTRANT............. 13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................ 14
ITEM 6. SELECTED FINANCIAL DATA............................ 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 24
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................ 24
ITEM 11. EXECUTIVE COMPENSATION............................ 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................... 24
THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), AND THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 15 U.S.C.A
SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND
MEMBERS OF ITS MANAGEMENT TEAM, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS
CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE
HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS INCLUDED AS EXHIBIT
99.13 TO THIS FORM 10-K, AND ARE HEREBY INCORPORATED BY REFERENCE. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO
REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES
TO FUTURE OPERATING RESULTS OVER TIME.
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PART I
ITEM 1. BUSINESS
OVERVIEW OF COMPANY
Medaphis Corporation, a corporation organized in 1985 under the laws of the
State of Delaware ("Medaphis" or the "Company"), provides healthcare information
products and business management services, together with enabling technologies
in selected industries. Medaphis provides its products and services through its
Healthcare Services Group and Per-Se Technologies, its Information Technologies
Group.
The Healthcare Services Group provides a range of business management
services to physicians and hospitals, including clinical data collection, data
input, medical coding, billing, cash collections and accounts receivable
management. These services are designed to assist customers with the business
management functions associated with the delivery of healthcare services,
allowing physicians and hospital staff to focus on providing quality patient
care. These services also assist physicians and hospitals in improving cash
flows and reducing administrative costs and burdens. Per-Se Technologies
provides application software and a broad range of information technology and
consulting services to healthcare and other service-oriented markets such as
energy, communications and financial services.
Medaphis markets its products and services primarily to integrated
healthcare delivery networks, hospitals, physician practices, long-term care
facilities, home health providers and managed care providers. Medaphis serves
approximately 20,700 physicians and 2,700 hospitals predominantly in North
America. The Company sells its software solutions and systems integration
services internationally, both directly and through distribution agreements, in
the United States, Canada, England and Germany.
RECENT DEVELOPMENTS
On December 23, 1997, Medaphis entered into a $210 million loan facility
(the "New Facility") with an affiliate of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"). The proceeds of the New Facility were used in
part to repay the Company's previous credit facility. As a result, the warrants
issued to the lenders under the previous credit facility for 2% of the
outstanding voting common stock ("Common Stock") of the Company terminated.
Borrowings under the New Facility initially bear interest at Prime plus 250
basis points with rates increasing 100 basis points at June 23, 1998 and 50
basis points each quarter thereafter through the loan's maturity on April 1,
1999. The interest rate at December 31, 1997 was 11.0%. The New Facility
contains certain quarterly financial covenants related to the Company's
performance, is secured by substantially all of the assets of the Company and
its subsidiaries, and is guaranteed by substantially all of the Company's
subsidiaries. The New Facility also contains covenants restricting, among other
things, (i) the incurrence of additional indebtedness and other obligations and
the granting of additional liens; (ii) mergers, acquisitions, investments and
acquisitions and dispositions of assets; (iii) the incurrence of capitalized
lease obligations; (iv) dividends and other equity payments in respect of the
Company's Common Stock; (v) prepayments or repurchase of other indebtedness and
amendments to certain agreements governing indebtedness; (vi) engaging in
transactions with affiliates and formation of subsidiaries; and (vii) changes of
lines of business. The New Facility is prepayable, in whole or in part, at the
option of Medaphis, at any time. The notes evidencing the New Facility were
placed privately and have no registration rights. Loan costs for the New
Facility totaled approximately $8.1 million.
On December 31, 1997, the Company had $185 million of outstanding
indebtedness under the New Facility. On January 22, 1998, the Company drew down
the remaining $25 million of the New Facility, with the funds used in part to
purchase certain real property then under lease to the Company and to pay for
associated costs of the drawdown, with the balance invested in cash equivalents.
On January 26, 1998, the Company announced that it had received a
commitment for a $100 million revolving credit facility as part of a new planned
$250 million financing package. Under the terms of a senior bank financing
commitment letter between Medaphis and an affiliate of DLJ, such affiliate will
fully
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underwrite a $100 million, three-year revolving credit facility that will be
guaranteed by Medaphis' domestic subsidiaries and secured by a first-priority
lien on substantially all material assets of the Company and its domestic
subsidiaries. The financing is contingent upon customary conditions for this
type of facility and completion of an offering of $150 million in senior notes
maturing in 2005. The proceeds of the financing package will be used to
refinance the New Facility, and for general corporate purposes.
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
indicating that certain revenues and expenses may have been recorded incorrectly
between certain quarters during 1996. In addition, Deloitte & Touche LLP
("Deloitte & Touche") provided to senior management of the Company a letter
relating to the Company's internal control structure resulting from Deloitte &
Touche's audit of the Company's financial statements for the year ended December
31, 1996. This letter reflected Deloitte & Touche's view that inadequate
internal controls over the preparation of interim financial information for each
fiscal quarter of 1996 constituted a material weakness in internal controls
which resulted in certain errors and irregularities in the financial information
for such quarters. The Company previously disclosed in its Form 10-K for its
fiscal year ended December 31, 1996 that such errors and irregularities in its
financial information had occurred for each fiscal quarter of 1996. In
connection with the issuance of Deloitte & Touche's audit report dated March 31,
1997 on the Company's financial statements for the year ended December 31, 1996,
the Company recorded all adjustments to its interim financial statements deemed
appropriate for such errors and irregularities and consequently restated such
interim financial statements. All adjustments were for interim period
transactions and had no effect on the Company's 1996 annual pro forma net loss.
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at Health Data
Sciences Corporation ("HDS"), which was acquired in a merger transaction in June
1996 and accounted for as a pooling-of-interests. These practices related
principally to revenue recognized in fiscal years 1994, 1995 and 1996. As a
result of this evaluation, management determined that certain revenue of HDS was
improperly recognized and, accordingly, restated the Company's financial
statements for years ended December 31, 1994, 1995 and 1996 and interim periods
of 1997. (the "HDS Restatement").
Subsequent to the HDS Restatement, as part of its continued due diligence
efforts related to the refinancing, management completed its analysis of the
accounting for the December 1995 acquisition of Medical Management Sciences,
Inc. ("MMS") which was originally accounted for as a pooling-of-interests.
Management determined the acquisition of MMS should have been accounted for as a
purchase and accordingly, restated the Company's financial statements for the
years ended December 31, 1995, 1996 and interim periods of 1997 (the "MMS
Restatement").
As a result of the HDS Restatement, the predecessor accountants withdrew
their audit opinion dated March 31, 1997 covering 1994, 1995 and 1996. The audit
opinion issued by the predecessor accountants dated March 31, 1997 included an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern due to certain step-down payments required during
1997 under the Company's Senior Credit Facility. As discussed in Note 8 of the
Notes to Consolidated Financial Statements, on December 23, 1997, the Company
entered into the New Facility, the proceeds of which were utilized to refinance
the Company's then existing senior credit facility, that increased the Company's
borrowing capacity and extended the term into 1999, thereby removing the
substantial doubt expressed in the predecessor accountants' audit opinion.
Fiscal years 1995 and 1996 in the Consolidated Financial Statements have been
re-audited by the Company's current independent accountants.
In the third quarter of 1997 Medaphis combined the operations of Healthcare
Information Technologies ("HIT"), its software products division ("Per-Se
Product Operations"), and the operations of BSG Corporation ("BSG"), its
information technology services division ("Per-Se Services Operations"), under
the name Per-Se Technologies. This combination has helped the Company in its
efforts to contain costs and eliminate redundancies.
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On May 28, 1997, Medaphis sold Healthcare Recoveries, Inc. ("HRI") through
an initial public offering of 100% of its stock, which generated net proceeds to
the Company of approximately $117.0 million. Such proceeds were used to repay
indebtedness under the Company's then existing senior credit facility.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 16 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
The Company's business segments are comprised of Physician Services,
Hospital Services, Per-Se Product Operations and Per-Se Services Operations. The
Company's Physician Services and Hospital Services segments are operated as part
of its Healthcare Services Group and Per-Se Product Operations and Per-Se
Services Operations are operated as part of Per-Se Technologies. Per-Se Product
Operations and Per-Se Service Operations had previously been operated by the
Company as HIT and BSG, respectively.
Physician Services
Physician Services is a leading provider of business management solutions
and claims processing to physicians in the United States. The Company serves
more than 17,000 physician clients throughout 47 states. Physician Services
offers clients both revenue and cost management services. Revenue management
services include medical coding, electronic and manual claims submission,
automated patient billing, past due and delinquent accounts receivable
collection, capitation analysis (i.e., an analysis of the price per member paid
to healthcare providers by managed care health programs for a predetermined set
of healthcare services and procedures) and contract negotiation with payors,
including managed care organizations. Cost management provide comprehensive
practice management services including front office administration, employee
benefit plan design and administration, cash flow forecasting and budgeting and
general consulting services.
Physician Services' current systems support approximately 30 different
medical and surgical specialties. Although Physician Services is preparing for
growth in the academic and office-based markets, the majority of Physician
Services' customers are in the hospital-based market.
To meet the business management service needs of hospital-based, faculty
practice, and office-based physicians, Physician Services has developed a broad
service selection. Its core services include accounts receivable management,
fee-for-service billing, expense accounting, practice consulting, analysis of
practice statistics, and electronic data interchange ("EDI") consulting
regarding claims and remittance status. Physician Services also has developed a
variety of emerging services in response to the changing business needs of
physicians, including: activity-based costing systems; consulting services
regarding alliances and mergers and acquisitions; capitation management and
analysis; compliance services; consulting regarding EDI for eligibility,
referrals and authorizations; outcomes reporting; and medical guidelines
management. Physician Services has expanded its range of services to include
information management and consulting services for mergers and group formations,
and has created a distinct operating unit whose exclusive mission is to manage
specialty networks.
The Physician Services business is highly competitive. The Company competes
with national and regional physician reimbursement organizations and certain
physician groups and hospitals which provide their own business management
services. Competition among these organizations is based upon the relationship
with the client or prospective client, the efficiency and effectiveness of
converting medical services to cash, the ability to provide proactive practice
management services and, to the extent that service offerings are comparable,
upon price.
Hospital Services
Hospital Services is a leading provider of business management services to
hospitals in the United States, representing over 1,100 hospitals in a highly
fragmented industry. Hospital Services offers services primarily related to
"late stage" (over 90 days) receivables, including claims submission and
automated patient billing.
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Hospital Services' target market is primarily community hospitals. Hospital
Services offers its customers a broad range of services, which can be purchased
individually or as a complete package, depending on the customer's needs. The
products and services offered by Hospital Services includes:
- Patient Financial Services Outsourcing. Under its most intensive
program, Hospital Services customizes management systems and services to
assume responsibility for the customer's entire business office functions,
including patient admissions/registration, medical records and business
office activities.
- Customized Collection Services. Medaphis' collection agency
services collections contracts in the healthcare industry. Its regional
offices offer (i) a national presence represented through regional
headquarters, (ii) an experienced management team and (iii) a healthcare
focus.
- Extended Business Office Services. Through this program, Hospital
Services assumes responsibility for managing collection of assigned
accounts receivable.
- Managed Care and Charge Accuracy Services. Hospital Services
identifies underpaid claims, helps in contract negotiation and
administration, and assists in payment recovery to assure accurate
reimbursement.
- Claims Resolution Services. These services assist customers in
favorably resolving disputes with third party payors.
- Entitlement Program Services. Under this program, Hospital Services
assists patients in qualifying for reimbursement under appropriate federal,
state, and local government healthcare programs.
- Consulting Services. Hospital Services provides specialized
consulting services, including interim management and supervisory services,
business office reviews, evaluations and assessments, management
recruitment, and seminars for in-house personnel.
- Shared Systems. Hospital Services' shared systems enable customers
to license and operate Hospital Services' software, on a 'turnkey' basis.
The hospital services business in the healthcare industry is highly
competitive. The Company competes with national and regional hospital
reimbursement organizations and certain hospitals which provide their own
business management services. Competition among these organizations is based
upon the relationship with the client or prospective client, the efficiency and
effectiveness of converting medical and hospital services to cash, the ability
to provide proactive practice management services and, to the extent that
service offerings are comparable, upon price.
Per-Se Product Operations
Per-Se Product Operations segment provides application software and systems
integration services to over 1,800 hospitals and 4,000 physicians. Per-Se
Product Operations offers the following product lines: (i) an integrated
enterprise-wide patient-centered information system that coordinates quality
integrated care at nearly 200 acute-care and extended-care facilities
representing more than 30,000 beds, and for thousands of ambulatory clinics and
home-care providers; (ii) an advanced radiology information management system
for both single- and multi-site hospitals and imaging center networks; and (iii)
a suite of rules-based staff productivity, patient scheduling and resource
management software installed at over 1,900 global locations. These products
address both the business and the clinical management needs of Per-Se's
healthcare provider customers, and can function in either a stand-alone provider
setting or across an entire healthcare delivery network. Per-Se also provides a
variety of interfaces to ensure that its products are compatible with other
software products used by healthcare providers. Per-Se Product Operations'
revenue is derived from software licenses, resale of hardware, installation and
implementation services, and continuing customer support and software
maintenance activities.
Per-Se Product Operations is comprised of Automation Atwork ("Atwork"), the
provider of the rules-based staff productivity, patient scheduling and resource
management software referred to above; Consort Technologies, Inc., the provider
of advanced radiology information management systems for single and multi-
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site hospitals and imaging center networks; and HDS which distributes
patient-centered clinically-based information systems.
The healthcare information technology business is highly competitive. The
Company competes primarily with national companies, many of which have longer
operating histories and greater financial resources than those of the Company.
These competitors exist in both the "best of breed" niche marketplace and in the
enterprise-wide market for broad sets of application products. Competition among
these companies is based on product quality, ease of use and ease of integration
of new products with other existing and planned applications.
Per-Se Services Operations
Through Per-Se Services Operations, the Company provides full-service
systems integration, information technology consulting and tailored software
development to more than 100 customers, primarily in service-oriented markets
such as healthcare, energy, communications and financial services. The Company
provides its expertise in information technology and business services to
organizations seeking to create competitive advantages through the strategic use
of advanced technologies. These technologies enable customers to streamline
business processes and improve access to information within their organizations,
as well as to create strategic advantages by extending business processes and
information to customers, suppliers and other organizations through networked
systems.
The systems integration, information technology consulting and software
development industry is highly fragmented and characterized by low barriers to
entry, rapid change and intense competition. The markets in which Per-Se
Services Operations compete include companies specializing in information
technology and systems integration consulting services, application development
companies, software development and systems integration units of major computer
equipment manufacturers, information systems facilities management and
outsourcing organizations, major accounting firms and information systems groups
of large general management consulting firms.
Many of Per-Se Services Operations' competitors have longer operating
histories and substantially greater financial, technical and marketing
resources, and generate greater systems technology consulting and systems
integration revenue. The introduction of lower priced competition or significant
price reductions by current or potential competitors, or such competitors'
ability to respond more quickly than Per-Se Services Operations to new or
emerging technologies or changes in customer requirements, could have an adverse
effect on Per-Se Services Operations' business.
Many of Per-Se Services Operations' current and potential customers
periodically evaluate whether to staff system implementation and deployment
projects with their in-house information systems staff instead of an outside
services company.
RESULTS BY INDUSTRY SEGMENT
Information relating to the Company's industry segments, including revenue,
operating profit or loss and identifiable assets attributable to each segment
for each of the fiscal years 1995 through 1997 is presented in Note 16 of Notes
to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.
HEALTHCARE INDUSTRY
The Company's business is affected 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 paid the prices established
by providers while other healthcare payors, notably government agencies and
managed care companies, have paid 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
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purchased by government agencies and others but not paid for 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 accounts receivable 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 the 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 affecting 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 adversely affected and
could continue to adversely affect the revenues and profit margins of the
Company's operations.
RESEARCH AND DEVELOPMENT
The Company recorded research and development expenses of approximately
$2.8 million, $3.2 million and $3.3 million in 1995, 1996 and 1997,
respectively.
REGULATION
Under Medicare law, physicians and hospitals are only permitted to assign
Medicare claims to a billing and collection service in certain limited
circumstances. The Medicare statutes that restrict the assignment of Medicare
claims are supplemented by Medicare regulations and provisions in the Manual.
The Medicare regulations and the Manual provide that a billing service that
prepares and sends bills for the provider or physician and does not receive and
negotiate the checks made payable to the provider or physician does not violate
the restrictions on assignment of Medicare claims. Management believes that its
practices do not violate the restrictions on assignment of Medicare claims
because, among other things, it bills only in the name of the medical provider,
checks and payments for Medicare services are made payable to the medical
provider and the Company lacks any power, authority or ability to negotiate
checks made payable to the medical provider. Medaphis, medical billing and
collection activities are also governed by numerous federal and state civil and
criminal laws. In general, these laws provide for various fines, penalties,
multiple damages, assessments and sanctions for violations, including possible
exclusion from Medicare, Medicaid and certain other federal and state healthcare
programs. See Item 3. Legal Proceedings.
Submission of claims for services or procedures that are not provided as
claimed may lead to civil monetary penalties, criminal fines, imprisonment
and/or exclusion from participation in Medicare, Medicaid and other federally
funded healthcare programs. Specifically, the Federal False Claims Act allows a
private person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and for such person to share in any
amounts paid to the government in damages and civil penalties. Successful
plaintiffs can receive up to 25-30% of the total recovery from the defendant.
Such qui tam actions or "whistle-blower" lawsuits have increased significantly
in recent years and have increased the risk that a company engaged in the
healthcare industry, such as Medaphis and many of its clients, may become the
subject of a federal or state investigation or may ultimately be required to
defend a false claims action, may be subjected to government investigation and
possible criminal fines, may be sued by private payors and may be excluded from
Medicare, Medicaid and/or other federally funded healthcare programs as a result
of such an action. The government on its own may also institute a Civil False
Claims Act case, either in conjunction with a criminal prosecution or as a stand
alone civil case. Whether instituted by a qui tam plaintiff or by the
government, the government can recover triple its damages together with civil
penalties of $5,000-$10,000 per false claim. Under applicable case law, a party
successfully sued under the Federal False Claims Act may be jointly and
severally liable for damages and penalties. Some state laws also provide for
false claims actions, including actions initiated by a qui tam plaintiff. There
can be no assurance that Medaphis will not be the subject of false claims or qui
tam proceedings relating to its billing and collection activities or that
Medaphis will not be the subject of further government scrutiny or
investigations relating to its billing and accounts receivable
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management services operations. See Item 3. Legal Proceedings. Any such
proceeding or investigation could have a material adverse effect upon the
Company.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Act sets forth various provisions designed
to eliminate abusive, deceptive and unfair debt collection practices by debt
collectors. The Federal Fair Debt Act also provides for, among other things, a
civil right of action against any debt collector who fails to comply with the
provisions thereof. Various states have also promulgated laws and regulations
that govern credit collection practices. In general, these laws and regulations
prohibit certain fraudulent and oppressive credit collection practices and also
may impose license or registration requirements upon collection agencies. In
addition, state credit collection laws and regulations generally provide for
criminal fines, civil penalties and injunctions for failure to comply with such
laws and regulations. Although most of the Company's billing and accounts
receivable management services the Company provides to its clients are not
considered debt collection services, the Company may be subjected to regulation
as a "debt collector" under the Federal Fair Debt Act and as a "collection
agency" under certain state collection agency laws and regulations. Management
believes that the Company operates in accordance with the Federal Fair Debt Act
and complies in all material respects with the applicable collection agency laws
and regulations governing collection practices in the states in which it
conducts its business or is exempt from such laws and regulations.
The ownership and operation of hospitals is subject to comprehensive
regulation by federal and state governments which may adversely affect hospital
reimbursement. Hospitals are paid a predetermined amount for operating expenses
relating to each Medicare patient admission based on the patient's diagnosis.
Additional changes in the reimbursement provisions of the Medicare and Medicaid
programs may continue to reduce the rate of increase of federal expenditures for
hospital inpatient costs and charges. Such changes could have an adverse effect
on the operations of hospitals in general, and consequently reduce the amount of
the Company's revenue related to its hospital clients.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing and collection practices of healthcare providers and related entities.
