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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996).
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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.)
2840 MT. WILKINSON 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 March 12, 1999 was approximately $246,702,031 calculated
using the closing price on such date of $3.125. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of March 12, 1999 was
78,944,650.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 6, 1999 are incorporated herein by reference in Part III.
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MEDAPHIS CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE OF
FORM 10-K
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ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 6
ITEM 3. LEGAL PROCEEDINGS........................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 7
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 8
ITEM 6. SELECTED FINANCIAL DATA..................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 19
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 19
ITEM 11. EXECUTIVE COMPENSATION...................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 20
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
99.1 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 a wide range of
business management services, enterprise-wide software and electronic commerce
solutions to healthcare providers. The Company's large client base and national
presence make it one of the leading competitors in its business. 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. Medaphis provides its services and products
through the following three business segments: Medaphis Physician Services
("Physician Services"), Per-Se Technologies ("Per-Se") and Impact Innovations
Group ("Impact").
Physician Services 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 to focus on providing quality patient care. These services also
assist physicians in improving cash flows and reducing administrative costs and
burdens. Per-Se provides a broad range of application software and electronic
commerce solutions to healthcare providers. Impact provides full-service systems
integration, information technology consulting and tailored software development
to service-oriented markets such as energy, communications and financial
services.
Medaphis markets its services and products primarily to integrated delivery
networks ("IDNs"), hospitals, physician enterprises, long-term care facilities,
home health agencies and managed care organizations.
RECENT DEVELOPMENTS
In early 1998, management initiated a plan to focus the Company's financial
and management resources on its two core healthcare segments, in an effort to
return the Company to profitability. Management has defined its two core
segments as: Physician Services and Per-Se. Management began to seek
alternatives for the remaining non-core business segments: Medaphis Services
Corporation ("Hospital Services") and Impact. Although Hospital Services
provided business management and accounts receivable management services to
approximately 1,200 hospitals, the Company's management deemed the segment
non-core as a substantial portion of the services offered was bad debt
collection. Impact was deemed non-core as it did not provide consulting services
to the healthcare industry.
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. In
February 1999, the Company received additional proceeds of $0.5 million based on
the Hospital Services final closing balance sheet. In addition, Medaphis could
receive a purchase price adjustment of up to $10.0 million subject to the
achievement of various operational targets in 1999.
After reviewing several alternatives for Impact throughout 1998, management
concluded a sale of this segment would generate the greatest return to the
stockholders and finalized its plan to sell Impact. Management intends to have
this sale completed by the end of 1999 and does not anticipate future losses in
connection with the sale.
The results of operations for both Hospital Services and Impact have been
classified as discontinued operations for all periods presented.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
The following description of the Company's business by industry segment
should be read in conjunction with Note 17 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.
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Physician Services
Physician Services is one of the largest providers of comprehensive
business management services, including billing, consulting, information
services and claims processing, to physicians throughout the United States.
Physician Services serves approximately 15,000 physician clients in 39 states.
Physician Services offers practice support services, revenue growth consulting,
cost management consulting and practice security services designed to help its
physician clients manage these four key areas of their medical practices.
Practice support services include physician credentialing, scheduling,
coding and accounts receivable/revenue cycle management services. These services
are designed to allow physicians to focus on providing healthcare, maintaining a
stable patient base and remaining in compliance with the complex healthcare
rules and regulations without getting entangled in managing the billing and
collections.
Revenue growth consulting provides physician practices with a framework for
revenue growth through strategic planning, including merger planning and
execution; fee schedule review utilizing geographic and specialty expertise; and
billing and accounts receivable management in order to derive maximum allowable
revenue from services provided while remaining in compliance with healthcare
regulations.
In its cost management consulting services, Physician Services uses
proprietary technology solutions, industry expertise and a vast storehouse of
medical specialty specific information to provide operations planning,
benchmarking and productivity analysis for its physician clients. In addition,
in complete practice reviews, Physician Services analyzes client accounts
receivable and assists physician clients in maximizing payments while
maintaining compliance with healthcare regulations. This allows physicians to
better manage administrative productivity and control the expenses associated
with providing high quality healthcare.
Physician Services also provides practice security services which include
compliance program design, monitoring and consulting. These services may also be
utilized in conjunction with liability coverage for physician billing errors and
omissions through a business partner to provide physician clients with peace of
mind in the complex healthcare billing environment.
Physician Services' systems currently support approximately 30 different
medical and surgical specialties. Although Physician Services is preparing for
growth in the academic surgical specialties and primary care markets, the
majority of Physician Services' customers are in the hospital-based market.