This scrutiny has been directed at, among other things, fraudulent billing
practices. The Department of Health and Human Services in recent years has
increased the resources of its Office of the Inspector General ("OIG")
specifically to pursue both false claims and fraud and abuse violations under
the Medicare program. This heightened examination has resulted in a number of
high profile investigations, lawsuits and settlements.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, Pub. L. No. 104-191, 1996 U.S.C.C.A.N. (110 Stat. 1936) (codified
in scattered titles of the United States Code, including 18, 26, 29 and 42
U.S.C.) which includes an expansion of certain fraud and abuse provisions, such
as expanding the application of Medicare and Medicaid fraud penalties to other
federal healthcare programs, and creating additional criminal offenses relating
to healthcare benefit programs, which are defined to include both public and
private payer programs. The Health Insurance Act also provides for forfeitures
and asset freezing orders in connection with such healthcare offenses. Civil
monetary penalties and program exclusion authority available to the OIG also
have been expanded. The Health Insurance Act contains provisions for instituting
greater coordination of federal, state and local enforcement agency resources
and actions through the OIG. There also have been several recent healthcare
reform proposals which have included an expansion of the anti-kickback laws to
include referrals of any patients regardless of payer source.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation was on budgetary and related funding mechanism issues. A
number of reports, including the 1995 Annual Report of the Board of Trustees of
the Federal Hospital Insurance Program, projected that the Medicare trust fund
is likely to become insolvent by the year 2002 if the current growth rate of
approximately 10% per annum in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the federal
budget, both the Congress and the Clinton
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Administration have made proposals to reduce the rate of increase in projected
Medicare and Medicaid expenditures and to change funding mechanisms and other
aspects of both programs. In late 1995, Congress passed legislation that would
substantially reduce projected expenditure increases and would make significant
changes in the Medicare and the Medicaid programs. The Clinton Administration
has proposed alternate measures to reduce, to a lesser extent, projected
increases in Medicare and Medicaid expenditures. Neither proposal became law
prior to Congress' 1996 adjournment. Medaphis anticipates that both the Clinton
Administration and the Republican majorities in Congress will introduce
legislation in 1997 designed to reduce projected increases in Medicare and
Medicaid expenditures and to make other changes in the Medicare and Medicaid
programs. Medaphis anticipates that such proposed legislation would, if adopted,
change aspects of the present methods of paying physicians under such programs
and provide incentives for Medicare and Medicaid beneficiaries to enroll in
health maintenance organizations and other managed care plans. Medaphis cannot
predict the effect of any such legislation, if adopted, on its operations.
A number of states in which Medaphis has operations either have adopted or
are considering the adoption of healthcare reform proposals at the state level.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These medical reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services by integrated delivery systems may result in a decrease in
demand for Medaphis billing and collection services for particular physician
practices, but this decrease may be offset by an increase in demand for
Medaphis' consulting and comprehensive business management services (including
billing and collection services) for the new provider systems.
EMPLOYEES
The Company currently employs approximately 9,800 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are leased and are located in
Atlanta, Georgia. The lease expires in February 2000.
Healthcare Services Group
Physician Services' principal office is leased and is located in Atlanta,
Georgia. The lease expires in February 2000. In addition to its principal
office, Physician Services, through its various operating subsidiaries, operates
approximately 174 business offices throughout the United States. Two of the
facilities are owned and unencumbered. All of the remaining facilities are
leased with expiration dates ranging from April 1998 to April 2005.
Hospital Services' principal office is leased and is located in Norcross,
Georgia. The lease expires in May 2002. In addition to its principal office,
Hospital Services, through its various operating subsidiaries, operates
approximately 41 business offices throughout the United States. These facilities
are leased with expiration dates ranging from April 1998 to September 2002.
Per-Se Technologies
Per-Se Technologies' principal office is leased and is located in Atlanta,
Georgia. The lease expires in September 1999. In addition to its principal
office, Per-Se Technologies, through its various operating subsidiaries,
operates approximately 36 offices in the United States, Australia, Canada and
Europe. These facilities are leased with expiration dates from April 1998 to
April 2004.
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ITEM 3. 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, MPSC, which offices are
located in Calabasas and Cypress, California (the "Designated Offices") (the
"California Investigation"). Medaphis first became aware of the California
Investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally for
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued to payors with respect to such global billing reports in the
Company's various offices, including the Designated Offices.
Investigations such as the California Investigation can be initiated
following the commencement of qui tam litigation which is commenced under
applicable state and federal statutes and is maintained under court seal without
disclosure to the defendant. Under the applicable statutes, the United States
and the State of California may elect to intervene fully or partially in qui tam
litigation, and proceed with the action. The United States typically will
provide a defendant with the opportunity to enter into settlement negotiations
prior to the intervention of the United States in the matter. An application by
the United States to partially lift the seal in qui tam litigation in order to
make disclosure of the complaint available to the defendant often precedes such
settlement discussions.
On February 6, 1998, on application of the United States, the United States
District Court for the Central District of California issued an order partially
lifting the seal on the qui tam suit entitled United States of America and State
of California, ex rel. Relator I and Relator II v. Compmed Corporation, Medaphis
Corporation, Does 1 to 200, Inclusive. Civil Action No. 94-8158 LGB (kx). On
February 11, 1998, the United States provided Medaphis with a copy of the
Complaint, Substitution of Attorney, and Order which prohibited the Company from
making any use of the Complaint, including any public disclosure, other than for
the purposes of settlement negotiations, without further order of the Court. On
February 12, 1998, upon the joint application of Medaphis and the United States,
the Court issued an order modifying its February 6, 1998 order to allow Medaphis
to make public disclosures concerning the Complaint and its contents to the
extent that Medaphis determined such disclosures were required by applicable
securities laws, provided that such disclosure did not reveal the Relators'
identities.
According to the Complaint, filed December 20, 1995 by the Relators and
which contains allegations raised by them, the action is to recover damages and
civil penalties on behalf of the United States and the State of California
arising out of alleged false claims presented by the defendants on behalf of
their clients for payment under various state and federal insurance programs. No
charges or claims by the government have been made. The Complaint includes
causes of action under the Federal False Claims Act, 31 U.S.C. sec 3729 et seq.,
and the California False Claims Act, Cal. Gov't Code sec. 12650 et seq. The
Complaint also includes causes of action relating to Medaphis's termination of
Relator II, including a count under the state and federal whistleblower
protection statutes. The Complaint alleges overpayments of approximately
$20,500,000 together with treble damages and additional penalties based on
statutory civil penalties. The Complaint alleges that at least 50,000 separate
false claims were filed under federal programs and at least 8,000 separate false
claims were filed under state programs. The Complaint also alleges unspecified
compensatory, general and punitive damages on behalf of Relator II on his or her
employment claims. The allegations in the Complaint are limited to the office of
CompMed (acquired by Medaphis) in Culver City, California. Medaphis believes
that this Complaint relates to and concerns the California Investigation.
Medaphis is engaged in discussions with the United States and California, and
intends to pursue settlement discussions with the United States, the State of
California, and the Relators. The Company has agreed with the government to toll
applicable statutes of limitations through September 30, 1998.
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Although the Company continues to believe that the principal focus of the
California Investigation remains on the billing and collection practices in the
Designated Offices, there can be no assurance that the California Investigation
will not expand to other offices, that the California Investigation or the qui
tam suit will be resolved promptly, that additional subpoenas or search warrants
will not be received by Medaphis or MPSC or that the California Investigation or
the qui tam suit will not have a material adverse effect on the Company. The
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the California Investigation and the
putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the California Investigation. The
charges are intended to cover only the anticipated expenses of the California
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.
In September 1996, MPSC became aware of apparently inadvertent computer
software errors affecting some of its electronic billing to carriers in the
State of California. The error relates to global billing (i.e., billing for the
professional and technical components of a service) for certain radiological
services under circumstances where the radiologist is only entitled to bill for
the professional component of such services. The Company believes such
inadvertent errors may have caused overpayments on certain claims submitted on
behalf of clients in the State of California. The full extent of overpayments by
carriers and beneficiaries, which impacts only certain managed care plans,
cannot be determined by the Company, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error. The Company is
unable to estimate the possible range of loss, if any.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, 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 alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act and the Company's underwriters and outside directors were no
longer named as defendants. On June 26, 1996, the court denied plaintiffs'
motion to certify plaintiffs' class. On May 19, 1997, the plaintiffs and the
defendants entered into a stipulation and settlement agreement, pursuant to
which the parties agreed 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 included the related putative class action lawsuit
filed in the Superior Court of Cobb County, Georgia, described more fully below.
On October 28, 1997 the court certified a class for settlement purposes,
approved the settlement and entered final judgment dismissing the action with
prejudice. One of Medaphis' directors' and officers' liability insurance
carriers has paid $3.7 million of the 1995 Class Action Settlement directly for
the benefit of the plaintiffs. The Company accrued approximately $1.2 million in
the quarter ended December 31, 1996 for the anticipated balance of the 1995
Class Action Settlement and to pay certain fees incident thereto. On November 6,
1997, the Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was brought on behalf of a
putative class of purchasers of Medaphis Common Stock during the period from
March 29, 1995 through
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June 15, 1995. Plaintiffs sought compensatory damages and costs. Pursuant to the
1995 Class Action Settlement, the claims in this state action were settled and
were dismissed without prejudice.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan are
investigating allegations concerning the Company's wholly owned subsidiary,
Gottlieb's Financial Services, Inc. ("GFS") (the "GFS Investigation"). Beginning
in February, 1998, the Office of the Inspector General of Health and Human
Services has requested information from GFS following an audit of a GFS client.
GFS has complied with those requests. 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 each of the years ended
December 31, 1996 and 1997, GFS represented approximately 7% of Medaphis'
revenue. During those years, GFS processed approximately 5.6 million and 6.25
million claims, respectively, approximately 2 million and 2.3 million of which,
respectively, were made to government programs. The government has requested
that GFS voluntarily produce records, and GFS has complied with that request.
Although the precise scope and subject matter of the GFS Investigation are not
known to the Company, Medaphis believes that the GFS 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. The Company is actively pursuing settlement
discussions with the United States and representatives of various states. There
can be no assurance that the GFS Investigation will be resolved promptly, that
it can be settled on terms acceptable to the Company, or that the GFS
Investigation will not have a material adverse effect upon Medaphis. No charges
or claims by the government have been made. Currently, the Company has recorded
charges of $2 million and $1 million in the second and third quarters of 1997,
respectively, solely for legal and administrative fees, costs and expenses in
connection with the GFS Investigation, which charges do not include any
provision for fines, penalties, damages, assessments, judgments or sanctions
that may arise out of this matter.
In addition, the Company decided in April 1998 to transition from the
computerized coding system to manual coding. There can be no assurances that the
Company will not be subject to customer complaints, claims and contract
terminations as a result of the coding system transition or modifications
previously made to the system. See "Item 7. Management's Discussion and Analysis
of Results of Operations -- Liquidity and Capital Resources."
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 alleged violations of the federal
securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures. The Consolidated Second Amended
Complaint was brought on behalf of a class of persons who purchased or otherwise
acquired Medaphis Common Stock between February 6, 1996 and October 21, 1996.
The Consolidated Second Amended Complaint also asserted claims on behalf of a
sub-class of all persons who acquired Medaphis Common Stock pursuant to the
merger between Medaphis and HDS. The Consolidated Second Amended Complaint
sought compensatory and rescissory damages, as well as fees, interest and other
costs. 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. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Other Matters."
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The parties entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") 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 (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
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 Stipulation
also includes, among other things: (i) a complete release of claims against the
Company, the individual defendants and certain related persons and entities; and
(ii) certain anti-dilution rights in favor of 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
pending or asserted against the Company, subject to a 5.0 million share basket
below which there will be no dilution adjustments. The Stipulation also contains
other 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, and the final approval of the settlement by the
court. On December 15, 1997, the court granted preliminary approval to the
settlement and conditionally certified the classes for settlement purposes only.
The Company's insurance carriers consented to the settlement and funded the $20
million cash portion. On March 25, 1998, the Court granted final approval of the
settlement and entered final judgment dismissing the action.
The Company recorded a $52.5 million charge in the quarter ended September
30, 1997 in connection with the Stipulation. This charge is comprised of the
following: (i) $30.2 million representing the original 3,355,556 shares of
common stock valued at the fair value of a common share on the date that the
material terms of the agreement were reached or approximately $9 per share and
(ii) $22.3 million representing the fair value of the warrants on the date the
material terms of the agreement were reached, valued using the Black-Scholes
option pricing model with the following assumptions: expected life -- 5 years,
risk free interest rate -- 6%, dividend rate -- 0% and expected volatility
factor -- 60%. No accounting recognition was required for the additional 600,000
shares to be issued pursuant to the agreement as these shares represent the
maximum number of contingent shares that were issuable based on certain stock
price contingencies during the ten day period prior to October 11, 1997. As a
result of the actual decline in the Company's stock price during such period,
the Stipulation required that the maximum number of contingent shares be
awarded; however, no additional accounting charge is required in connection with
the award of such contingent shares. Although the exact timing of the issuance
of the 3,955,556 shares is not known, the Company does not expect such shares to
be issued before the second quarter of 1998. Additionally, no accounting
recognition has been afforded the cash portion of the Stipulation as this amount
is the responsibility of the insurance carriers. Such amount has been paid
directly to an escrow account for the benefit of the plaintiffs by the insurance
carriers. The Company has classified the entire $52.5 million liability
associated with the settlement as noncurrent since such obligation will be
settled with equity (common stock and warrants) rather than current assets, and
the exact timing of the payment of claims pursuant to such settlement is not
determinable.
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 "Derivative Suit"). The plaintiff seeks
unspecified 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 all other defendants filed a motion to
dismiss the amended complaint, which motion was denied without prejudice. The
parties have reached an agreement in principle to settle the Derivative Suit for
$250,000 in cash to be paid by the Company's directors' and officers' liability
insurance carrier. Such agreement in principle is subject to definitive
documentation, consent and approval of the insurance carrier (which has been
requested by the Company), and preliminary and final approval of the settlement
by the court.
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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 in excess of $100 million,
rescission, injunctive relief and costs. The Company is unable to estimate a
possible range of loss. On January 10, 1997, the defendants filed a demurrer to
the complaint. On February 5, 1997 the Court overruled defendants' demurrer. 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 and
current officers of Medaphis. All of the newly added defendants have 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 Securities Act, but the Company
believes that it has substantial defenses to the alleged damages relating to
such Securities 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). Plaintiffs seek
unspecified compensatory and punitive damages, as well as fees, interest and
other costs. The Company is unable to estimate a possible range of loss. 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
Securities Act and common law and new parties, including former officers of
Medaphis, Medaphis' former outside auditors and BSG. On or about October 29,
1997 all defendants filed motions to dismiss the amended complaint. On May 12,
1998, the court ruled in favor of defendants on the motions, dismissing all of
plaintiffs' claims with prejudice and without leave to amend. On May 15, 1998,
the Judge signed an order dismissing all of the plaintiff's claims.
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 December 31, 1996, Medaphis entered into
a standstill and tolling agreement with Mr. Noorda, Mr. Papermaster and other
former BSG shareholders, which, as extended, runs through June 30, 1998. The
standstill and tolling agreement extends any applicable statute of limitations
for claims by the former BSG shareholders and provides that neither party will
file suit against the other prior to the expiration of the agreement.
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 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
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all MMS shares, as well as damages in excess of $100 million. The Company is
unable to estimate a possible range of loss. Additionally, plaintiffs seek to
void various non-compete covenants and contract provisions between Medaphis and
plaintiffs. Defendants have filed a motion to dismiss the complaint. Discovery
has been stayed pending resolution of the motion to dismiss.
On August 12, 1997, George D. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Exchange Act on behalf of all
persons who purchased or otherwise acquired Medaphis Common Stock between
February 6, 1996 and October 21, 1996. The complaint also asserts claims under
the Securities Act on behalf of a subclass consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, unspecified rescissory and
compensatory damages, and interest, fees and other costs. The parties have
reached an agreement in principle to settle the Stickle complaint. The
settlement provides for $137,500 in cash to be paid by the Company's directors'
and officers' liability insurance carrier and a number of shares of Medaphis
Common Stock to be determined such that the aggregate value of the cash portion
of the settlement and the stock portion of the settlement (with the Medaphis
shares being deemed to have an agreed upon value) will approximate $500,000.
Such agreement in principle is subject to definitive documentation, consent and
approval of the Company's insurance carrier (which has been requested by the
Company), and preliminary and final approval of the settlement by the court.
The Company also has received other written demands from various
stockholders, including stockholders of recently acquired companies. To date,
these other stockholders have not filed lawsuits.
On January 8, 1997, the Commission notified the Company that it 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. In addition, the Company believes that the
Commission is investigating the Company's restatement of its interim financial
statements for each quarter of 1996 and the November 19, 1997 and December 23,
1997 restatements of the Company's financial statements. 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, including, without limitation, the Company's results of operations,
financial position and cash flow. Because the Company is unable to estimate a
range of loss with respect to any of the pending claims, the Company has not
accrued any amounts for any contingent liability with respect to such unsettled
claims.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for a vote during the fourth
quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of January 30, 1998:
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
- ---- --- -------- ---------------
David E. McDowell................ 55 Chairman and Chief Executive 1996
Officer and Director
Randolph L.M. Hutto.............. 49 Executive Vice President 1997
and General Counsel
Allen W. Ritchie................. 40 Executive Vice President and 1998
Chief Financial Officer
C. James Schaper................. 46 Executive Vice President and 1997
Chief Operating Officer
Harvey Herscovitch............... 60 Senior Vice 1997
President -- Strategy &
Organization
Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
DAVID E. MCDOWELL joined Medaphis in October 1996 as Chairman and Chief
Executive Officer. Mr. McDowell was appointed to the Medaphis Board of Directors
in May 1996. From 1992 to 1996, Mr. McDowell was President, Chief Operating
Officer and a director of McKesson Corporation. McKesson Corporation is the
world's largest distributor of pharmaceutical and healthcare products through
McKesson Drug Company in the United States and Medis Health and Pharmaceutical
Services, Inc. in Canada. Prior to 1992, Mr. McDowell served for over 25 years
as a senior executive at IBM, including as a Vice President and President of the
National Services Division.
RANDOLPH L. M. HUTTO joined Medaphis in August 1997 as Executive Vice
President and General Counsel. From 1992 to 1996, Mr. Hutto was employed by
First Data Corporation (formally known as First Financial Management
Corporation) where he served in a variety of executive positions, including
Senior Executive Vice President -- General Counsel and, most recently, Senior
Vice President -- Planning and Development. Prior to that, Mr. Hutto was a
partner in the law firm of Sutherland, Asbill & Brennan.
ALLEN W. RITCHIE joined Medaphis in January 1998 as Executive Vice
President and Chief Financial Officer. Mr. Ritchie served as President and Chief
Executive Officer of Royal Precision, Inc. from October 1997 to present. He
served as President, Finance and Administration of AGCO Corporation ("AGCO"),
headquartered in Atlanta, GA from July 1996 until January 1997 and President of
AGCO from January 1996 to July 1996. From September 1991 until December 1995, he
was AGCO's Chief Financial Officer and an Executive Vice President since July
1994. Mr. Ritchie also served on the Board of Directors of AGCO and as a member
of the Board's Strategic Planning Committee.
C. JAMES SCHAPER joined Medaphis in March 1997 as President of Medaphis
Healthcare Information Technology Company and Executive Vice President of
Medaphis. From 1994 to 1997, Mr. Schaper held numerous positions with Dun &
Bradstreet Software, including President, Chief Executive Officer, Chief
Operating Officer, Executive Vice President, and Senior Vice President, Field
Operations and Marketing. From 1989 to 1994, Mr. Schaper held several positions
with Banyan Systems, Inc., including Senior Vice President, Worldwide Sales and
Marketing, Vice President, North America Field Operations and Regional Vice
President.
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HARVEY HERSCOVITCH joined Medaphis in February 1997 and serves as Senior
Vice President -- Strategy & Organization. From 1993 to December 1996, Mr.
Herscovitch served as an independent consultant in the pharmaceutical benefits
management and wholesale pharmaceutical distribution industries. Prior to 1993,
Mr. Herscovitch was employed by IBM Corporation in a variety of executive
positions dealing with the services side of the business.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the Nasdaq National Market under
the symbol MEDA.
The prices in the table below represent the high and low sales price for
the Common Stock as reported in the National Market System for the periods
presented. Such prices are based on inter-dealer bid and asked prices without
markup, markdown, commissions or adjustments and may not represent actual
transactions.
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---------------------------- ------- -------
First Quarter............................................. $53.250 $34.000
Second Quarter............................................ 50.250 34.625
Third Quarter............................................. 42.500 11.250
Fourth Quarter............................................ 18.500 8.250
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---------------------------- ------- -------
First Quarter............................................. $14.750 $ 9.625
Second Quarter............................................ 10.500 3.500
Third Quarter............................................. 11.000 6.125
Fourth Quarter............................................ 8.750 4.938
The last reported sales price of the Common Stock as reported on the Nasdaq
National Market on January 23, 1998 was $6.938 per share. As of January 23, 1998
the Company's Common Stock was held of record by 723 stockholders.