The Physician Services business is highly competitive. Physician Services
competes with national and regional physician reimbursement organizations and
certain physician groups and hospitals that 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, price.
Per-Se
Per-Se provides a diverse, integrated suite of patient-focused,
enterprise-wide software and services and electronic commerce solutions that
enable healthcare organizations to more effectively deliver quality care, manage
resources, reduce costs, improve productivity and drive operational
effectiveness.
Per-Se's products operate across the entire scope of the healthcare
enterprise -- IDNs, managed care organizations, physician enterprises, payors,
home health agencies and hospitals -- and manage more than 20 million lives on
line.
Per-Se's customers, which include more than 2,000 healthcare organizations
and 3,500 physician clients, depend on Per-Se's solutions for many critical
functions, including: providing access to real-time, point-of-care clinical
information and decision analysis capability across the continuum of care;
automating enterprise-wide staff and patient scheduling; managing surgical
inventory; enhancing enterprise-wide staff productivity; and improving
physician's access to and use of advanced radiology images and information.
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Per-Se is a market leader in several key areas of healthcare information
technology, including nurse scheduling and productivity management, surgical
scheduling and resource management and enterprise-wide staff and productivity
management.
As a leader in electronic claims processing for healthcare, Per-Se
processes more than six million claims per month for physicians and healthcare
organizations. This technology supports more than 140 governmental payor
connections in 46 states and more than 300 commercial connections as well as
claims processing for hospitals via more than 35 government connections in 15
states.
Per-Se competes against a variety of information technology companies,
including those marketing comprehensive, enterprise-wide health information
systems as well as niche and "best-of-breed" software application vendors.
Per-Se's competitors are primarily national companies, many of which have longer
operating histories and greater financial resources than those of Per-Se.
Competition is based on product quality, ease of use and ease of
integration of new products with other existing and planned applications. Many
competitive offerings, however, operate on disparate technologies that are
linked through complex interfaces. Per-Se's integrated approach to its products
and technologies enables it to deliver the real-time information management
capabilities that are so critical in today's age of enterprise-wide health care.
Impact
Impact, formerly Per-Se Technologies Services Operations, provides
full-service systems integration, information technology consulting, component
frameworks and tailored software development to more than 100 customers in
service-oriented industries, including energy, communications, high tech and
government.
Impact meets the individual needs of customers through delivery chain
management ("DCM") solutions that help optimize each and every customer
interaction and deliver value one customer at a time. As a result, organizations
realize operational and cost benefits and derive a competitive advantage.
Many of Impact's competitors have longer operating histories and
substantially greater financial, technical and marketing resources, and generate
greater systems technology consulting and systems integration revenue than those
of Impact. The introduction of lower priced competition or significant price
reductions by current or potential competitors, or such competitors' ability to
respond more quickly than Impact to new or emerging technologies or changes in
customer requirements, could have an adverse effect on Impact's business.
Also, Impact's current and potential customers periodically evaluate
whether to staff system implementation and deployment projects with their
in-house information systems staff instead of an outside services company.
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 ended 1998, 1997 and 1996 and as of December 31,
1998 and 1997, is presented in Note 17 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 purchased by government agencies and
others but not fully 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
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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 revenue and profit margins of the Company's operations.
REGULATION
Under federal and state law, physicians and hospitals are only permitted to
assign Medicare and Medicaid claims to a billing and collection service in
certain limited circumstances. The statutes that restrict the assignment of such
claims are supplemented by federal regulations and provisions in the Medicare
Intermediary Manual. The Medicare regulations and the Medicare Intermediary
Manual clarify that a billing service that merely 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 and Medicaid claims. Management believes that the
Company's practices do not violate the restrictions on assignment of Medicare
and Medicaid claims because, among other things, it bills only in the name of
the medical provider, checks and payments for Medicare and Medicaid 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 activities are also governed by numerous federal and state civil
and criminal laws. In general, these laws provide for the imposition of fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs and possible prohibition from providing goods or services to
entities and persons which participate in such programs. See Note 10 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Fair Debt
Act") sets forth various provisions designed to eliminate abusive, deceptive and
unfair debt collection practices by debt collectors. The 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.
While management believes that the billing and accounts receivable management
services the Company provides to its clients are not debt collection services,
the Company may be subjected to regulation as a "debt collector" under the Fair
Debt Act and as a "collection agency" under certain state collection agency laws
and regulations.