Medaphis has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. The New Facility
contains restrictions on the Company's ability to declare or pay cash dividends
on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial information
for Medaphis for and as of each of the five fiscal years in the period ended
December 31, 1997. The selected consolidated financial information of Medaphis
for each of the three fiscal years in the period ended December 31, 1997 and as
of December 31, 1995, 1996 and 1997 has been derived from the audited
consolidated financial statements of Medaphis which give retroactive effect to
the mergers with Atwork, HRI, Rapid Systems, BSG and HDS, all of which have been
accounted for as poolings-of-interests. The selected consolidated financial data
of Medaphis for each of the two fiscal years ended December 31, 1994 and as of
December 31, 1993 and 1994 has been derived from the unaudited consolidated
financial statements of Medaphis, which give retroactive effect to the mergers
with Atwork, HRI, Rapid Systems, BSG and HDS, all of which have been accounted
for using the pooling-of-interests method of accounting. The Company's
consolidated financial statements as of and for each of the two fiscal years in
the period ended December 31, 1994 are unaudited because the Company's
predecessor accountants withdrew its audit opinions covering these periods. See
Note 2 to the Notes to Consolidated Financial Statements. Management believes
that the unaudited consolidated financial statements referred to
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above include all adjustments (consisting only of normal recurring adjustments)
that are necessary for a fair presentation of the financial position and results
of operations for such periods.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue............................. $250,094 $369,483 $538,012 $ 596,714 $572,625
Salaries and wages.................. 151,913 216,950 314,790 398,573 377,363
Other operating expenses............ 65,258 88,655 134,055 163,677 153,372
Depreciation........................ 6,967 9,065 14,187 28,276 29,355
Amortization........................ 6,926 10,310 18,048 25,713 24,137
Interest expense, net............... 6,202 5,591 9,761 11,585 23,260
Litigation settlement............... -- -- -- -- 52,500
Restructuring and other charges..... -- -- 48,750 180,316 22,640
Income (loss) before extraordinary
item and cumulative effect of
accounting change................ 5,984 25,682 (2,650) (137,337) (93,229)
Net income (loss)................... 5,984 25,682 (2,650) (137,337) (19,303)(3)
Pro forma net income (loss)(1)...... 6,001 24,251 (4,780) (136,358) (19,303)
Weighted average shares
outstanding...................... 39,179 46,128 52,591 71,225 72,679
PER SHARE DATA(1)(2)
Pro forma basic income (loss) before
extraordinary item and cumulative
effect of accounting change...... $ 0.15 $ 0.53 $ (0.09) $ (1.91) $ (1.28)
Pro forma basic net income (loss)... $ 0.15 $ 0.53 $ (0.09) $ (1.91) $ (0.26)
AS OF DECEMBER 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ------------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital..................... $ 48,757 $ 65,549 $ 90,043 $ 56,492 $ 93,497
Intangible assets................... 181,000 376,827 611,544 539,151 515,939
Total assets........................ 334,361 597,487 935,790 936,854 874,027
Total debt.......................... 76,308 218,374 161,246 271,727 200,941
Convertible subordinated
debentures....................... 63,375 63,375 63,375 -- --
Stockholders' equity................ $166,706 $236,003 $554,074 $ 508,525 $501,781
- ---------------
(1) In 1995 and 1996, the Company acquired Atwork, Consort, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior
to the mergers, Atwork, Consort, IVC, Rapid Systems and a company acquired
by BSG prior to the Company's merger with BSG had elected "S" corporation
status for income tax purposes. As a result of the mergers (or, in the case
of the company acquired by BSG, its acquisition by BSG), such entities
terminated their "S" corporation elections. Pro forma net income (loss) and
pro forma net income (loss) per common share are presented in the
consolidated statements of operations as if each of these entities had been
a "C" corporation during the periods presented.
(2) In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share," and has retroactively restated all periods
presented.
(3) Reflects the extraordinary income of $76.4 million relating to the sale of
HRI and a $2.5 million charge for the change in accounting for business
process reengineering costs incurred in connection with an information
technology project, pursuant to Emerging Issues Task Force Consensus No.
97-13, "Accounting for Costs Incurred in Connection with a Consulting or an
Internal Project that Combines Business Process Reengineering and
Information Technology".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Medaphis is a leader in delivering healthcare information and business
management services, together with enabling technologies in selected industries.
Medaphis believes it is well-positioned to capitalize on the healthcare industry
trends toward consolidation, managed care and cost containment through a broad
range of services and products that enable customers to provide quality patient
care efficiently and cost effectively. Servicing approximately 20,700 physicians
and 2,700 hospitals, predominantly in North America, the Company's large client
base and national presence further support the Company's competitive position.
Medaphis provides its services and products through its Healthcare Services
Group and Per-Se Technologies, its Information Technology Group.
The Company suffered several setbacks in recent years, including (i)
government investigations into: (a) the billing and collection practices in two
offices of Medaphis Physician Services Corporation ("MPSC"), and (b) the billing
procedures and computerized coding system used at Gottlieb's Financial Services
("GFS") to process claims, which may lead to claims of errors in billing; (ii)
the failure of prior management's acquisition strategy to integrate businesses
acquired; (iii) several restatements of various financial statements of the
Company, including restatements of the Company's fiscal 1995, 1996 and interim
1997 financial statements; (iv) the shut down of the operations of one of the
companies acquired; (v) the abandonment of an extensive reengineering program
that failed to realize the improvement in customer service and reduction of
costs that were expected; (vi) a steep drop in the price of its Common Stock;
and (vii) the filing of various lawsuits and claims made against the Company,
including multiple putative shareholder class action lawsuits alleging
violations of the federal securities laws.
In response to certain of these setbacks, assembly of a new management team
began in the fourth quarter of 1996, headed by David E. McDowell (former
President and Chief Operating Officer of McKesson Corporation). The new
management team combines healthcare industry talent with information technology
expertise from other industries that have already undergone the transition to
effective use of information technology. The Company believes that the combined
strengths of this team position Medaphis to take advantage of growth
opportunities in the healthcare marketplace.
In addition, in February 1997, new management announced its 1997 operating
plan, refocusing the Company on its core business of delivering healthcare
information products and business management services, together with enabling
technologies in selected industries. The major components of the plan included:
(i) exiting non-core businesses; (ii) achieving improved predictability of
business results through enhanced management accountability and controls; (iii)
reducing costs and increasing efficiencies in its core businesses; (iv)
achieving excellence in customer service; and (v) implementing cross-selling
initiatives.
The Company made significant progress in accomplishing the 1997 operating
plan, including the divestiture of HRI, in May 1997 for net proceeds of
approximately $117.0 million, the combination of the operations of HIT and BSG
under the Per-Se name, the improvement of financial controls, the imposition of
cost-containment measures throughout the Company, and the formulation of a new
customer-focused strategy centered on a "markets of one" approach to creating
solutions that meet the distinct needs of each customer.
The Company also reached a proposed settlement in 1997 with the plaintiffs
in one of the major class-action securities lawsuits pending against it and,
during the third quarter of 1997, the Company recorded a non-cash charge of
$52.5 million related to this settlement. In addition, through the successful
completion of a $210.0 million loan facility (the "New Facility"), management
believes it has stabilized and provided for the near-term financing needs of the
Company.
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RESULTS OF OPERATIONS
The following table shows certain items reflected in the Company's
statements of operations as a percentage of revenue:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997
---------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
Revenue......................... $538,012 100.0% $ 596,714 100.0% $ 572,625 100.0%
Salaries and wages.............. 314,790 58.5 398,573 66.8 377,363 65.9
Other operating expenses........ 134,055 24.9 163,677 27.4 153,372 26.8
Depreciation.................... 14,187 2.6 28,276 4.7 29,355 5.1
Amortization.................... 18,048 3.4 25,713 4.3 24,137 4.2
Interest expense, net........... 9,761 1.8 11,585 2.0 23,260 4.1
Litigation settlement........... -- -- -- -- 52,500 9.2
Restructuring and other
charges....................... 48,750 9.1 180,316 30.2 22,640 3.9
-------- ----- --------- ----- --------- -----
Loss before income taxes........ (1,579) (0.3) (211,426) (35.4) (110,002) (19.2)
Income tax expense (benefit).... 1,071 0.2 (74,089) (12.4) (16,773) (2.9)
-------- ----- --------- ----- --------- -----
Loss before extraordinary item
and cumulative effect of
accounting change............. (2,650) (0.5) (137,337) (23.0) (93,229) (16.3)
Extraordinary item: Gain on sale
of HRI, net of tax............ -- -- -- -- 76,391 13.3
Cumulative effect of accounting
change, net of tax............ -- -- -- -- (2,465) (0.4)
-------- ----- --------- ----- --------- -----
Net loss...................... (2,650) (0.5) (137,337) (23.0) (19,303) (3.4)
Pro forma tax adjustments....... (2,130) (0.4) 979 0.2 -- --
-------- ----- --------- ----- --------- -----
Pro forma net loss.............. $ (4,780) (0.9)% $(136,358) (22.8)% $ (19,303) (3.4)%
======== ===== ========= ===== ========= =====
Fiscal 1997 compared to Fiscal 1996
REVENUE. Revenue classified by the Company's reportable segments is as follows:
YEAR ENDED
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $294,406 $279,593
Hospital Services........................................... 89,715 98,067
HRI......................................................... 31,419 14,720
Per-Se Product Operations................................... 70,047 90,977
Per-Se Services Operations.................................. 113,988 90,594
Eliminations................................................ (2,861) (1,326)
-------- --------
$596,714 $572,625
======== ========
Physician Services' revenue for the year ended December 31, 1997 declined
5.0% from the prior year principally due to an adjustment to revenue of $12.1
million in the third quarter of 1997 that resulted from a detailed review,
performed by the Company, to update the assumptions and methodology underlying
the calculation of accounts receivable, unbilled, for Physician Services. In
1997, management's emphasis has been on enhancing client service to its existing
clients and not on expanding the client base.
Hospital Services' revenue for the year ended December 31, 1997 increased
9.3% as compared to the comparable period in 1996. This increase reflects
internally-generated volume growth.
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22
Medaphis acquired HRI on August 28, 1995 in a transaction accounted for as
a pooling-of-interests. On May 28, 1997 Medaphis completed the sale of HRI and,
as a result, there are only five months of revenue from HRI in 1997 compared
with a full year for 1996.
Per-Se's Product Operations revenue increased 29.9% for the year ended
December 31, 1997, as compared with the year ended December 31, 1996. This
increase is primarily the result of an increase in license fees associated with
the ULTICARE(R) and scheduling product lines offset in part by charges of $4.7
million for adjustments to accounts receivable, unbilled relating to
unanticipated collection issues on certain contracts.
Per-Se's Services Operations revenue in 1996 includes the results of the
Company's wholly-owned subsidiary, Imonics Corporation ("Imonics"), which was
shut down at the end of 1996 (the "Imonics Shutdown"). Imonics generated $12.3
million of revenue during the year ended December 31, 1996. Excluding the
revenue generated by Imonics, Per-Se's Services Operations revenue decreased
10.9% for the year ended December 31, 1997, as compared with the year ended
December 31, 1996. Disruptions associated with the restructuring of this
division have negatively affected revenue. Also negatively impacting the
Per-Se's Services Operations revenue for 1997 was approximately $1.1 million of
adjustments for collection issues on certain contracts.
SALARIES AND WAGES. Salaries and wages for 1997 decreased to $377.4
million (65.9% of revenue) from $398.6 million (66.8% of revenue) in 1996. This
decrease is attributable to management's efforts to reduce costs by streamlining
processes and reducing the overall head count of the Company. Management further
reduced the Company's head count during the fourth quarter of 1997 within
Physician Services and Per-Se.
OTHER OPERATING EXPENSES. Other operating expenses decreased to $153.4
million (26.8% of revenue) in 1997 from $163.7 million (27.4% of revenue) in
1996. The decrease in other operating expenses as a percentage of revenue
reflects the cost management initiatives that were stated in the Company's 1997
business plan. Included in other operating expenses for 1997 are higher than
normal professional fees the Company incurred to assist with a variety of
financial, operational and organizational projects undertaken by the management
of the Company. Management believes that expenditures for professional fees will
decrease in 1998. Other operating expenses are primarily comprised of postage,
facility and equipment rental, telecommunications, travel, office supplies and
legal, accounting and other professional services.
DEPRECIATION. Depreciation expense was $29.4 million in the year ended
December 31, 1997 as compared with $28.3 million for the same period of 1996.
This increase reflects the Company's normal 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 software products, was $24.1
million for the year ended December 31, 1997 as compared with $25.7 million for
the same period of 1996. This decrease is primarily due to the write-offs of
goodwill and capitalized software associated with the Imonics Shutdown.
INTANGIBLE ASSETS. As of December 31, 1997, the Company's balance sheet
included approximately $516 million of unamortized intangible assets, which is
greater than 59% of the Company's total asset balance. The current amortization
rate on the unamortized intangible assets is in excess of $20 million per year.
The Company amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets
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(approximately $434 million at December 31, 1997) for the Company's Physician
Services segment was still recoverable. These events included: (i) operating
losses reported for two consecutive years, (ii) significant restructuring
charges within the Physician Services segment and (iii) absence of revenue
growth within the Physician Services segment. Therefore, in accordance with
applicable accounting rules, management prepared a 40 year undiscounted cash
flow analysis to determine if these intangible assets were still recoverable.
Management prepared the analysis with assumptions that reflected its current
outlook on the business. In all instances, management believes the assumptions
inherent in the analysis were reasonable and supportable. The following key
assumptions were used in management's undiscounted cash flow analysis: revenue
growth was forecasted at an average rate of 3.4% and the EBITDA margin was
forecasted at approximately 3.5 percentage points above the current level. Such
analysis indicated that no impairment of these intangible assets had occurred.
However, the Company recognizes that modest adjustments to the assumptions could
have a material impact on the analysis and related conclusions. For example, if
the Physician Services segment is unable to improve its EBITDA margin, revenue
growth of at least 4.1% would be required to allow for recoverability of these
assets over the 40 year life. If the projected undiscounted cash flows used in
the Company's recoverability analysis decreased to one dollar below the carrying
value of the intangible assets, the Company would be required to record a
non-cash impairment charge that may exceed $300 million to reduce the Physician
Services segment's intangible assets to their fair value, as determined by
discounting the future cash flows of this segment. Management still believes the
current intangible asset balance is recoverable.
INTEREST. Net interest expense was $23.3 million in the year ended
December 31, 1997 as compared with $11.6 million in the same period of 1996. The
increase in interest expense was due to increased borrowing rates. Management
anticipates that interest rate fluctuations and changes in the amount of
borrowings under the New Facility will impact future interest expense.
RESTRUCTURING AND OTHER CHARGES. During 1997, the Company recorded
restructuring charges of approximately $6.7 million as compared to charges in
1996 of approximately $14.1 million. The 1997 charges primarily relate to a plan
adopted in August 1997 to further combine the operations of the Company's
technology companies, the BSG and HIT Groups, and to rename the combined
operations "Per-Se Technologies" (the "Per-Se Restructuring"). The objective of
the Per-Se Restructuring was to improve profitability through capitalizing on
perceived synergies of these similar businesses and better utilizing office
space and other resources. In connection with the Per-Se Restructuring, the
Company recorded charges of approximately $5.0 million, primarily consisting of
lease termination costs and severance costs. See "-- Fiscal 1996 as compared to
Fiscal 1995" for an explanation of the restructuring costs incurred in 1996 and
details regarding each of the Company's plans.
As of December 31, 1997, the Company had accrued, but had not paid,
expenses of approximately $9.4 million, in connection with the office
consolidation aspect of the Reengineering Project, the BSG Group Restructuring,
the Imonics Shutdown, and the Per-Se Restructuring. Such amount primarily
consists of estimated lease termination cost which will be paid in varying
amounts through 2005.
Exclusive of the restructuring charges discussed above, other charges
aggregated approximately $15.9 million in 1997 as compared to $166.3 million in
1996, which included $86.1 million of software abandonment expenses. The primary
components of the 1997 amounts were: (i) $7.0 million in non-cash property and
equipment impairment charges associated with the Per-Se Restructuring and the
Company's assessment of the recoverability of certain of its long-lived assets;
(ii) $2.6 million in legal costs associated with various lawsuits and
investigations (see "Item 3. Legal Proceedings"); and (iii) $5.3 million of
various other costs, including severance and other individually insignificant,
non recurring, items. See "-- Fiscal 1996 as compared to Fiscal
1995 -- Restructuring and Other Charges" for an explanation of the $80.2 million
of other charges incurred in 1996, the $86.1 million of software abandonment
expenses incurred in 1996 and additional details regarding each of the Company's
restructuring plans.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with the litigation settlement in 1997 and merger transactions consummated by
the Company in 1996 and previous years. Pro forma adjustments for income taxes
have been
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provided for companies that elected to be treated as "S" Corporations under the
Internal Revenue Code of 1986, as amended, prior to merging with the Company.
DEFERRED TAX ASSET. As of December 31, 1997, the Company had recorded a
net deferred tax asset of $60.9 million reflecting primarily a tax benefit of
$104.3 million for net operating loss carryforwards ("NOLs") offset by a
valuation allowance of $26.5 million. The valuation allowance primarily reflects
the Company's assessment of the uncertainty associated with the realizability of
NOLs assumed in certain business combinations; a full valuation allowance has
been provided on such amounts. With respect to the deferred tax asset for which
a valuation allowance has not been provided, realizability of such amount is
dependent on the Company generating sufficient taxable income to be offset by
such NOLs prior to their expiration. Currently, the Company's NOLs are scheduled
to expire in varying amounts from 1998 through 2011; however, no material
amounts are scheduled to expire prior to 2008. Although realization is not
assured, based on the Company's current analyses and estimates, management
believes it is more likely than not that the Company will generate sufficient
taxable income to realize the deferred tax asset fully prior to the expiration
of the carryforward period. In addition, if future taxable income is not
sufficient to utilize the deferred tax asset fully, other tax planning
strategies are available to the Company, which makes it more likely than not
that the Company will be able to utilize the deferred tax asset.
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 $117.0 million. Medaphis had acquired HRI on August 28,
1995 through a business combination accounted for using the pooling-of-interests
method of accounting.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In November 1997, the Emerging
Issues Task Force ("EITF") issued EITF 97-13 "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology" ("EITF 97-13"). EITF
97-13 requires process reengineering costs, as defined, which had been
previously capitalized as part of an information technology project to be
expensed in the quarter which includes November 1997. The Company recorded a
charge of $2.5 million, net of tax of $1.6 million, in the fourth quarter of
1997 as a result of EITF 97-13.
Fiscal 1996 compared to Fiscal 1995
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
--------- ---------
(DOLLARS IN THOUSANDS)
Physician Services.......................................... $289,968 $294,406
Hospital Services........................................... 69,689 89,715
HRI......................................................... 22,667 31,419
Per-Se Product Operations................................... 58,799 70,047
Per-Se Services Operations.................................. 98,615 113,988
Eliminations................................................ (1,726) (2,861)
-------- --------
$538,012 $596,714
======== ========
Physician Services' revenue grew only 1.5% in 1996 as compared to 1995.
Excluding the 7.3% growth by acquisitions, Physician Services experienced a 5.8%
decline in revenue, which is attributable to the loss of clients at a higher
rate than had historically been experienced by the Company. These client losses
were mostly due to the reengineering and consolidation effort undertaken by
Physician Services, which diverted management's attention away from client
service.
Hospital Services' revenue grew by 28.7% in 1996 as compared to 1995. The
majority of this growth is attributable to acquisitions made in December 1995
and the first quarter of 1996.
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HRI's revenue increased by 38.6% in 1996 as compared with 1995. This growth
was caused by increased subrogation recoveries.
Per-Se's Product Operations revenue increased 19.1% in 1996 as compared
with the same period in 1995. This increase is primarily the result of higher
licensing revenue from the ULTICARE product line.
Per-Se's Services Operations 1996 revenues increased 15.6% from 1995. The
increases in the BSG's revenue reflected the demand for Per-Se's services as
migration to client server architectures continued to accelerate. This demand
for Per-Se's services was negatively affected in 1996 by a decrease in the
revenues generated by Imonics.
SALARIES AND WAGES. Salaries and wages increased to $398.6 million (66.8%
of revenue) in 1996 from $314.8 million (58.5% of revenue) in 1995. This
increase was due to a slowdown in the growth of the Company's revenue and an
increase in the employment levels across the Company.
OTHER OPERATING EXPENSES. Other operating expenses increased to $163.7
million (27.4% of revenue) in 1996 from $134.1 million (24.9% of revenue) in
1995. The increase in other operating expenses as a percentage of revenue for
1996, as compared with 1995, is due to a slowdown in the growth of the Company's
revenue without a corresponding slowdown in the growth of the Company's
operating expenses. Other operating expenses are primarily comprised of postage,
facility and equipment rental, telecommunications, travel, office supplies and
legal, accounting and other outside professional services.
DEPRECIATION. Depreciation expense was $28.3 million in 1996 compared to
$14.2 million in 1995. This increase reflects the Company's investment in
property and equipment, including approximately $42.0 million of new computer
and other data processing equipment purchased in connection with the Company's
reengineering program, and to support growth in its business, including
acquisitions.
AMORTIZATION. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and software products, was $25.7
million in 1996 versus $18.0 million in 1995. The increases are primarily due to
increased amortization of goodwill and client lists resulting from acquisitions.
INTEREST. Net interest expense was $11.6 million in 1996, compared to $9.8
million in 1995. The increase in 1996 is primarily due to increased borrowings
under the Company's then-current credit facility to finance acquisitions and the
Company's investment in its reengineering project.
RESTRUCTURING AND OTHER CHARGES. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). The objectives of the
Reengineering Project were: (i) to improve profitability in the near term
through office consolidations; (ii) to improve longer-term profitability by
developing technology and then leveraging such technology to make the Company's
workflow process more efficient; and (iii) to standardize operating procedures
throughout MPSC.
In June 1996, a comprehensive assessment of the technology aspect of the
Reengineering Project was completed. Management concluded that, due to increased
development costs and higher than expected operating costs, it was no longer
cost effective to continue the deployment of the technology upon which the
Reengineering Project was based. While technologically feasible, management
determined that such technology had no alternative useful application in the
Company's operations. In connection with the abandonment of this project, the
Company recorded a non-cash charge of $86.1 million during 1996. No further
amounts are expected to be expended in connection with the technology project.
During 1995, the Company recorded restructuring charges of approximately
$15.0 million as a result of the office consolidation aspect of the
Reengineering Project, related primarily to costs associated with the
termination of leases for closed offices and incremental costs associated with
discontinued client contracts. In August 1996, the Company expensed an
additional $3.9 million, related primarily to additional lease termination
costs.
During 1996, the Company adopted a plan to consolidate the three
subsidiaries within its system integration businesses (the "BSG Group
Restructuring") and, later in 1996, revised such plan to entirely shut down one
of such businesses, Imonics Corporation (the "Imonics Shutdown"). The objectives
of the BSG
23
26
Group Restructuring were to improve profitability through capitalizing on the
synergies of these similar businesses and to better utilize office space and
other resources. Management's decision to shut down Imonics was due to the
continued under-performance of this subsidiary along with management's decision,
as discussed above, to abandon the Reengineering Project, in which Imonics
Corporation was instrumental in technology development. During 1996, the Company
recorded expenses of approximately $10.7 million, consisting primarily of
severance and lease termination costs, in connection with the BSG Group
Restructuring and the Imonics Shutdown.
As of December 31, 1996, the Company had accrued, but had not paid,
expenses of approximately $11.5 million in connection with the above
restructuring plans. Such amount consists primarily of estimated lease
termination costs which will be paid in varying amounts through 2005.
Exclusive of the restructuring charges and software abandonment charges
discussed above, other charges aggregated approximately $80.2 million and $31.9
million in 1996 and 1995, respectively. The primary components of the 1996
amount were: (i) $35.6 million in non-cash property and equipment impairment
charges associated with the abandonment of the Reengineering Plan and the
Imonics Shutdown; (ii) $13.0 million in non-cash intangible asset impairment
charges associated with the write-off of goodwill resulting from the Imonics
Shutdown; (iii) $12.8 million in legal costs associated with various lawsuits
and investigations (see "Item 3. Legal Proceedings"); and (iv) $9.8 million of
pooling costs, primarily related to the Company's mergers with BSG and HDS. The
principal components of the 1995 amounts were: (i) $12.0 million in legal costs
associated with various lawsuits and investigations (see "Item 3. Legal
Proceedings"); (ii) $9.2 million of pooling costs, related to the Company's
mergers with Atwork, HRI, and Consort; and (iii) $5.0 million in non-cash
property and equipment impairment charges associated with the office
consolidation component of the Reengineering Project.
INCOME TAXES. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with merger transactions consummated by the Company in 1996 and previous years.
Pro forma adjustments for income taxes have been provided for companies that
elected to be treated as "S" Corporations under the Internal Revenue Code of
1986, as amended, prior to merging with the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $93.5 million at December 31, 1997 and
had unrestricted cash and cash equivalents of $17.8 million. The Company used
cash of $10.2 million for operating activities in the year ended December 31,
1997, principally to fund liabilities related to restructuring and other
charges.
Also during 1997, the Company generated approximately $126.4 million of
cash proceeds from the sale of HRI. The net cash proceeds of approximately
$117.0 million were used to reduce the Company's borrowings under its
then-current credit facility.
On December 23, 1997, Medaphis entered into the New Facility with an
affiliate of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). The
proceeds of the New Facility were used in part to repay the Company's previous
credit facility. Borrowings under the New Facility initially bear interest at
Prime plus 250 basis points with rates increasing 100 basis points at June 23,
1998 and 50 basis points each quarter thereafter through the loan's maturity on
April 1, 1999. The interest rate at December 31, 1997 was 11.0%. The New
Facility contains certain quarterly financial covenants related to the Company's
performance, is secured by substantially all of the assets of the Company and
its subsidiaries, and is guaranteed by substantially all of the Company's
subsidiaries. The New Facility also contains customary covenants for facilities
of this type. The New Facility is prepayable, in whole or in part, at the option
of Medaphis, at any time. The notes evidencing the New Facility were placed
privately and have no registration rights. Loan costs for the New Facility
totaled approximately $8.1 million.
On December 31, 1997, the Company had $185.0 million of outstanding
indebtedness under the New Facility. On January 22, 1998, the Company drew down
the remaining $25.0 million of the New Facility, with
24
27
the funds used in part to purchase certain real property then under lease to the
Company, with the balance invested in cash equivalents.
On February 20, 1998, the Company sold $175 million of 9 1/2% Senior Notes
due 2005 (the "Notes"). The Notes bear interest at the rate of 9 1/2% per annum,
payable semi-annually on February 15 and August 15 of each year, commencing on
August 15, 1998. The Notes will mature on February 15, 2005. The Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after February 15, 2002, at a declining premium to par until 2004 and at par
thereafter, plus accrued and unpaid interest. In addition, at any time on or
prior to February 15, 2001, the Company may redeem up to 35% of the original
principal amount of the Notes at a redemption price equal to 109.5% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more equity offerings; provided that at least $100 million aggregate principal
amount of the Notes remain outstanding immediately following any such
redemption.
Payment of principal, of premium, if any, and interest on the Notes will be
fully and unconditionally guaranteed, on a senior unsecured basis, jointly and
severally by all of the Company's present and future domestic restricted
subsidiaries (the "Subsidiary Guarantors"). The financial statements of the
Subsidiary Guarantors have not been presented as all subsidiaries, except for
certain insignificant foreign subsidiaries, have provided guarantees and the
parent company does not have any significant operations or assets, separate from
its investment in subsidiaries. Any non-guarantor subsidiaries are insignificant
individually and in the aggregate to the consolidated financial statements.
The Company also entered into a new $100 million credit facility (the "New
Credit Facility") on February 20, 1998. The Company has the option of making
"LIBOR" based loans or "base rate" loans under the New Credit Facility. LIBOR
based loans bear interest at LIBOR plus amounts ranging from 1.0% to 2.75% based
on the Company's leverage ratio, as defined in the New Credit Facility. Base
rate loans bear interest at prime plus amounts ranging from 0.0% to 1.75% based
on the Company's leverage ratio, as defined. In addition the Company pays a
quarterly commitment fee on the unused portion of the New Credit Facility
ranging from 0.25% to 0.75% per annum based on the Company's leverage ratio. The
New Credit Facility contains financial and other restrictive covenants,
including without limitation those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends, sales of assets,
capital expenditures, and prepayment of the Notes and those requiring
maintenance of minimum net worth, minimum EBITDA (as defined) and minimum
interest coverage and limiting leverage. Amounts outstanding under the New
Credit Facility will be due on February 20, 2001. At March 31, 1998, the Company
had $36 million in borrowings outstanding under the New Credit Facility at
interest rates ranging from 8.1% to 8.2%.
The Company recently decided to transition from the computerized coding
system used by GFS for emergency room physician billing to manual coding. The
Company does not expect to incur any material extraordinary charges as a result
of the transition from the computerized coding system. There can be no assurance
that any third party claims or lost business relating to transition from, or
modifications previously made to, the GFS coding system will not have a material
adverse effect on the Company, including, without limitation, on the Company's
revenue, results of operations, financial condition or cash flow.
The Company believes that its cash flow, together with available borrowings
under the New Credit Facility, will be sufficient to permit the Company to meet
its operating expenses and to service its debt requirements as they become due
in the next twelve months and for the long term, however, there can be no
assurance that such results will be achieved. The Company is a party to legal
actions and government investigations as described in "Item 3. Legal
Proceedings." There can be no assurance that these actions or investigations
will not have a disruptive effect upon the operations of the business or that
the resolution of these actions or investigations will not have a material
adverse effect on the Company's liquidity or financial position. If the Company
is unable to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
25
28
The degree to which the Company is leveraged could have the following
consequences: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or other general
corporate purposes may be impaired; and (ii) a substantial portion of the
Company's cash flow from operations may be dedicated to the payment of principal
and interest on its indebtedness, thereby reducing the funds available to the
Company for its operations. In addition, the New Credit Facility and the
Indenture contain financial and other restrictive covenants, including without
limitation those restricting the incurrence of additional indebtedness, the
creation of liens, the payment of dividends, sales of assets, capital
expenditures, and prepayments of indebtedness and, with respect to the New
Credit Facility only, those requiring maintenance of minimum net worth, minimum
EBITDA and minimum interest coverage and limiting leverage.
OTHER MATTERS
It is possible that the Company's currently installed computer systems,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems, and
is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. However, there can be no assurance that the Company
will identify all such Year 2000 problems in its computer systems or those of
its customers, vendors or resellers in advance of their occurrence or that the
Company will be able to successfully remedy any problems that are discovered.
The expenses of the Company's efforts to identify and address such problems, or
the expenses or liabilities to which the Company may become subject as a result
of such problems, could have a material adverse effect on the Company's
business, financial condition and results of operations. The revenue stream and
financial stability of existing customers may be adversely impacted by Year 2000
problems, which could cause fluctuations in the Company's revenues. In addition,
failure of the Company to identify and remedy Year 2000 problems could put the
Company at a competitive disadvantage relative to companies that have corrected
Year 2000 problems.
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at HDS, which was
acquired in a merger transaction in June 1996 and accounted for as a
pooling-of-interests. These practices related principally to revenue recognized
in fiscal years 1994, 1995 and 1996. As a result of this evaluation, management
determined that the revenue was improperly recognized and, accordingly, restated
the Company's financial statements for the years ended December 31, 1994, 1995,
1996 and interim periods of 1997 and retained earnings (accumulated deficit) as
of December 31, 1994 (the "HDS Restatement").
As a result of the HDS-related restatement, Deloitte & Touche withdrew its
audit opinion dated March 31, 1997 in respect of the Company's 1994, 1995 and
1996 fiscal years. Consequently, the Company engaged Price Waterhouse to
re-audit the Company's 1995 and 1996 fiscal years and audit the Company's
nine-month period ending September 30, 1997. As indicated in a Current Report on
Form 8-K filed by the Company on January 8, 1998 (the "January 8-K"), the
Company determined to further restate the results of such periods to account for
the December 1995 acquisition by the Company of Medical Management Sciences,
Inc. ("MMS") on a purchase accounting basis (the "MMS Restatement"). Such
acquisition had previously been accounted for as a pooling-of-interests.
The withdrawn audit opinion included an explanatory paragraph expressing
substantial doubt about the Company's ability to continue as a going concern due
to certain step-down payments required during 1997 under the Company's Senior
Credit Facility. As discussed in Note 8 of the Notes to Consolidated Financial
Statements, on December 23, 1997, the Company entered into the New Facility, the
proceeds of which were used to refinance the Senior Credit Facility, and that
increased the Company's borrowing capacity and extended the term into 1999,
thereby removing the substantial doubt expressed in the predecessor account-
26
29
ants' audit opinion. Fiscal years 1995 and 1996 have been re-audited by the
Company's current independent accountants.
The impact of the HDS Restatement and MMS Restatement for the years ended
December 31, 1995 and 1996 and as of the years ended December 31, 1994, 1995 and
1996 is presented below:
AS PREVIOUSLY
REPORTED AS RESTATED
---------------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
AS OF DECEMBER 31, 1994
Retained earnings (accumulated deficit)............. $ 4,838 $ (16,059)
Total stockholders' equity.......................... $ 257,097 $ 236,004
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenue............................................. $ 559,877 $ 538,012
Pro forma net loss.................................. (8,504) (4,780)
Pro forma basic net loss per share.................. $ (0.15) $ (0.09)
AS OF DECEMBER 31, 1995
Accumulated deficit................................. $ (6,052) $ (21,284)
Total stockholders' equity.......................... $ 421,306 $ 554,074
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenue............................................. $ 608,313 $ 596,714
Pro forma net loss.................................. (123,642) (136,358)
Pro forma basic net loss per share.................. $ (1.74) $ (1.91)
AS OF DECEMBER 31, 1996
Current assets...................................... $ 269,385 $ 255,239
Intangible assets................................... 389,033 539,151
Total assets........................................ 815,624 936,854
Current liabilities................................. 193,752 198,747
Total liabilities................................... 423,334 428,329
Total stockholders' equity.......................... $ 392,290 $ 508,525
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 30, 1997, following a competitive review and request for proposal
process in which Deloitte & Touche LLP ("Deloitte & Touche"), the Company's
then-present auditors, and a number of other nationally recognized accounting
firms participated, the Company notified Deloitte & Touche that it had been
dismissed as the Company's principal accountants and that the Company intended
to engage new principal accountants. This action was recommended by the Audit
Committee of the Company's Board of Directors, and the Board approved such
change on June 27, 1997. On July 9, 1997, the Company engaged Price Waterhouse
LLP as the Company's new principal accountants. See Item 1. Business -- Recent
Developments.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Management of the Company" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held in May 1998 and is incorporated herein by reference.
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30
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders held in May 1998 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders held in May 1998 and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the section entitled
"Certain Transactions" of the Proxy Statement for the Annual Meeting of
Stockholders held in May 1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
Report of Independent Accountants;
Consolidated Balance Sheets -- as of December 31, 1996 and 1997;
Consolidated Statements of Operations -- years ended December 31, 1995,
1996 and 1997;
Consolidated Statements of Cash Flows -- years ended December 31, 1995,
1996 and 1997;
Consolidated Statements of Stockholders' Equity -- years ended December
31, 1995, 1996 and 1997; and Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of the report:
Report of Independent Accountants;
Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 1995, 1996 and 1997.
Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.
3. Exhibits
The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference
to other filings:
EXHIBIT
NO. DOCUMENT
- ------- --------
2.1 -- Amended and Restated Merger Agreement, dated July 28, 1995,
among Registrant, RaySub, Inc. and Healthcare Recoveries,
Inc. (incorporated by reference to Exhibit 2.1 to Current
Report on Form 8-K filed on September 12, 1995).
2.2 -- Merger Agreement, dated December 29, 1995, among Registrant,
CarSub, Inc. and Medical Management Sciences, Inc.
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on January 19, 1996).
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31
EXHIBIT
NO. DOCUMENT
- ------- --------
2.3 -- Merger Agreement, dated as of March 12, 1996, by and among
Registrant, Rapid Systems Solutions, Inc. and RipSub, Inc.
(incorporated by reference to Exhibit 2.19 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1995,
File No. 000-19480 (the "1995 Form 10-K")).
2.4 -- Merger Agreement, dated as of March 15, 1996, by and among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, File No. 333-2506).
2.5 -- Merger Agreement, dated January 29, 1995, by and among
Registrant, BullSub, Inc., Automation, Atwork, Atwork
Australia, Atwork Canada-Corp., Atwork-Europe and Atwork,
U.K. (incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4, File No. 33-088910).
2.6 -- Stock Purchase Agreement, dated December 31, 1995, among
MedQuist Receivables Management Company, MedQuist, Inc. and
Medaphis Hospital Services Corporation (incorporated by
reference to Exhibit 2.4 to Current Report on Form 8-K filed
on January 19, 1996).
2.7 -- Merger Agreement, dated October 13, 1995, among Registrant,
NukSub, Inc. and Consort Technologies, Inc. (incorporated by
reference to Exhibit 2.1 to Current Report on Form 8-K filed
on December 5, 1995).
2.8 -- Merger Agreement, dated as of May 23, 1996 among Registrant,
RAKSub, Inc., and HDS, Inc. (incorporated by reference to
Exhibit 2.1 to Registration Statement on Form S-4, File No.
333-04451).
3.1 -- Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-42216).
3.2 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 to
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1993).
3.3 -- Certificate of Amendment of Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 to
Registration Statement on Form 8-A/A, filed on March 28,
1995).
3.4 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 4.4 to Registration Statement on Form S-8,
Registration No. 333-03213).
3.5 -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Exhibit 3.5 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997).
3.6 -- Amended and Restated By-laws of Registrant (incorporated by
reference to Exhibit 3.6 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997).
4.1 -- Indenture by and between Registrant and Trust Company Bank,
as Trustee, dated December 30, 1992 (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on January 11, 1993).
4.2 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the 1995 Form 10-K).
4.3 -- Commitment Letter from DLJ Bridge Finance, Inc. to
Registrant, dated December 15, 1997, with respect to $210
million in aggregate principal amount of senior secured
increasing rate notes (incorporated by reference to Exhibit
10.1 on Current Report on Form 8-K filed on December 18,
1997).
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32
EXHIBIT
NO. DOCUMENT
- ------- --------
4.4 -- Note Purchase Agreement, dated December 23, 1997, by and
among Registrant, certain of its subsidiaries and Med
Funding, Inc. with respect to up to $210 million in
aggregate principal amount of Senior Secured Increasing Rate
Notes (including Form of Note) (incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K filed on January
8, 1998).
4.5 -- Security Agreement, dated December 23, 1997, by and among
Registrant, certain of its subsidiaries and Med Funding,
Inc. (incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed on January 8, 1998).
4.6 -- Pledge Agreement, dated December 23, 1997, by and among
Registrant, certain of its subsidiaries and Med Funding,
Inc. (incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K filed on January 8, 1998).
4.7 -- Form of Option Agreement relating to Registrant's Stock
Option Plan (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-1, File No. 33-42216).
4.8 -- Form of Option Agreement relating to Registrant's Executive
Performance Plan (incorporated by reference to Exhibit 4.3
to Registration Statement on Form S-1, File No. 33-42216).
4.9 -- Form of Option Agreement relating to Registrant's Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3, File No. 33-71552).
4.10 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to the
1995 Form 10-K).
4.11 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan (incorporated by
reference to Exhibit 4.6 to the 1995 Form 10-K).
4.12 -- Registration Rights Agreement, dated as of March 17, 1995,
by and among Registrant, David Michael Warner and John P.
Holton (incorporated by reference to Exhibit 4.10 to Annual
Report on Form 10-K for the year ended December 31, 1994,
File No. 000-19480 (the "1994 Form 10-K")).
4.13 -- Form of Common Stock Purchase Warrant issued to Fredrica
Morf and Ursula Nelson (incorporated by reference to Exhibit
4.19 to the 1994 Form 10-K).
4.14 -- Form of Warrant issued to one or more lenders pursuant to
Registrant's Second Amended and Restated Credit Agreement,
dated as of February 4, 1997 (incorporated by reference to
Exhibit 4.1 to Current Report on Form 8-K filed on February
18, 1997).
4.15 -- Form of Registration Rights Agreement among Registrant,
Mahmoud R. Ghavi, Barry G. Wahlig, William L. McCready, and
Kimberly D. Elkins (incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed on December 5, 1995).
4.16 -- Form of Registration Rights Agreement among Registrant,
William J. DeZonia, Lori T. Caudill, Carol T. Shumaker,
Alyson T. Stinson, James F. Thacker, James F. Thacker
Retained Annuity Trust and Paulanne H. Thacker Retained
Annuity Trust (incorporated by reference to Exhibit 4.1 to
Current Report on Form 8-K filed on January 19, 1996).
4.17 -- Form of Registration Rights Agreement among Registrant,
Raymond J. Noorda and Steven G. Papermaster (incorporated by
reference to Exhibit 4.17 to Registration Statement on Form
S-4, file No. 33-2506).
4.18 -- Form of Registration Rights Agreement among Registrant,
Michael Clark, Andrei Mitran, and Steven Theidke
(incorporated by reference to Exhibit 4.18 to Registration
Statement on Form S-4, File No. 33-2506).
4.19 -- Notice of Redemption for 6.5% Convertible Subordinated
Debentures Due 2000 (incorporated by reference to Exhibit
4.21 to the 1995 Form 10-K).
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33
EXHIBIT
NO. DOCUMENT
- ------- --------
4.20 -- Form of Option Agreement relating to Registrant's
Non-Qualified Stock Option Plan for Non-Executive Employees
(incorporated by reference to Exhibit 4.17 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1996,
File No. 000-19480 (the "1996 Form 10-K")).
10.1 -- Amended and Restated Medaphis Corporation Non-Qualified
Stock Option Plan (incorporated by reference to Exhibit 28.1
to Registration Statement on Form S-8, File No. 33-46847).
10.2 -- First Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.1 to Registration Statement on Form S-8, File
No. 33-64952).
10.3 -- Second Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.5 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, File No. 000-19480
(the "1992 Form 10-K")).
10.4 -- Third Amendment to Amended and Restated Medaphis Corporation
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1993).
10.5 -- Fourth Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.6 -- Fifth Amendment to the Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (the "1993 Form 10-K")).
10.7 -- Sixth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 10 to Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1994).
10.8 -- Seventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, File No. 33-95742).
10.9 -- Eighth Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 99.1 to Registration Statement on Form
S-8, File No. 333-07203).
10.10 -- Ninth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.2 to Registration Statement on Form S-8, File
No. 333-07203).
10.11 -- Tenth Amendment to Medaphis Corporation Amended and Restated
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 99.3 to Registration Statement on Form S-8, File
No. 333-7203).
10.12 -- Eleventh Amendment to Medaphis Corporation Amended and
Restated Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.12 on the 1996 Form 10-K).
10.13 -- Medaphis Corporation Senior Executive Performance
Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 28.2 to Registration Statement on Form S-8, File
No. 33-46847).
10.14 -- First Amendment to Medaphis Corporation Senior Executive
Performance Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
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34
EXHIBIT
NO. DOCUMENT
- ------- --------
10.15 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Employees of Acquired Companies (incorporated by reference
to Exhibit 99.1 to Registration Statement on Form S-8, File
No. 33-67752).
10.16 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-71556).
10.17 -- Second Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99 to Registration
Statement on Form S-8, File No. 33-88442).
10.18 -- Third Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.14 to the 1995 Form
10-K).
10.19 -- Fourth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.2 to Registration
Statement on Form S-8, File No. 333-3213).
10.20 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 99.1 to Registration
Statement on Form S-8, File No. 333-07627).
10.21 -- Sixth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.21 on the 1996 Form
10-K).
10.22 -- Medaphis Corporation Non-Employee Director Stock Option
Plan, dated as of August 12, 1994 (incorporated by reference
to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994).
10.23 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 on the 1996 Form 10-K).
10.24 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.24 on the 1996 Form 10-K).
10.25 -- Second Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.25 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, File No. 000-19480
(the "1997 Form 10-K").
10.26 -- Third Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.26 to the 1997 Form 10-K).
10.27 -- Fourth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.27 to the 1997 Form 10-K).
10.28 -- Fifth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.28 to the 1997 Form 10-K).
10.29 -- Restricted Stock Plan of the Registrant, dated as of August
12, 1994 (incorporated by reference to Exhibit 10.2 to
Registration Statement on Form S-4, File No. 33-88910).
10.30 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 to the 1995 Form
10-K).
10.31 -- First Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.27 on
the 1996 Form 10-K).
32
35
EXHIBIT
NO. DOCUMENT
- ------- --------
10.32 -- Second Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.32 to
the 1997 Form 10-K).
10.33 -- Third Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.33 to
the 1997 Form 10-K).
10.34 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.35 -- Amended and Restated Medaphis Employees' Retirement Savings
Plan (incorporated by reference to Exhibit 10.29 on the 1996
Form 10-K).
10.36 -- First Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.30 on the 1996 Form 10-K).
10.37 -- Form of Second Amendment to the Amended and Restated
Medaphis Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.31 on the 1996 Form 10-K).
10.38 -- Third Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
10.39 -- Fourth Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.39 to the 1997 Form 10-K).
10.40 -- Loan Agreement, dated October 1, 1983, between Medical
Management Consultants, Inc. and Development Authority of
Cobb County (incorporated by reference to Exhibit 10.16 to
Registration Statement on Form S-1, File No. 33-42216).
10.41 -- Second Amended and Restated Credit Agreement, dated as of
February 4, 1997, among the Registrant, the lenders listed
therein and the Agent (incorporated by reference to Exhibit
99.2 to Current Report on Form 8-K filed on February 18,
1997).
10.42 -- Waiver and Extension Letter Agreement, dated September 18,
1997, with respect to the Second Amended and Restated Credit
Agreement, dated February 4, 1997, among Registrant, the
lenders signatory thereto and SunTrust Bank, Atlanta, as
agent (incorporated by reference to Exhibit 10.6 to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997).
10.43 -- Waiver and Extension Letter Agreement, dated October 24,
1997, with respect to the Second Amended and Restated Credit
Agreement, dated February 4, 1997, among Registrant, the
lenders signatory thereto and SunTrust Bank, Atlanta, as
agent (incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K filed on October 27, 1997).
10.44 -- Waiver and Extension Letter Agreement, dated October 24,
1997, with respect to the Participation Agreement, dated
April 21, 1995, as amended, among Registrant, SunTrust Bank,
Atlanta, and Creditanstalt Corporate Finance, Inc., and
SunTrust Bank, Atlanta, as agent (incorporated by reference
to Exhibit 10.2 to Current Report on Form 8-K filed on
October 27, 1997).
10.45 -- First Modification, dated November 19, 1997, of the Second
Amended and Restated Credit Agreement, dated February 4,
1997, among Registrant, the lenders signatory thereto and
SunTrust Bank, Atlanta, as agent (incorporated by reference
to Exhibit 10.9 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.46 -- Certificate of Merger of CompMed, Inc. with and into
Medaphis Physician Services Corporation dated as of December
31, 1993 (incorporated by reference to Exhibit 10.30 to the
1993 Form 10-K).
33
36
EXHIBIT
NO. DOCUMENT
- ------- --------
10.47 -- Employment Agreement, dated December 14, 1992, between
MedCorp Holding, Inc. and Dennis A. Pryor (incorporated by
reference to Exhibit 10.26 to the 1992 Form 10-K).
10.48 -- Amendment No. 1 to the Employment Agreement between Dennis
A. Pryor and Medaphis Physician Services Corporation
(formerly MedCorp Holding, Inc., which changed its name to
CompMed, Inc. and subsequently merged into Medaphis
Physician Services Corporation (incorporated by reference to
Exhibit 10.37 to the 1994 Form 10-K).
10.49 -- Lease Agreement, dated August 1, 1989, between Financial
Enterprises III (a general partnership consisting of Martin
L. Brill and Dennis A. Pryor) and Medical Management
Sciences South, Inc. (incorporated by reference to Exhibit
10.37 on the 1996 Form 10-K).
10.50 -- Agreement for Management Services by and among Registrant,
INTEGRATEC Med-Services, Inc. and Medaphis Hospital Services
Corporation, dated as of January 13, 1993 (incorporated by
reference to Exhibit 10.37 to the 1993 Form 10-K).
10.51 -- Employment Agreement by and between Registrant and Randolph
G. Brown, dated March 24, 1995 (incorporated by reference to
Exhibit 10.46 to the 1994 Form 10-K).
10.52 -- Master Equipment Lease, dated January 25, 1994, by and
between Trust Company Bank and Registrant (incorporated by
reference to Exhibit 10.63 to the 1994 Form 10-K).
10.53 -- Lease and Development and Participation Agreement, dated
April 21, 1995 (incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995).
10.54 -- Master Equipment Lease Agreement Intended for Security with
NationsBank Leasing Corporation, dated May 31, 1995
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995).
10.55 -- Amendment No. 1 to the Master Equipment Lease Agreement
Intended for Security with Nationsbanc Leasing Corporation
of North Carolina, dated March 29, 1996 (incorporated by
reference to Exhibit 10.8 to Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1996).
10.56 -- Equipment Lease, dated September 29, 1995, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.70 to
the 1995 Form 10-K).
10.57 -- Equipment Lease, dated October 31, 1995 by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.71 to
the 1995 Form 10-K).
10.58 -- Equipment Lease, dated January 31, 1996 by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.61 to
the 1995 Form 10-K).
10.59 -- Equipment Lease, dated February 29, 1996, by and between
NationsBank Leasing Corporation of North Carolina and
Registrant (incorporated by reference to Exhibit 10.62 to
the 1995 Form 10-K).
10.60 -- Tivoli Systems, Inc. End User Software License Agreement,
dated June 30, 1995 (incorporated by reference to exhibit
10.3 to Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1995).
10.61 -- 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).
34
37
EXHIBIT
NO. DOCUMENT
- ------- --------
10.62 -- Employment Agreement by and between Registrant and David E.
McDowell, dated November 19, 1996 (incorporated by reference
to Exhibit 10.49 on the 1996 Form 10-K).
10.63 -- Employment Agreement by and between Registrant and Daniel S.
Connors, Jr., dated February 25, 1997 (incorporated by
reference to Exhibit 10.50 on the 1996 Form 10-K).
10.64 -- Employment Agreement by and between Registrant and Carl
James Schaper, dated February 25, 1997 (incorporated by
reference to Exhibit 10.51 on the 1996 Form 10-K).
10.65 -- Employment Agreement by and between Registrant and Jerome H.
Baglien, dated January 3, 1997 (incorporated by reference to
Exhibit 10.52 on the 1996 Form 10-K).
10.66 -- Employment Agreement dated July 28, 1997, between Registrant
and Randolph L.M. Hutto (incorporated by reference to
Exhibit 10.10 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.67 -- Employment Agreement dated September 30, 1997, between
Registrant and Mark P. Colonnese (incorporated by reference
to Exhibit 10.11 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1997).
10.68 -- Employment Agreement dated April 9, 1997, between Registrant
and Harvey Herscovitch (incorporated by reference to Exhibit
10.68 to the 1997 Form 10-K).
10.69 -- Employment Agreement dated January 25, 1998, between
Registrant and Allen W. Ritchie (incorporated by reference
to Exhibit 10.69 to the 1997 Form 10-K).
10.70 -- Employment Agreement dated January 27, 1998 between
Registrant and Kevin P. Castle (incorporated by reference to
Exhibit 10.70 to the 1997 Form 10-K).
10.71 -- Limited Partnership Agreement of Bertelsmann-Imonics GmbH &
Co. KG, dated March 13, 1996 (incorporated by reference to
Exhibit 10.65 to the 1995 Form 10-K).
10.72 -- Agreement for Collection Services between AssetCare, Inc.
and Galen Health Care, Inc., dated March 28, 1996
(incorporated by reference to Exhibit 10.7 to Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1996).
10.73 -- Medaphis Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.74 -- First Amendment to the Medaphis Deferred Compensation Plan
(incorporated by reference to Exhibit 10.2 to Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997).
10.75 -- Second Amendment to the Medaphis Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997).
10.76 -- Third Amendment to the Medaphis Corporation Deferred
Compensation Plan (incorporated by reference to Exhibit
10.76 to the 1997 Form 10-K).
10.77 -- Written description of Registrant's Non-Employee Director
Compensation Plan (incorporated by reference to Exhibit 10.4
to Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997).
10.78 -- Medaphis Corporation Non-Employee Director Deferred Stock
Credit Plan (incorporated by reference to Exhibit 10.5 to
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1997).
10.79 -- Separation Agreement dated as of May 28, 1997, between
Registrant and Healthcare Recoveries, Inc. (incorporated by
reference to Exhibit 10.12 to Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997).
35
38
EXHIBIT
NO. DOCUMENT
- ------- --------
10.80 -- Form of Letter Agreement dated May 30, 1997 between
Registrant and certain executives (incorporated by reference
to Exhibit 10.80 to the 1997 Form 10-K).
11 -- Statement re: Computation of Per Share Earnings
(incorporated by reference to Exhibit 11 to the 1997 Form
10-K).
16 -- Letter from Deloitte & Touche regarding change in certifying
accountant (incorporated by reference to Exhibit 16 to
Current Report on Form 8-K filed on July 10, 1997).
21 -- Subsidiaries of Registrant (incorporated by reference to
Exhibit 21 to the 1997 Form 10-K).
23.1 -- Consent of Price Waterhouse LLP.
27 -- Financial Data Schedule (for SEC use only) (incorporated by
reference to Exhibit 27 to the 1997 Form 10-K).
99.1 -- Consolidated Class Action Complaint filed in the United
States District Court for the Northern District of Georgia,
Atlanta Division (incorporated by reference to Exhibit 99.1
to the 1995 Form 10-K).
99.2 -- Consolidated Class Action Complaint filed in the United
States District Court, Northern District of Georgia, Atlanta
Division (incorporated by reference to Exhibit 99.2 on the
1996 Form 10-K).
99.3 -- Complaint filed in Los Angeles County Superior Court
(incorporated by reference to Exhibit 99.3 on the 1996 Form
10-K).
99.4 -- Class Action Complaint filed in Superior Court of New
Jersey, Law Division, Essex County (incorporated by
reference to Exhibit 99.4 on the 1996 Form 10-K).
99.5 -- Verified Derivative Complaint filed in the United States
District Court, Northern District of Georgia, Atlanta
Division (incorporated by reference to Exhibit 99.5 on the
1996 Form 10-K).
99.6 -- Text of Press Release of the Registrant, dated May 21, 1997
(incorporated by reference to Exhibit 99.1 to Current Report
on Form 8-K filed on May 22, 1997).
99.7 -- Text of Press Release issued by the Registrant on October
27, 1997 (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed on October 27, 1997).
99.8 -- Letter from Deloitte & Touche LLP, dated November 20, 1997,
advising the Registrant as to the withdrawal of certain
reports of Deloitte & Touche with respect to certain
financial statements of the Registrant (incorporated by
reference to Exhibit 99.1 to Current Report on Form 8-K
filed on December 4, 1997).
99.9 -- Text of Press Release issued by the Registrant on November
19, 1997 (incorporated by reference to Exhibit 99.2 to
Current Report on Form 8-K filed on December 4, 1997).
99.10 -- Text of Press Release issued by the Registrant on December
15, 1997 (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed on December 18, 1997).
99.11 -- Financial Statements of the Registrant as of and for the
years ended December 31, 1995 and 1996 and as of and for the
nine month period ended September 30, 1997 audited by Price
Waterhouse LLP (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed on January 8, 1998).
99.12 -- Text of Press Release issued by the Registrant on December
24, 1997 (incorporated by reference to Exhibit 99.2 to
Current Report on Form 8-K filed on January 8, 1998).
99.13 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
- ---------------
* The exhibits which are referenced in the above documents are hereby
incorporated by reference. Such exhibits have been omitted for purposes of
this filing but will be furnished supplementary to the Commission upon
request.
36
39
(b) Reports on Form 8-K
Three reports on Form 8-K were filed during the quarter ended December
31, 1997:
FINANCIAL
ITEM REPORTED STATEMENTS FILED DATE OF REPORT
------------- ---------------- ------------------
Medaphis entered into a waiver and extension
agreement with respect to the Second Amended
Facility......................................... No October 27, 1997
Letter from Deloitte & Touche LLP advising Medaphis
as to the withdrawal of their audit opinion for
the year ended December 31, 1996................. No December 3, 1997
Commitment Letter from Donaldson, Lufkin & Jenrette
for a $210 million loan facility................. No December 17, 1997
37
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Medaphis Corporation
(Registrant)
Date: June 22, 1998 By: /s/ DAVID E. MCDOWELL
--------------------------------------------------------
David E. McDowell
Chairman, Chief Executive
Officer and Director
Date: June 22, 1998 By: /s/ MARK P. COLONNESE
--------------------------------------------------------
Mark P. Colonnese
Senior Vice President and Chief
Financial Officer (Principal Accounting Officer)
38
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Medaphis Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Medaphis Corporation and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As more fully discussed in Note 2 of the Notes to Consolidated Financial
Statements, the Company restated its financial statements for the years ended
December 31, 1995 and 1996. As a result of the restatement for certain revenue
recognition practices, the predecessor accountants withdrew their audit opinion
dated March 31, 1997 covering these years. The audit opinion issued by the
predecessor accountants dated March 31, 1997 included an explanatory paragraph
expressing substantial doubt about the Company's ability to continue as a going
concern due to certain step-down payments required during 1997 under the
Company's Senior Credit Facility. As discussed in Note 8 of the Notes to
Consolidated Financial Statements, on December 23, 1997, the Company entered
into a credit facility that increased the Company's borrowing capacity and
extended the term into 1999, thereby removing the substantial doubt expressed in
the predecessor accountants' audit opinion.
As more fully discussed in Note 1 of the Notes to Consolidated Financial
Statements, during 1997 the Company changed its accounting for business process
reengineering costs incurred in connection with an information technology
project, pursuant to Emerging Issues Task Force Consensus No. 97-13, "Accounting
for Costs Incurred in Connection with a Consulting or an Internal Project that
Combines Business Process Reengineering and Information Technology."
PRICE WATERHOUSE LLP
Atlanta, Georgia
January 27, 1998
F-1
42
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
DECEMBER 31,
-------------------------
1996 1997
------------- ---------
(AS RESTATED)
Current Assets:
Cash and cash equivalents................................. $ 7,631 $ 17,794
Restricted cash........................................... 19,568 5,576
Accounts receivable, billed (less allowances of $21,325
and $20,660)........................................... 99,823 100,813
Accounts receivable, unbilled............................. 79,911 75,888
Deferred income taxes..................................... 36,177 --
Other..................................................... 12,129 12,365
--------- ---------
Total current assets.............................. 255,239 212,436
Property and equipment...................................... 97,850 72,763
Deferred income taxes....................................... 43,044 60,857
Intangible assets........................................... 539,151 515,939
Other....................................................... 1,570 12,032
--------- ---------
$ 936,854 $ 874,027
========= =========
Current Liabilities:
Accounts payable.......................................... $ 11,765 $ 12,256
Accrued compensation...................................... 30,332 36,506
Accrued expenses.......................................... 100,675 56,295
Current portion of long-term debt......................... 55,975 11,490
Deferred income taxes..................................... -- 2,392
--------- ---------
Total current liabilities......................... 198,747 118,939
Long-term debt.............................................. 215,752 189,451
Accrued litigation settlement............................... -- 52,500
Other obligations........................................... 13,830 11,356
--------- ---------
Total liabilities................................. 428,329 372,246
--------- ---------
Commitments and contingencies (Notes 9 and 10)
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 1996 and 1997; issued and outstanding, 71,721 in
1996 and 73,204 in 1997................................ 717 732
Common stock, non-voting, $0.01 par value, 600 authorized
in 1996 and 1997; none issued.......................... -- --
Paid-in capital........................................... 666,673 678,998
Accumulated deficit....................................... (158,696) (177,949)
--------- ---------
508,694 501,781
Less treasury stock, at cost -- 16 shares in 1996......... (169) --
--------- ---------
Total stockholders' equity........................ 508,525 501,781
--------- ---------
$ 936,854 $ 874,027
========= =========
See notes to consolidated financial statements.
F-2
43
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- --------
(AS RESTATED)
Revenue..................................................... $ 538,012 $ 596,714 $572,625
--------- --------- --------
Salaries and wages.......................................... 314,790 398,573 377,363
Other operating expenses.................................... 134,055 163,677 153,372
Depreciation................................................ 14,187 28,276 29,355
Amortization................................................ 18,048 25,713 24,137
Interest expense, net....................................... 9,761 11,585 23,260
Litigation settlement....................................... -- -- 52,500
Restructuring and other charges............................. 48,750 180,316 22,640
--------- --------- --------
Total expenses.................................... 539,591 808,140 682,627
--------- --------- --------
Loss before income taxes.................................... (1,579) (211,426) (110,002)
Income tax expense (benefit)................................ 1,071 (74,089) (16,773)
--------- --------- --------
Loss before extraordinary item and cumulative effect of
accounting change......................................... (2,650) (137,337) (93,229)
Extraordinary item: Gain on sale of HRI, net of tax......... -- -- 76,391
Cumulative effect of accounting change, net of tax.......... -- -- (2,465)
--------- --------- --------
Net loss.......................................... (2,650) (137,337) (19,303)
--------- --------- --------
Pro forma tax adjustments................................... (2,130) 979 --
--------- --------- --------
Pro forma net loss.......................................... $ (4,780) $(136,358) $(19,303)
========= ========= ========
Pro forma basic net loss per common share:
Pro forma basic loss before extraordinary item and
cumulative effect of accounting change................. $ (0.09) $ (1.91) $ (1.28)
Extraordinary item: Gain on sale of HRI, net of tax....... -- -- 1.05
Cumulative effect of accounting change, net of tax........ -- -- (0.03)
--------- --------- --------
Pro forma basic net loss.................................. $ (0.09) $ (1.91) $ (0.26)
========= ========= ========
Weighted average shares outstanding......................... 52,591 71,225 72,679
========= ========= ========
See notes to consolidated financial statements.
F-3
44
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
(AS RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (2,650) $(137,337) $ (19,303)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization............................. 32,235 53,989 53,492
Gain on sale of HRI, net of tax........................... -- -- (76,391)
Cumulative effect of accounting change, net of tax........ -- -- 2,465
Impairment loss on assets................................. 5,035 135,195 9,810
Deferred income taxes..................................... 740 (77,068) (18,748)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash........................................ (3,253) (6,152) (1,698)
Accounts receivable, billed............................ (21,472) (11,316) (3,230)
Accounts receivable, unbilled.......................... (12,094) 1,511 5,418
Accounts payable....................................... 344 (10,297) 1,252
Accrued compensation................................... (204) 5,277 8,322
Accrued expenses....................................... 26,606 28,913 (29,846)
Accrued litigation settlement.......................... -- -- 52,500
Other, net............................................. (5,435) 9,422 5,750
--------- --------- ---------
Net cash provided by (used for) operating
activities...................................... 19,852 (7,863) (10,207)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (76,077) (18,200) (7,029)
Purchases of property and equipment......................... (51,120) (51,135) (19,971)
Proceeds from sale of HRI, net.............................. -- -- 126,375
Proceeds from sale of property and equipment................ -- -- 3,644
Software development costs.................................. (35,611) (37,946) (5,587)
Other....................................................... 650 -- --
--------- --------- ---------
Net cash (used for) provided by investing
activities...................................... (162,158) (107,281) 97,432
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock............................. 147,197 -- 1,216
Proceeds from the exercise of stock options................. 4,621 11,196 6,104
Proceeds from borrowings.................................... 140,243 129,155 327,325
Payments of debt............................................ (136,319) (36,511) (398,111)
Dividends to shareholders of acquired companies............. (4,052) -- --
Repurchase of stock and warrants............................ -- (5,591) --
Debt issuance costs......................................... -- -- (13,596)
Other....................................................... (7,355) 5,547 --
--------- --------- ---------
Net cash provided by (used for) financing
activities...................................... 144,335 103,796 (77,062)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Net change.................................................. 2,029 (11,348) 10,163
Balance at beginning of period (see Note 3)................. 17,241 18,979 7,631
--------- --------- ---------
Balance at end of period.................................... $ 19,270 $ 7,631 $ 17,794
========= ========= =========
See notes to consolidated financial statements.
F-4
45
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON PREFERRED TREASURY TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCK STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT AMOUNT EQUITY
------ ------ --------- --------- -------- ------------- -------- -------------
BALANCE AT DECEMBER 31, 1994, AS
RESTATED........................ 5,990 $460 22,191 $ 225 $251,378 $ (16,059) $ -- $ 236,004
Issuance of common stock.......... 4,244 42 -- -- 121,580 -- -- 121,622
Issuance of common stock in
acquisitions.................... 4,020 40 -- -- 148,419 -- -- 148,459
Exercise of stock options
(including tax benefit of
$7,901)......................... 557 6 -- -- 12,516 -- -- 12,522
Issuance and conversion of
preferred stock at acquired
companies....................... 3,344 33 (2,737) 157 37,398 -- -- 37,588
Pre-merger dividends to former
owners.......................... -- -- -- -- -- (1,818) -- (1,818)
Net loss.......................... -- -- -- -- -- (2,650) -- (2,650)
Other............................. 762 8 -- -- 3,096 (757) -- 2,347
----- ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1995, AS
RESTATED........................ 8,917 589 19,454 382 574,387 (21,284) -- 554,074
Changes in HDS's stockholders'
equity in the three months ended
March 31, 1996 (see Note 3)..... -- -- -- -- -- (382) -- (382)
Exercise of stock options
(including tax benefit of
$21,012)........................ 1,536 15 -- -- 31,348 -- 845 32,208
Repurchase of stock and
warrants........................ (58) -- -- -- (4,577) -- (1,014) (5,591)
Conversion of preferred stock at
acquired companies.............. 6,528 65 (19,454) (382) 317 -- -- --
Conversion of subordinated
debentures...................... 4,527 45 -- -- 62,305 -- -- 62,350
Net loss.......................... -- -- -- -- (137,337) -- (137,337)
Other............................. 255 3 -- -- 2,893 307 -- 3,203
----- ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1996, AS
RESTATED........................ 1,705 717 -- -- 666,673 (158,696) (169) 508,525
Issuance of common stock.......... 205 2 -- -- 1,214 -- -- 1,216
Exercise of stock options
(including tax benefit of
$2,762)......................... 1,303 13 -- -- 8,594 -- 259 8,866
Net loss.......................... -- -- -- -- -- (19,303) -- (19,303)
Other............................. (9) -- -- -- 2,517 50 (90) 2,477
----- ---- ------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31, 1997...... 3,204 $732 -- $ -- $678,998 $(177,949) $ -- $ 501,781
===== ==== ======= ===== ======== ========= ======= =========
See notes to consolidated financial statements.
F-5
46
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Medaphis Corporation and its subsidiaries ("Medaphis" or the
"Company"), including the retroactive effect of mergers accounted for under the
pooling-of-interests method of accounting. As more fully discussed in Note 2,
the Company has restated its consolidated financial statements for the years
ended December 31, 1995 and 1996. All significant intercompany transactions have
been eliminated. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
NATURE OF OPERATIONS. Medaphis provides business management services and
systems primarily to the healthcare industry throughout the United States. The
Company historically has not experienced any significant losses related to
individual clients, classes of clients or groups of clients in any geographical
area.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. Fees for the Company's business management services
are primarily based on a percentage of net collections on clients' patient
accounts, and revenue is recognized as such business management services are
performed. Accounts receivable, billed, represents amounts invoiced to clients.
Accounts receivable, unbilled, represents amounts recognized for services
rendered but not yet invoiced and is based on the Company's estimate of the fees
that will be invoiced when collections on patient accounts are received. During
the third quarter of 1997, the Company refined its method for calculating the
estimate for accounts receivable, unbilled, which resulted in a decrease of
$10.7 million.
Revenue from software licenses is generally recognized upon shipment of the
products and when no significant contractual obligations remain outstanding.
When the Company receives payment prior to shipment or fulfillment of
significant vendor obligations, such payments are recorded as deferred revenue
and are recognized as revenue upon shipment or fulfillment of significant vendor
obligations. The license agreements typically provide for partial payments
subsequent to shipment; such terms result in an unbilled receivable at the date
the revenue is recognized. Costs related to insignificant vendor obligations are
accrued upon recognition of the license revenue. Software maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically one year.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 is effective for transactions entered into in fiscal years beginning
after December 15, 1997. Subject to approval of AcSEC's proposal to defer the
effective date of certain provisions of SOP 97-2 for certain transactions, for
one year, the Company does not believe the adoption of the remaining provisions
of SOP 97-2 will have a significant impact on the pattern of revenue recognition
of software sales.
Revenues from systems integration contracts are recorded based on the terms
of the underlying contracts, which are primarily time and material or fixed
price contracts. Revenue from time and material type contracts is recognized as
services are rendered and costs are incurred based on contractual rates. Revenue
from fixed price contracts is recorded using the percentage of completion
method. Anticipated losses, if any, are charged to operations in the period such
losses are determined. Revenue for which customers have not yet been invoiced is
reflected as accounts receivable, unbilled in the accompanying consolidated
balance sheets.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
F-6
47
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRICTED CASH. Restricted cash principally represents amounts collected
on behalf of certain clients, a portion of which is held in trust until remitted
to such clients.
PROPERTY AND EQUIPMENT. Property and equipment, including equipment under
capital leases, are stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets, generally four to ten
years for furniture and fixtures, three to seven years for equipment, and 20
years for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
client lists and software development costs.
Goodwill and Client Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized using the straight line method. The
Company generally amortizes goodwill over a period of 40 years as management
believes that these assets have an indeterminate life. Management believes that
Medaphis' value is in the differentiated service business it operates, which
outlasts the individual clients that make it up, and that the current base of
business, which has made Medaphis a leader in healthcare business management
services, provides the foundation for continued growth. Management continually
monitors events and circumstances both within the Company and within the
industry which could warrant revisions to the Company's estimated useful life of
goodwill. If the Company ever determines that a reduction in the amortization
period is necessary, it could have a material impact on the Company's results of
operations. Client lists are amortized using the straight line method over their
estimated period of benefit, generally 7 to 20 years.
The Company monitors events and changes in circumstances that could
indicate carrying amounts of intangible assets may not be recoverable. When
events or changes in circumstances are present that indicate the carrying amount
of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through undiscounted expected future
cash flows. Should the Company determine that the carrying values of specific
intangible assets are not recoverable, the Company would record a charge to
reduce the carrying value of such assets to their fair values. The Company
determines fair value based on discounted expected future cash flows during the
period of benefit. No impairment losses related to goodwill or client lists have
been recorded during the three year period ended December 31, 1997, except for
those discussed in Note 4 related to the Imonics Shutdown.
During 1996 and 1997, management of the Company believed there were events
and changes in circumstances that warranted a re-assessment as to whether the
carrying amount of the intangible assets (approximately $434 million at December
31, 1997) for the Company's Physician Services segment was still recoverable.
These events included: (i) operating losses reported for two consecutive years,
(ii) significant restructuring charges within the Physician Services segment and
(iii) absence of revenue growth within the Physician Services segment.
Therefore, in accordance with applicable accounting rules, management prepared a
40 year undiscounted cash flow analysis to determine if these intangible assets
were still recoverable. Management prepared the analysis with assumptions that
reflected its current outlook on the business. In all instances, management
believes the assumptions inherent in the analysis were reasonable and
supportable. Such analysis indicated that no impairment of these intangible
assets had occurred. However, the Company recognizes that modest adjustments to
the assumptions could have a material impact on the analysis and related
conclusions. If the projected undiscounted cash flows used in the Company's
recoverability analysis decreased to one dollar below the carrying value of the
intangible assets, the Company would be required to record a non-cash impairment
charge that may exceed $300 million to reduce the Physician Services segment's
intangible assets to their fair value, as determined by discounting the future
cash flows of this segment. Management still believes the current intangible
asset balance is recoverable.
F-7
48
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software utilized in
providing the Company's business management systems and services. Software
development costs are capitalized upon the establishment of technological
feasibility for each product or process and capitalization ceases when the
product or process is available for general release to customers or is put into
service. Software development costs are amortized using the straight line method
over the estimated economic lives of the assets, which are generally three to
five years.
STOCK-BASED COMPENSATION PLANS. The Company accounts for its stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). In Note 12, the Company presents
the disclosure requirements of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" ("SFAS No. 123"). SFAS No. 123
requires that companies which elect to not account for stock-based compensation
as prescribed by that statement shall disclose, among other things, the pro
forma effects on net income (loss) and basic net income (loss) per share as if
SFAS No. 123 had been adopted.
LEGAL COSTS. The Company records charges for the legal and administrative
fees, costs and expenses and damages or settlements it anticipates incurring in
conjunction with its legal matters when management can reasonably estimate these
costs.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws and changes to such laws. Management includes the consideration of
future events to assess the likelihood that tax benefits will be realized in the
future.
PRO FORMA PROVISION FOR INCOME TAXES. In 1995 and 1996, the Company
acquired the Automation Atwork Companies ("Atwork"), Rapid Systems Solutions,
Inc. ("Rapid Systems") and BSG Corporation ("BSG") in merger transactions
accounted for as poolings-of-interests. Prior to the mergers, Atwork, Rapid
Systems and a company acquired by BSG prior to the merger between BSG and the
Company (the "BSG Merger") had elected "S" corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company acquired by
BSG, its acquisition by BSG), such entities terminated their "S" corporation
elections. Pro forma provision (benefit) for income taxes, taken together with
reported income tax expense (benefit), presents the combined pro forma tax
expense (benefit) of such entities as if they had been "C" corporations during
the periods presented.
PRO FORMA BASIC NET LOSS PER COMMON SHARE. Pro forma basic net loss per
common share is presented in accordance with 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
was effective for financial statements for both interim and annual periods ended
after December 15, 1997. The Company has restated the pro forma basic net loss
per common share for all periods presented to give effect to SFAS No. 128.
Pro forma basic net loss per common share is based on the weighted average
number of shares of common stock outstanding during the period. Pro forma
diluted net loss per common share is not presented as it is antidilutive. Stock
options and warrants are the only securities issued which would have been
included in the pro forma diluted earnings per share calculation.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In November 1997, the Emerging
Issues Task Force ("EITF") issued EITF 97-13 "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that Combines
Business Process Reengineering and Information Technology" ("EITF 97-13"). EITF
97-13 requires process reengineering costs, as defined, which had been
previously capitalized as part of an information technology project to be
expensed in the quarter including November 1997. The
F-8
49
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded a charge of $2.5 million, net of tax of $1.6 million, in the
fourth quarter of 1997 as a result of EITF 97-13.
SEGMENT REPORTING. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for
the way companies report information about operating segments including the
related disclosures about products and services. The Company has adopted SFAS
No. 131 during the year ended December 31, 1997 and, as required, has restated
prior years for comparability. See Note 16 where the Company discloses
information about its reportable segments.
2. RESTATEMENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 1997, in connection with a refinancing effort,
management evaluated certain revenue recognition practices at Health Data
Sciences Corporation ("HDS"), which was acquired in a merger transaction in June
1996 and accounted for as a pooling-of-interests. These practices related
principally to revenue recognized in fiscal years 1995 and 1996. As a result of
this evaluation, management determined that the revenue was improperly
recognized because certain license fees were not fixed and determinable due to
significant contingencies within the license agreements and, accordingly,
restated the Company's financial statements for the years ended December 31,
1995, 1996 and interim periods of 1997 and retained earnings (accumulated
deficit) as of December 31, 1994 (the "HDS Restatement").
Subsequent to the restatement related to HDS, as part of its continued due
diligence efforts related to the refinancing, management completed its analysis
of the accounting for the December 1995 acquisition of Medical Management
Sciences, Inc. ("MMS") which was originally accounted for as a
pooling-of-interests. Management determined the acquisition of MMS should have
been accounted for as a purchase because the Company did not purchase a real
estate holding company that was under common control of the primary shareholders
of MMS and accordingly, restated the Company's financial statements for the
years ended December 31, 1995, 1996 and interim periods of 1997 (the "MMS
Restatement").
As a result of the HDS Restatement, the predecessor accountants withdrew
their audit opinion dated March 31, 1997 covering 1994, 1995 and 1996. The audit
opinion issued by the predecessor accountants, dated March 31, 1997, included an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern due to certain step-down payments required during
1997 under the Company's Senior Credit Facility. As discussed in Note 8, on
December 23, 1997, the Company entered into a credit facility, the proceeds of
which were used to refinance the Senior Credit Facility, and that increased the
Company's borrowing capacity and extended the term into 1999, thereby removing
the substantial doubt expressed in the predecessor accountants' audit opinion.
Fiscal years 1995 and 1996 have been re-audited by the Company's current
independent accountants.
The impact of the HDS Restatement and MMS Restatement is presented below:
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
AS OF DECEMBER 31, 1994
Retained earnings (accumulated deficit)................... $ 4,838 $ (16,059)
Total stockholders' equity................................ $ 257,097 $ 236,004
FOR THE YEAR ENDED DECEMBER 31, 1995
Revenue................................................... $ 559,877 $ 538,012
Pro forma net loss........................................ (8,504) (4,780)
Pro forma basic net loss per share........................ $ (0.15) $ (0.09)
F-9
50
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
AS OF DECEMBER 31, 1995
Accumulated deficit....................................... $ (6,052) $ (21,284)
Total stockholders' equity................................ $ 421,306 $ 554,074
FOR THE YEAR ENDED DECEMBER 31, 1996
Revenue................................................... $ 608,313 $ 596,714
Pro forma net loss........................................ (123,642) (136,358)
Pro forma basic net loss per share........................ $ (1.74) $ (1.91)
AS OF DECEMBER 31, 1996
Current assets............................................ $ 269,385 $ 255,239
Intangible assets......................................... 389,033 539,151
Total assets.............................................. 815,624 936,854
Current liabilities....................................... 193,752 198,747
Total liabilities......................................... 423,334 428,329
Total stockholders' equity................................ $ 392,290 $ 508,525
3. BUSINESS COMBINATIONS AND DIVESTITURES
From January 1, 1995 through December 31, 1996, the Company acquired either
substantially all of the assets or all of the outstanding capital stock of each
of the following businesses which were accounted for using the purchase method
of accounting:
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
- ---------------- ------------- ----------------
(IN THOUSANDS)
Sage Communication, Inc. ("Sage")....................... * October 1996
The Medico Group, Ltd................................... * April 1996
Medical Management Computer Sciences, Inc............... * February 1996
CBT Financial Services, Inc............................. * February 1996
The Receivables Management Division of MedQuist, Inc.... $ 17,300 December 1995
MMS..................................................... 148,000 December 1995
The Halley Exchange, Inc. ("Halley").................... * December 1995
Billing and Professional Services, Inc.................. * October 1995
Medical Office Consultants, Inc......................... * May 1995
Computers Diversified, Inc.............................. 15,500 April 1995
Medical Management, Inc................................. 8,000 March 1995
The Decision Support Group, Inc......................... * January 1995
- ---------------
* Consideration not material.
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The operating results of the acquired businesses
are included in the Company's consolidated statements of operations from the
respective dates of acquisition. The pro forma impact of the foregoing
acquisitions are not presented due to the immaterial effect these acquisitions
have on the Company's results of operations for 1995 and 1996.
With respect to each of the material acquisitions above, the fair value of
the net tangible assets acquired was not significant; as a result, substantially
all of the aggregate purchase price was allocated to goodwill and other
intangibles as follows: goodwill -- $169.0 million and client lists -- $28.8
million. The remainder of the purchase price was allocated among various net
tangible assets.
F-10
51
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the foregoing acquisitions, the Company combined with seven
businesses in 1995 and 1996 which were accounted for using the
pooling-of-interests method of accounting. Following is a list of the mergers
and the shares exchanged:
SHARES
COMPANY EXCHANGED MERGER DATE
- ------- --------- -----------
HDS......................................................... 6,215,000 June 1996
BSG......................................................... 7,539,000 May 1996
Rapid Systems............................................... 1,135,000 April 1996
Intelligent Visual Computing, Inc. ("IVC").................. * February 1996
Consort Technologies, Inc. ("Consort")...................... 825,000 November 1995
Healthcare Recoveries, Inc. ("HRI")......................... 3,265,000 August 1995
Atwork...................................................... 8,000,000 March 1995
- ---------------
* Consideration not material
Since these business combinations have been recorded using the
pooling-of-interests method of accounting, no adjustment has been made to the
historical carrying amounts of assets acquired and liabilities assumed. The
accompanying consolidated financial statements have been restated to include the
financial position and operating results of the significant mergers, Atwork,
HRI, Rapid Systems, BSG and HDS, for all periods prior to the mergers.
Prior to its merger with the Company, HDS reported on a fiscal period
ending March 31. HDS's financial position and operating results as of and for
the year ended March 31, 1996 were combined with the Company's financial
position and operating results as of and for the years ended December 31, 1995.
Accordingly, HDS's operating results for the three months ended March 31, 1996
were duplicated in each of the years ended December 31, 1995 and 1996. HDS's
revenue and net income for that three-month period were $3,758,000 and $382,000,
respectively. The beginning cash and cash equivalents balance in the
accompanying 1996 consolidated statement of cash flows does not equal the
December 31, 1995 cash and cash equivalents balance as a result of the
combination of HDS's financial position as of March 31, 1996 with the financial
position of the Company as of December 31, 1995.
A summary of revenue and net income (loss) for each of the three
significant pooling-of-interests transactions consummated in 1996 for the year
ended December 31, 1995 is as follows:
PRO FORMA
NET INCOME
COMPANY REVENUE (LOSS)
- ------- ------- ----------
(IN THOUSANDS)
Rapid Systems............................................. $14,722 $ 972
BSG....................................................... 69,663 (1,045)
HDS, as restated.......................................... 10,449 (4,294)
A summary of revenue and pro forma net income (loss) for each of the three
significant pooling-of-interests transactions consummated after the first
quarter of 1996 for interim year-to-date periods preceding the dates of
consummation are as follows:
INTERIM PERIOD PRO FORMA
PRECEDING NET INCOME
COMPANY CONSUMMATION REVENUE (LOSS)
- ------- -------------- ------- -----------------
(IN THOUSANDS)
Rapid Systems................................ March 31, 1996 $ 5,248 $ (498)
BSG.......................................... March 31, 1996 19,539 2,497
HDS.......................................... March 31, 1996 3,758 382
F-11
52
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$126.4 million and an extraordinary gain of $76.4 million, net of taxes of $46.2
million. Medaphis acquired HRI on August 28, 1995 through a business combination
accounted for as a pooling-of-interests and therefore, the resultant gain from
the sale has been presented as an extraordinary item. The net proceeds from the
sale were used to pay down borrowings under the Second Amended Facility (see
Note 8).
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
Restructuring charges.................................... $15,037 $ 14,076 $ 6,687
Software abandonment..................................... 1,800 86,088 --
Property and equipment impairment........................ 5,030 35,592 6,959
Intangible asset impairment.............................. -- 13,048 --
Legal costs.............................................. 12,000 12,800 2,600
Pooling charges.......................................... 9,200 9,798 (46)
Severance costs.......................................... 4,933 3,913 2,524
Other.................................................... 750 5,001 3,916
------- -------- -------
$48,750 $180,316 $22,640
======= ======== =======
Restructuring Charges. In early 1995, the Company initiated a
reengineering program focused upon its billing and accounts receivable
management operations (the "Reengineering Project"). There were two components
of the Reengineering Project: (i) workflow, process and operational improvements
along with new technology development, and (ii) office consolidation within its
wholly owned operating subsidiary, Medaphis Physician Services Corporation
("MPSC") (the "MPSC Restructuring Plan"). The Company had recorded a
restructuring reserve for the exit costs associated with the MPSC Restructuring
Plan in 1995 of $6.7 million for the costs associated with the termination of
certain leases, $5.5 million for the costs associated with discontinued client
contracts and $2.8 million for other exit activities. In August 1996, the
Company revised the MPSC Restructuring Plan and increased its lease termination
costs by $2.0 million and reduced other reserves by $3.8 million. During the
first half of 1996, the Company incurred $5.2 million of costs that were related
to the Reengineering Project, which had not previously been reserved. In 1997,
the Company reevaluated the adequacy of the reserves established for the MPSC
Restructuring Plan and recorded an additional charge of $1.7 million for lease
termination costs.
During 1996, the Company adopted a plan to consolidate its system
integration businesses, BSG, Rapid Systems and Imonics Corporation ("Imonics")
(the "BSG Group Restructuring"). In December 1996, the Company adopted a plan to
shut down Imonics (the "Imonics Shutdown"). In connection with the BSG Group
Restructuring and the Imonics Shutdown, Medaphis recorded charges of $3.0
million for the costs associated with the termination of certain leases and $6.5
million for severance costs for approximately 200 Imonics employees who had been
notified of their termination and $1.2 million for other exit activities.
In August 1997, the Company adopted a plan to combine the operations of its
technology companies, under the Per-Se name (the "Per-Se Restructuring"). In
connection with the Per-Se Restructuring, the Company recorded charges of $2.7
million for the costs associated with the termination of certain leases and $2.3
million for severance costs related to approximately 100 employees who had been
notified of their termination.
F-12
53
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for all restructurings discussed above
are as follows:
1995 COSTS RESERVE COSTS RESERVE
INITIAL APPLIED BALANCE APPLIED BALANCE
RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31, RESERVE
CHARGE RESERVE 1995 ADJUSTMENTS RESERVES 1996 ADJUSTMENTS
------- ------- ------------ ----------- -------- ------------ -----------
(IN THOUSANDS)
Lease termination costs.... $ 6,726 $ (736) $ 5,990 $ 5,017 $ (3,493) $ 7,514 $ 4,395
Incremental costs
associated with
discontinued client
contracts................ 5,488 (797) 4,691 (2,690) (2,001) -- --
Severance.................. -- -- -- 6,541 (3,793) 2,748 2,292
Other...................... 2,823 (1,035) 1,788 5,208 (5,774) 1,222 --
------- ------- ------- ------- -------- ------- -------
$15,037 $(2,568) $12,469 $14,076 $(15,061) $11,484 $16,687
======= ======= ======= ======= ======== ======= =======
COSTS RESERVE
APPLIED BALANCE
AGAINST DECEMBER 31,
RESERVE 1997
------- ------------
(IN THOUSANDS)
Lease termination costs.... $(3,894) $8,015
Incremental costs
associated with
discontinued client
contracts................ -- --
Severance.................. (3,683) 1,357
Other...................... (1,222) --
------- ------
$(8,799) $9,372
======= ======
The terminated leases have various expiration dates through 2005.
Software Abandonment. In connection with the Halley acquisition in 1995,
the Company recorded a $1.8 million charge related to the cost of purchased
research and development activities related to acquired technology for which
technological feasibility had not yet been established and which had no
alternative future uses.
In June 1996, the Company began a comprehensive assessment of the
Reengineering Project. The comprehensive review was completed and management
concluded that it was not cost effective to continue the development and
deployment of the software and technology upon which the Reengineering Project
was based and that the reengineering software and technology had no alternative
useful application in the Company's operations. In connection with abandonment
of its Reengineering Project and the Imonics Shutdown, the Company abandoned
certain software development projects and recorded charges for the write-off of
$86.1 million of capitalized software development costs related to these
projects.
Property and Equipment Impairment. In connection with the MPSC
Restructuring Plan in 1995 and the abandonment of the Reengineering Project and
the Imonics Shutdown in 1996, the Company assessed the recoverability of certain
of its long lived assets and recorded impairment losses of approximately $5.0
million and $35.6 million in 1995 and 1996, respectively.
In connection with the Per-Se Restructuring and the Company's assessment of
the recoverability of certain of its long-lived assets, the Company recorded a
charge of $7.0 million for impairment losses during 1997.
Intangible Asset Impairment. In connection with the Imonics Shutdown in
1996, Medaphis recorded a charge of $13.0 million for the write-off of the
unamortized goodwill associated with the purchase of Imonics.
Legal Costs. In 1995, the Company recorded a charge of $12.0 million for
the legal and administrative fees, costs and expenses it anticipated incurring
in connection with the California Investigation and various putative class
action lawsuits which were based on this investigation.
In 1996, the Company accrued an additional $2.0 million for the legal and
administrative fees, costs and expenses associated with the California
Investigation. Also in 1996, the Company recorded a charge of $5.0 million for
the legal and administrative fees, costs and expenses it anticipated incurring
in connection with various putative class action lawsuits which have been filed
since August 14, 1996 (the "1996 Lawsuits") against the Company and certain of
its former officers, one of whom was also a director. The Company also accrued
$4.6 million for the legal costs and other fees the Company had or planned to
incur in connection with the turnaround effort undertaken by the new management
team and various other legal matters. Also in 1996, the Company had recorded a
$1.2 million charge for the anticipated settlement of the 1995 Class Action
Settlement (see Note 10).
F-13
54
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, the Company recorded charges of $3.0 million for the legal and
administrative fees, costs and expenses it has incurred and plans to incur in
connection with the GFS Investigation.
Also in 1997, the Company evaluated the adequacy of the reserves
established for the California Investigation and the turnaround plan adopted in
December 1996 and reduced these reserves by $3.4 million. The Company also
increased its reserve for the 1996 Lawsuits by $3.0 million.
Pooling Charges. In 1995 and 1996, Medaphis acquired seven companies in
merger transactions accounted for under the pooling-of-interests method of
accounting. In connection therewith, the Company incurred transaction fees,
costs and expenses, which it accrued at the closing of the transaction. Such
estimates were adjusted based on actual charges. The impact of these charges and
subsequent adjustments are set forth below as (income)/expense:
1995 1996 1997
------ ------ ----
(IN THOUSANDS)
Atwork...................................................... $6,000 $ (430) $
HRI......................................................... 2,000 (778) --
Consort..................................................... 1,200 (529) --
IVC......................................................... -- 169 --
Rapid Systems............................................... -- 584 (15)
BSG......................................................... -- 6,094 (14)
HDS......................................................... -- 4,688 (17)
------ ------ ----
$9,200 $9,798 $(46)
====== ====== ====
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $4.9
million, $0.9 million and $0.5 million in 1995, 1996 and 1997, respectively, in
accordance with Statement of Financial Accounting Standards No. 112 to reflect
the expense for employees' rights to involuntary severance benefits that have
accumulated to date.
In 1996 and 1997 the Company recorded charges of $3.0 million and $0.3
million, respectively, for severance costs associated with former executive
management. In 1997, the Company also extended the stock option exercise period
for the former chief executive officer of the Company and recorded a charge of
$1.7 million.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1996 1997
-------- --------
(IN THOUSANDS)
Land........................................................ $ 2,873 $ 2,508
Buildings................................................... 5,563 4,854
Furniture and fixtures...................................... 23,276 20,208
Equipment................................................... 120,731 113,704
Leasehold improvements...................................... 12,308 14,100
-------- --------
164,751 155,374
Less accumulated depreciation............................... 66,901 82,611
-------- --------
$ 97,850 $ 72,763
======== ========
F-14
55
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consists of the following:
1996 1997
-------- --------
(IN THOUSANDS)
Goodwill.................................................... $488,138 $486,907
Client lists................................................ 79,954 79,954
Software development costs.................................. 34,030 34,716
Other....................................................... 1,000 --
-------- --------
603,122 601,577
Less accumulated amortization............................... 63,971 85,638
-------- --------
$539,151 $515,939
======== ========
Expenditures on capitalized software development costs were approximately
$35.6 million, $37.9 million and $5.6 million in 1995, 1996 and 1997,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $5.1 million, $6.6 million and $5.9 million in 1995, 1996 and
1997, respectively. The unamortized balance of software development costs at
December 31, 1996 and 1997 was $15.1 million and $12.9 million, respectively.
7. ACCRUED EXPENSES
Accrued expenses consists of the following:
1996 1997
-------- --------
(IN THOUSANDS)
Accrued costs of businesses acquired........................ $ 9,904 $ 2,474
Funds due clients........................................... 19,568 3,076
Deferred revenue............................................ 18,853 17,469
Accrued legal costs......................................... 15,173 7,546
Accrued restructuring and severance costs................... 18,080 10,284
Interest.................................................... 985 712
Other....................................................... 18,112 14,734
-------- --------
$100,675 $ 56,295
======== ========
8. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1997
-------- --------
(IN THOUSANDS)
Borrowings under the credit facilities...................... $242,730 $185,000
Capital lease obligations, weighted average effective
interest rates of 8.4% and 8.1%........................... 27,810 14,800
Other....................................................... 1,187 1,141
-------- --------
271,727 200,941
Less current portion........................................ 55,975 11,490
-------- --------
$215,752 $189,451
======== ========
At December 31, 1996, the Company had a $250 million revolving credit
agreement (the "Senior Credit Facility") which was composed of a $240 million
revolving credit line and a $10 million cash management line. The Company had
the option of making "LIBOR" based loans or "base rate" loans under the Senior
F-15
56
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility. LIBOR based loans bore interest at LIBOR for the then current
interest period plus amounts varying from 1.25% to 1.75% based on the Company's
financial performance. Base rate loans bore interest equal to prime. At December
31, 1996, the Company had LIBOR based loans outstanding at interest rates
ranging from 6.78% to 6.90%. The Senior Credit Facility contained, among other
things, financial covenants which required the Company to maintain certain
financial ratios. The Company was in compliance with all covenants as of
December 31, 1996.
On February 4, 1997, the Company entered into the Second Amended Facility,
which replaced the Company's previous revolving credit agreement, increased the
revolving line of credit from $250 million to $285 million and had a maturity
date of June 30, 1998. The Second Amended Facility also required mandatory loan
commitment reductions to $200 million and $150 million on July 31, 1997 and
January 31, 1998, respectively. On May 28, 1997, the Company divested HRI
through an initial public offering of 100% of its stock. This sale generated
approximately $126.4 million of net proceeds, of which $117.0 million was 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 $168 million,
which met the required reduction for July 31, 1997.
On December 23, 1997, Medaphis entered into a $210 million loan facility
(the "New Facility") with an affiliate of Donaldson, Lufkin & Jenrette. The
proceeds of the New Facility were used to repay the Second Amended Facility.
Borrowings under the New Facility initially bear interest at Prime plus 250
basis points with rates increasing 100 basis points at June 23, 1998 and 50
basis points each quarter thereafter through the loan's maturity on April 1,
1999. At December 31, 1997, the New Facility bore interest at 11.0%. The New
Facility contains certain quarterly financial covenants related to the Company's
performance, is secured by substantially all of the assets of the Company and
its subsidiaries and is guaranteed by substantially all of the Company's
subsidiaries. The New Facility also contains, among other things, (i) the
incurrence of additional indebtedness and other obligations and the granting of
additional liens; (ii) mergers, acquisitions, investments and acquisitions and
dispositions of assets; (iii) the incurrence of capitalized lease obligations;
(iv) dividends and other equity payments in respect of the Company's voting
common stock ("Common Stock"); (v) prepayments or repurchase of other
indebtedness and amendments to certain agreements governing indebtedness; (vi)
engaging in transactions with affiliates and formation of subsidiaries; and
(vii) changes of lines of business. The facility is callable, in whole or in
part, at the option of Medaphis, at any time. The notes evidencing the New
Facility were placed privately and have no registration rights. Loan costs for
the New Facility totaled approximately $8.1 million. The Company was in
compliance with all covenants as of December 31, 1997.
It is the Company's policy to amortize debt issuance costs using the
straight-line method over the life of the debt agreement. Amortization expense
related to debt issuance costs for the years ended 1995, 1996, and 1997 were
$0.5 million, $0.3 million and $3.0 million, respectively.
In connection with the Second Amended Facility, the Company issued the
lenders warrants with vesting of 1% of the Company's 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. As a result of the
Company securing the New Facility, the warrants have been cancelled.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1996 and 1997, the net book value of equipment subject to
capital leases totaled $27.5 million and $17.9 million, respectively.
The carrying amounts of long-term debt and capital lease obligations
reflected in the consolidated balance sheets approximate fair value of such
instruments due to the variable rate nature of the long-term debt and the fixed
rates on the capital lease obligations which approximate market rates.
F-16
57
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
1998........................................................ $ 11,490
1999........................................................ 188,412
2000........................................................ 63
2001........................................................ 69
2002........................................................ 76
Thereafter.................................................. 831
--------
$200,941
========
9. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases which expire at various dates through 2008. Rent expense was $22.4
million, $25.6 million and $25.1 million for the years ended December 31, 1995,
1996 and 1997, respectively.
Future minimum lease payments under noncancelable operating leases
beginning in 1998 are as follows (in thousands):
1998........................................................ $25,103
1999........................................................ 21,697
2000........................................................ 15,261
2001........................................................ 8,413
2002........................................................ 7,003
Thereafter.................................................. 20,890
-------
$98,367
=======
10. 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, MPSC, which offices are
located in Calabasas and Cypress, California (the "Designated Offices") (the
"California Investigation"). Medaphis first became aware of the California
Investigation on June 13, 1995 when search warrants were executed on the
Designated Offices and it and MPSC received grand jury subpoenas. Medaphis
received an additional grand jury subpoena on August 22, 1997, with which it is
complying. The subpoena requires, among other things, records of any audit or
investigative reports relating to the billing of payors globally for
radiological services during the period January 1, 1991 to date and any refunds
owed to or issued to payors with respect to such global billing reports in the
Company's various offices, including the Designated Offices. Although the
precise scope of the California 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. No charges or claims by the
government have been made. Although the Company continues to believe that the
principal focus of the California Investigation remains on the billing and
collection practices in the Designated Offices, there can be no assurance that
the California Investigation will not expand to other offices, that the
California Investigation will be resolved promptly, that additional subpoenas or
search warrants will not be received by Medaphis or MPSC or that the California
Investigation will not have a material adverse effect on the Company. The
F-17
58
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded charges of $12 million in the third quarter of 1995, $2 million
in the fourth quarter of 1996 and a credit of $2.8 million in the third quarter
of 1997, solely for legal and administrative fees, costs and expenses it
anticipates incurring in connection with the California Investigation and the
putative class action lawsuits described below which were filed in 1995
following the Company's announcement of the California Investigation. The
charges are intended to cover only the anticipated expenses of the California
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.
MPSC has become aware of apparently inadvertent computer software errors
affecting some of its electronic billing to carriers in the State of California.
The error relates to global billing (i.e., billing for the professional and
technical components of a service) for certain radiological services under
circumstances where the radiologist is only entitled to bill for the
professional component of such services. The Company believes such inadvertent
errors may have caused overpayments on certain claims submitted on behalf of
clients in the State of California. The full extent of overpayments by carriers
and beneficiaries has not been determined, but as notifications to the affected
clients and carriers occur, and refunds or offsets are sought, the Company may
be required to return to clients its portion of fees previously collected, and
may receive claims for alleged damages as a result of the error.
Following the announcement of the investigation by the United States
Attorney's Office for the Central District of California, 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 alleged violations of the federal securities laws in connection
with Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of Common Stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the Consolidated
Complaint failed to state a claim upon which relief may be granted. On April 11,
1996, certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contained any claims based on the
Securities Act of 1933, as amended (the "1933 Act"), and the Company's
underwriters and outside directors were no longer named as defendants. On June
26, 1996, the court denied plaintiffs' motion to certify plaintiffs' class. The
plaintiffs and the defendants agreed 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 included the related putative
class action lawsuit currently pending in the Superior Court of Cobb County,
Georgia, described more fully below. On October 29, 1997 the court certified a
class for settlement purposes, approved the settlement and entered final
judgment dismissing the action with prejudice. One of Medaphis' directors and
officers' liability insurance carriers has paid $3.7 million of the 1995 Class
Action Settlement. The Company accrued approximately $1.2 million in the quarter
ended December 31, 1996 for the anticipated balance of the 1995 Class Action
Settlement and to pay certain fees incident thereto. On November 6, 1997, the
Company paid the remaining $1.05 million balance of the settlement.
On November 5, 1996, Medaphis, Randolph G. Brown, a former officer and
director, and Michael R. Cote and James S. Douglass, former officers, were named
as defendants in a putative shareholder class action lawsuit filed in Superior
Court of Cobb County, State of Georgia. This lawsuit was 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 sought compensatory damages and
costs. Pursuant to the 1995 Class Action Settlement, the claims in this state
action were settled and were dismissed without prejudice.
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") (the "GFS Investigation").
F-18
59
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 year ended December 31, 1996, GFS represented approximately 7%
of Medaphis' 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 GFS Investigation are not known to the Company, Medaphis believes that the
GFS 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 GFS Investigation will be resolved promptly or that the
GFS Investigation will not have a material adverse effect upon Medaphis. No
charges or claims by the government have been made. Currently, the Company has
recorded charges of $2 million and $1 million in the second and third quarters
of 1997, respectively, solely for legal and administrative fees, costs and
expenses in connection with the GFS 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 February 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 HDS. The Consolidated Second Amended Complaint seeks
compensatory and rescissory damages, as well as fees, interest and other costs.
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. 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 entered into a Stipulation and Agreement of Settlement dated
December 15, 1997 (the "Stipulation") 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 (to be paid by the
Company's directors' and officers' liability insurance carriers), 3,955,556
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 which were valued
at $22.3 million using an option pricing model. The Stipulation also includes,
among other things: (i) a complete release of claims against the Company, the
individual defendants and certain related persons and entities; and (ii) certain
anti-dilution rights in favor of 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 pending or
asserted against the Company, subject to a 5 million share basket below which
there will be no dilution adjustments. The Stipulation also contains other
conditions
F-19
60
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and the final approval of the settlement by the court. On December
15, 1997, the court granted preliminary approval to the settlement and
conditionally certified the classes for settlement purposes only. The Company
recorded a $52.5 million charge in the quarter ended September 30, 1997 for this
settlement. Such amount has been reflected as a non-current liability as the
Company does not anticipate satisfying the obligation with current assets.
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 all other defendants filed 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. On February 5, 1997 the Court overruled defendants demurrer. 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 and current officers
of Medaphis. All of the newly added defendants have responded to the amended
complaint. As a result of the Company's restatements 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 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). Plaintiffs seek compensatory and
punitive damages, as well as fees, interest and other costs. 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
common law and new parties, including former officers of Medaphis, Medaphis'
former outside auditors and BSG. On or about October 29, 1997, all defendants
filed motions to dismiss 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
F-20
61
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
its representations and warranties made in the merger agreement between Medaphis
and BSG. On December 31, 1996, Medaphis entered into a standstill and tolling
agreement with Mr. Noorda, Mr. Papermaster and other former BSG shareholders,
which, as extended, runs through September 30, 1998.
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 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 non-compete covenants and contract
provisions between Medaphis and plaintiffs. Defendants have filed a motion to
dismiss the complaint. Discovery has been stayed pending resolution of the
motion to dismiss.
On August 12, 1997, George W. Stickel filed a putative class action
complaint against Medaphis, Randolph W. Brown, Michael R. Cote and James S.
Douglass in the United States District Court for the Northern District of
Georgia. The complaint asserts claims under the Securities Exchange Act of 1934
on behalf of all persons who purchased or otherwise acquired Medaphis Common
Stock between February 6, 1996 and October 21, 1996. The complaint also asserts
claims under the 1933 Act on behalf of a sub-class consisting of all persons and
entities who, in connection with the merger of the Company and HDS, acquired
options to purchase shares of Medaphis Common Stock between February 6, 1996 and
October 21, 1996. The complaint seeks rescission, rescissory and compensatory
damages, and interest, fees and other costs. Defendants have not yet responded
to the complaint.
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 ended September 30, 1996 and its restated consolidated
financial statements for the three months and year ended December 31, 1995 and
its restated unaudited balance sheets as of March 31, 1996 and June 30, 1996. In
addition, the Company believes that the Commission is investigating the
Company's restatement of its interim financial statements for each quarter of
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.
F-21
62
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CAPITAL STOCK
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.
On May 1, 1996, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation, thereby
increasing the number of authorized shares of the Company's voting Common Stock
from 100 million to 200 million shares.
On May 3, 1995, the Company's Board of Directors declared a two-for-one
stock split of the outstanding shares of Common Stock. The stock split was
effected in the form of a stock dividend payable on May 31, 1995 to stockholders
of record as of May 24, 1995. The effect of the stock split has been
retroactively applied to all periods presented in the accompanying consolidated
financial statements.
On April 12, 1995, the Company completed a fourth public offering of its
common stock in which 4,244,000 shares were sold at $31.75 per share. The
Company sold 4,000,000 shares of its Common Stock and 244,000 shares of Common
Stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $121 million.
Prior to the BSG Merger, BSG had two classes of preferred stock
outstanding. Dividends were noncumulative and payable at 8% per year at the
discretion of BSG's Board of Directors. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of BSG, and
the preferred shareholders had the right to vote on an as converted basis. In
connection with the BSG Merger on May 6, 1996, all preferred shares were
converted into common shares of BSG which were subsequently exchanged for Common
Stock of the Company.
Prior to the Company's merger with HDS, HDS had three classes of preferred
stock outstanding. The preferred stock carried no guaranteed dividend features
and had no mandatory redemption features. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of HDS. In
connection with HDS's merger with the Company on June 29, 1996, all preferred
shares were converted into common shares of HDS which were subsequently
exchanged for Common Stock of the Company.
12. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies, a Non-Qualified Stock Option Plan for Non-executive Employees and
several stock option plans assumed as a result of the BSG Merger. Granted
options expire 10 to 11 years after the date of grant and generally vest over a
three-to-five-year period. In connection with the BSG Merger, the Company
offered to issue options under the Company's Non-Qualified Stock Option Plan for
Employees of Acquired Companies in exchange for options outstanding under the
BSG option plans.
F-22
63
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a Non-Employee Director Stock Option Plan (the
"Director Plan") for non-employees who serve on the Company's Board of
Directors. The plan was approved by the Company's stockholders at the annual
stockholders' meeting in 1995. The Director Plan provides for an initial grant
of 10,000 options at a strike price corresponding to the date on which the
non-employee director is elected or appointed to the Board of Directors.
Additionally, each non-employee director receives an annual grant of 2,000
options at each subsequent annual meeting in which the non-employee director is
a member of the Board of Directors. All options granted under the Director Plan
vest over a five-year period and expire 11 years from the date of grant.
The Company has a Senior Executive Non-Qualified Stock Option Plan which
permits certain of the Company's former executive officers to purchase up to an
aggregate of 550,746 shares of the Company's Common Stock at $2 per share. All
remaining options available for grant under this plan have been granted, expire
January 16, 2001 and are currently exercisable.
Activity related to all stock option plans is summarized as follows:
1995 1996 1997
------------------------- ------------------------- --------------------------
SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------ ---------------- ------ ---------------- ------- ----------------
Options outstanding as
of January 1.......... 6,446 $ 8.38 9,559 $12.27 11,214 $8.86
Granted................. 4,109 17.66 7,023 11.55 9,403 6.21
Exercised............... (557) 7.79 (1,536) 7.95 (1,303) 4.76
Canceled................ (439) 11.24 (3,832) 22.66 (10,135) 9.51
----- ------ -------
Options outstanding as
of December 31........ 9,559 $12.27 11,214 $ 8.86 9,179 $6.02
===== ====== =======
Options exercisable as
of December 31........ 2,613 $ 7.18 3,100 $ 7.53 2,903 $5.56
Weighted-average fair
value of options
granted during the
year.................. $8.78 $ 6.38 $ 3.05
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE AT
DECEMBER 31, REMAINING WEIGHTED- DECEMBER 31,
1997 CONTRACTUAL AVERAGE 1997 WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
- ------------------------ -------------- ----------- -------------- -------------- ----------------
$0.10 to $2.00......... 569 4.69 $ 1.09 512 $ 1.15
$2.61 to $4.35......... 822 7.18 3.88 541 3.94
$5.37 to $7.50......... 6,380 9.30 5.55 1,300 5.47
$7.75 to $9.88......... 920 7.81 9.07 415 9.11
$10.00 to $52.01....... 488 8.63 15.66 135 18.67
----- -----
$0.10 to $52.01........ 9,179 8.64 6.02 2,903 5.56
===== =====
On October 25, 1996, the Company changed the exercise price to $9.875 on
approximately 2.0 million of its then outstanding stock options which had an
exercise price of $15 or greater. No other terms of these options were changed.
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
F-23
64
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In 1994, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Restricted Stock Plan (the "Restricted Plan")
for executive officers. The plan was approved by the Company's stockholders at
the annual stockholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value common stock to certain executive
officers who have since resigned from the Company. The restricted stock vests
ratably over a four-year period from the date of award. Seventy-five percent of
the awards made under the Restricted Plan have vested.
In 1996, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Reengineering, Consolidation and Business
Improvement Cash Incentive Plan (the "Reengineering Incentive Plan") and the
Company granted 155,749 units pursuant to the provisions of the plan to certain
key employees of the Company. The Reengineering Incentive Plan provides for the
payment of cash bonuses to participants if certain performance goals related to
the Company's reengineering and consolidation project are achieved and certain
general business improvement milestones are satisfied. Awards under the plan are
based on units awarded to each participant. If the performance goals specified
in the Reengineering Incentive Plan are achieved and the awards vest, the value
of each unit will equal the average price of the Company's Common Stock during
the ten trading days immediately preceding such vesting date. At the point it
becomes probable that the performance goals and milestones will be met, the
Company will begin to accrue for the full amount of these bonuses. All awards
made under the Reengineering Incentive Plan, to the extent they remain unvested,
terminate on December 31, 1997. Due to the Company's decision to abandon the
reengineering program, certain of the performance goals and milestones were not
met prior to December 31, 1997, therefore all grants pursuant to the
Reengineering Incentive Plan have terminated.
The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted with an exercise price equal to the quoted market price of the
Company's Common Stock on the date of grant and which vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the fair value of each option grant and stock based award has been estimated as
of the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
1995 1996 1997
----- ----- -------------
Expected life (years).................................. 5.66 4.88 4.33
Risk-free interest rate................................ 6.30% 6.25% 6.39%
Dividend rate.......................................... 0.00% 0.00% 0.00%
Expected volatility.................................... 26.68% 46.88% 54.09%
F-24
65
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation cost been determined consistent with SFAS No. 123,
utilizing the assumptions detailed above, the Company's pro forma net loss and
pro forma basic loss per share would have increased to the following pro forma
amounts:
1995 1996 1997
-------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net loss:
As reported.................................. $ (4,780) $(136,358) $(19,303)
Pro forma -- for SFAS No. 123................ $ (6,995) $(143,121) $(34,374)
Pro forma basic net loss per share:
As reported.................................. $ (0.09) $ (1.91) $ (0.26)
Pro forma -- for SFAS No. 123................ $ (0.13) $ (2.01) $ (0.47)
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
13. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
1995 1996 1997
------ -------- --------
(IN THOUSANDS)
Current:
Federal............................................ $ 66 $ 635 $ --
State.............................................. 1,795 2,533 1,975
Deferred:
Federal............................................ (190) (67,993) (22,051)
State.............................................. (1,041) (9,221) (5,036)
Foreign............................................ -- 146 541
Valuation allowance.................................. 441 (189) 7,798
------ -------- --------
Income tax expense (benefit)......................... 1,071 (74,089) (16,773)
Income tax expense on extraordinary item............. -- -- 46,192
Cumulative effect of accounting change............... -- -- (1,629)
Pro forma tax adjustments............................ 2,636 (979) --
------ -------- --------
$3,707 $(75,068) $ 27,790
====== ======== ========
In 1995 and 1996, the Company acquired Atwork, Consort, IVC, Rapid Systems
and BSG in merger transactions accounted for as poolings-of-interests. Prior to
the mergers, Atwork, Consort, IVC, Rapid Systems and a company acquired by BSG
prior to the BSG Merger had elected "S" corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company acquired by
BSG, its acquisition by BSG), such entities terminated their "S" corporation
elections. Pro forma net income (loss) and pro forma net income (loss) per
common share are presented in the consolidated statements of operations as if
each of these entities had been a "C" corporation during the periods presented.
F-25
66
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to loss before income taxes and income tax expense (benefit) is
as follows:
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
Income tax benefit at federal statutory rate........ $ (553) $(73,999) $(38,501)
State taxes, net of federal benefit................. 363 (7,347) (5,280)
Nondeductible goodwill amortization................. 1,298 2,666 3,241
Nondeductible deal costs of business combinations... 3,186 3,529 (38)
Nondeductible litigation settlement................. -- -- 13,097
Valuation allowance................................. 441 (189) 8,126
Foreign............................................. -- 146 541
Other............................................... (1,028) 126 2,041
------- -------- --------
$ 3,707 $(75,068) $(16,773)
======= ======== ========
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes as of December 31, 1996 and 1997
are as follows:
1996 1997
-------- --------
(IN THOUSANDS)
Current:
Net operating loss carryforwards.......................... $ 44,249 $ --
Accounts receivable, unbilled............................. (32,851) (37,537)
Acquisition accruals...................................... (10,259) (11,680)
Accrued expenses.......................................... 34,268 50,990
Other deferred tax liabilities............................ 770 (4,165)
-------- --------
$ 36,177 $ (2,392)
======== ========
Noncurrent:
Net operating loss carryforwards.......................... $ 78,175 $104,268
Valuation allowance....................................... (18,334) (26,460)
Depreciation and amortization............................. (12,226) (14,848)
Other deferred tax liabilities............................ (4,571) (2,103)
-------- --------
$ 43,044 $ 60,857
======== ========
As of December 31, 1997, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $258.6 million
which expire at various dates between 1998 and 2011. The Internal Revenue Code
of 1986, as amended, may impose substantial limitations on the use of NOLs upon
the occurrence of an "ownership change." The Company has experienced three
ownership changes which have established maximum annual limitations on taxable
income against which NOLs incurred prior to the ownership changes may be
utilized to offset. After determining the annual maximum limitation, the Company
has approximately $190.0 million in NOLs available as of December 31, 1997. In
future years, the currently unavailable NOLs (because of the limitation) may
become available to offset income prior to the date of their expiration. As of
December 31, 1997, the Company has recorded a net deferred tax asset of $77.8
million reflecting primarily the tax benefit of $104.3 million for NOLs offset
by a valuation allowance of $26.5 million. Realization is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that the deferred tax asset will be realized. The amount of
the deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the carryforward period are reduced.
F-26
67
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance relates primarily to the uncertainty of the
realizability of NOLs assumed in certain business combinations. The increase in
the valuation allowance during 1997 is due to the Company providing a full
valuation allowance on these acquired NOLs.
14. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans, a percentage of which are matched by the Company. The Company's
contribution expense was $3.3 million, $3.5 million and $4.7 million for the
years ended December 31, 1995, 1996 and 1997, respectively.
The Company maintains a noncontributory money purchase pension plan which
covers substantially all employees who are retained by the Company primarily to
service specific physician clients. Contributions are determined annually by the
Company not to exceed the maximum amount deductible for federal income tax
purposes. The Company's contribution to the plan was $1.0 million in 1995, $1.2
million in 1996 and $0.9 million in 1997.
In May 1996, the Company's stockholders approved the adoption of the
Company's Employee Stock Purchase Plan ("ESPP") in which eligible employees of
the Company can purchase shares of Common Stock at a price equal to the lessor
of 85% of the fair market value of the Common Stock on the first date of the
purchase period or the last date of the purchase period. The maximum number of
shares authorized by this plan is 300,000 of which 157,121 shares are remaining
after the first purchase on July 1, 1997. The ESPP requires stockholder approval
to increase the number of shares authorized under the plan.
15. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Liabilities assumed in acquisitions................. $28,321 $ 2,888 --
Additions to capital lease obligations.............. 17,646 15,705 --
Common Stock issued in conjunction with
acquisitions..................................... 148,459 -- --
Conversion of subordinated debentures............... -- 63,375 --
Cash paid for:
Interest (net of amounts capitalized of $2,359 and
$4,092 for 1995 and 1996, respectively).......... 10,828 14,762 19,835
Income taxes........................................ 3,040 7,314 10,747
16. SEGMENT REPORTING
Medaphis provides its services and products through its Healthcare Services
Group and Per-Se Technologies. The Healthcare Services Group provides business
management services to physicians and hospitals, including the collection of
clinical data, data input, medical coding, billing, cash collections and
accounts receivable management. The Healthcare Services Group consists of two
reportable segments based on the clients they serve: (i) Physician Services,
which is a leading provider of business management solutions and claims
processing to physicians in the United States; and (ii) Hospital Services, which
is a leading provider of business management services to hospitals in the United
States. Per-Se Technologies ("Per-Se") provides application software and a broad
range of information technology and consulting services to healthcare and other
service-oriented markets. Per-Se is organized into two reportable segments based
on their different service offerings: (i) Product Operations, which provides
application software and system
F-27
68
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
integration services; and (ii) Services Operations, which provides full-service
systems integration, information technology consulting and tailored software
development. HRI provides subrogation and related recovery services primarily to
healthcare payors. HRI was sold on May 28, 1997.
Medaphis evaluates each segments' performance based on operating profit or
loss. The Company also accounts for intersegment sales as if the sales were to
third parties.
The Company's reportable segments are strategic business units that offer
different products and services. Information concerning the operations in these
reportable segments is as follows:
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
Revenue:
Physician Services................................. $289,968 $ 294,406 $ 279,593
Hospital Services.................................. 69,689 89,715 98,067
HRI................................................ 22,667 31,419 14,720
Per-Se Product Operations.......................... 58,799 70,047 90,977
Per-Se Services Operations......................... 98,615 113,988 90,594
Corporate.......................................... (1,726) (2,861) (1,326)
-------- --------- ---------
$538,012 $ 596,714 $ 572,625
======== ========= =========
Operating profit (loss)(1):
Physician Services................................. $ 29,719 $ (13,054) $ (5,319)
Hospital Services.................................. 14,282 13,309 9,277
HRI................................................ 5,611 8,502 3,685
Per-Se Product Operations.......................... 13,302 14,050 20,915
Per-Se Services Operations......................... 5,249 (14,982) (4,902)
Corporate.......................................... (11,231) (27,350) (35,258)
-------- --------- ---------
$ 56,932 $ (19,525) $ (11,602)
-------- --------- ---------
Interest expense, net................................ 9,761 11,585 23,260
-------- --------- ---------
Restructuring and other charges (including litigation
settlement):
Physician Services................................. $ 38,800 $ 98,951 $ 7,394
Hospital Services.................................. -- 67 --
HRI................................................ 2,000 (778) --
Per-Se Product Operations.......................... 7,950 3,957 1,006
Per-Se Services Operations......................... -- 60,882 5,899
Corporate.......................................... -- 17,237 60,841
-------- --------- ---------
$ 48,750 $ 180,316 $ 75,140
-------- --------- ---------
Loss before income taxes............................. $ (1,579) $(211,426) $(110,002)
======== ========= =========
Depreciation and amortization:
Physician Services................................. $ 17,521 $ 32,428 $ 34,552
Hospital Services.................................. 3,499 4,884 6,032
HRI................................................ 695 883 401
Per-Se Product Operations.......................... 4,153 6,135 6,445
Per-Se Services Operations......................... 5,842 7,980 4,528
Corporate.......................................... 525 1,679 1,534
-------- --------- ---------
$ 32,235 $ 53,989 $ 53,492
======== ========= =========
F-28
69
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995 1996 1997
-------- --------- ---------
(IN THOUSANDS)
Capital expenditures:
Physician Services................................. $ 30,113 $ 23,607 $ 5,783
Hospital Services.................................. 3,391 6,377 8,068
HRI................................................ 1,278 1,448 108
Per-Se Product Operations.......................... 1,847 3,204 2,571
Per-Se Services Operations......................... 12,927 13,376 2,073
Corporate.......................................... 1,564 3,123 1,368
-------- --------- ---------
$ 51,120 $ 51,135 $ 19,971
======== ========= =========
1996 1997
-------- --------
(IN THOUSANDS)
Identifiable Assets:
Physician Services........................................ $602,984 $563,825
Hospital Services......................................... 97,626 106,479
HRI....................................................... 23,863 --
Per-Se Product Operations................................. 67,961 72,505
Per-Se Services Operations................................ 51,972 30,489
Corporate................................................. 92,448 100,729
-------- --------
$936,854 $874,027
======== ========
- ---------------
(1) Excludes restructuring and other charges, litigation settlement and interest
expense.
F-29
70
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996(1)
Revenue........................................... $162,249 $160,768 $132,121 $ 141,576
Pro forma net income (loss)....................... 9,424 (9,931) (33,384) (102,467)
Pro forma basic net income (loss) per common
share........................................... $ 0.15 $ (0.14) $ (0.47) $ (1.43)
Weighted average shares outstanding............. 63,906 71,167 71,665 71,695
1997(2)(3)
Revenue........................................... $147,546 $150,967 $124,649 $ 149,463
Net loss before extraordinary item and cumulative
effect of accounting change..................... (3,064) (1,260) (81,209) (7,696)
Extraordinary item................................ -- 76,391 -- --
Cumulative effect of accounting change............ -- -- -- (2,465)
Net loss per common share before extraordinary
item and cumulative effect of accounting
change.......................................... (0.04) (0.02) (1.11) (0.11)
Extraordinary item per common share............... -- 1.06 -- --
Cumulative effect of accounting change per common
share........................................... -- -- -- (0.03)
Basic net loss per common share................... $ (0.04) $ 1.04 $ (1.11) $ (0.14)
Weighted average shares outstanding............. 72,235 72,443 72,942 73,171
- ---------------
(1) The quarterly periods ended June 30, 1996, September 30, 1996 and December
31, 1996 included the impact of $16.9 million, $24.4 million and $138.6
million, respectively, of restructuring and other charges. See Note 4 for an
explanation of these charges.
(2) The quarterly periods ended June 30, 1997, September 30, 1997 and December
31, 1997 included the impact of $2.8 million, $13.8 million and $6.0
million, respectively, of restructuring and other charges. See Note 4 for a
detailed explanation of these charges.
(3) The quarterly period ended September 30, 1997 also included the impact of a
$52.5 million charge for a litigation settlement (see Note 10).
F-30
71
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Medaphis Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 27, 1998 appearing in this Annual Report on Form 10-K also
included an audit of the Financial Statement Schedule listed in Item 14(a) of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Atlanta, Georgia
January 27, 1998
F-31
72
MEDAPHIS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- ----------- ---------- ---------- -------- ---------- -----------
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts.... $ 3,205 $ 6,718 $1,278(1) $ (4,976)(2) $ 6,225
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts.... $ 6,225 $24,156 $ 566(1) $ (9,622)(2) $21,325
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts.... $21,325 $13,949 $ -- $(14,614)(2) $20,660
- ---------------
(1) Represents the allowance recorded in conjunction with acquired companies.
(2) Represents write-off of uncollectible accounts receivable.
F-32