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
governmentally 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, 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 governmentally
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
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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, parties
successfully sued under the Federal False Claims Act may be jointly and
severally liable for damages and penalties. Some state laws also provide for
false claims actions, including actions initiated by a qui tam plaintiff. There
can be no assurance that Medaphis will not be the subject of false claims or qui
tam proceedings relating to its billing and collection activities or that
Medaphis will not be the subject of further government scrutiny or
investigations relating to its billing and accounts receivable management
services operations. See Note 10 of Notes to the Financial Statements in Item 8.
Financial Statements and Supplementary Data. Any such proceeding or
investigation could have a material adverse effect upon the Company.
The ownership and operation of hospitals, physician practices and other
healthcare entities is subject to comprehensive regulation by federal and state
governments, which may adversely affect payment and reimbursement. Such entities
are frequently paid a predetermined amount for operating expenses relating to
each Medicare or Medicaid patient admission or office visit based on the
patient's diagnosis. Additional changes in the payment and reimbursement
provisions of the Medicare and Medicaid programs may continue to reduce the rate
of increase of federal expenditures for provider inpatient and outpatient costs
and charges. Such changes could have an adverse effect on the operations of
providers in general, and consequently reduce the amount of the Company's
revenue related to its provider clients.
GOVERNMENTAL BUDGETARY CONSTRAINTS AND HEALTHCARE REFORM
The federal government in recent years has placed increased scrutiny on the
billing 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 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 November 1998, the OIG released compliance plan guidance for third party
billing companies, in which it identified certain areas which it viewed as
particularly problematic, including, but not limited to, billing for
undocumented items or services, unbundling, uncoding, inappropriate balance
billing, inadequate resolution of overpayments, lack of integrity in computer
systems, failure to maintain the confidentiality of information records, misuse
of provider identification numbers, duplicate billing and billing for discharge
in lieu of transfer, failure to properly use modifiers, illegal billing company
incentives, routine waiver of copayments and discounts and professional
courtesy. While not mandatory, OIG encourages companies such as Medaphis and
healthcare providers to adopt compliance plans. The existence of an effective
compliance plan may reduce the severity of criminal sanctions for certain
healthcare related offenses and may be considered in the settlement of civil
investigations. The Company has an extensive compliance program that considers
every aspect of the OIG release.
In 1996, Congress enacted the Health Insurance Portability and Accounting
Act of 1996 ("HIPAA"), which expanded certain fraud and abuse provisions, such
as the application of Medicare and Medicaid fraud penalties to other federal
healthcare programs and the creation of additional criminal offenses relating to
healthcare benefit programs which are defined to include both public and private
payor programs. HIPAA 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. HIPAA 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 that have included an expansion of
certain laws prohibiting payment for referrals of patients for Medicare and
Medicaid services to include referrals of any patients regardless of payor
source.
The United States Congress and the Clinton Administration continue to focus
on controlling growth in healthcare costs. Medaphis anticipates that new
legislation may be introduced into Congress which may reduce projected increases
in Medicare and Medicaid expenditures and make other changes in the payment and
reimbursement received by healthcare providers from government healthcare
programs. Medaphis anticipates that such proposed legislation could, if adopted,
change aspects of the present methods of paying providers under
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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 that 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 6,600 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 for those offices expires in February 2000.
Physician Services
Physician Services' principal office is leased and is located in Atlanta,
Georgia. The lease for that office expires in February 2000. In addition to its
principal office, Physician Services, through its two operating subsidiaries,
operates approximately 165 business offices throughout the United States. Five
of the facilities are owned and unencumbered. All of the remaining facilities
are leased with expiration dates ranging from April 1999 to April 2005.
Per-Se
Per-Se's principal office is leased and is located in Atlanta, Georgia. The
lease for that office expires in February 2000. In addition to its principal
office, Per-Se, through its various operating subsidiaries, operates
approximately 20 offices in the United States, Australia, Canada and Europe.
These facilities are leased with expiration dates from July 1999 to April 2004.
ITEM 3. LEGAL PROCEEDINGS
The information required by this Item is included in Note 10 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
pages F-16 to F-21.
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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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of December 31, 1998:
YEAR FIRST
NAME AGE POSITION ELECTED OFFICER
- ---- --- -------- ---------------
David E. McDowell................ 56 Chairman of the Board 1996
Allen W. Ritchie................. 41 President and Chief Executive 1998
Officer
Wayne A. Tanner.................. 44 Executive Vice President and 1998
Chief Financial Officer
Randolph L.M. Hutto.............. 50 Executive Vice President, General 1997
Counsel and Secretary
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 has served as the Chairman of the Board of the Company
since October 1996. He has been a member of the Medaphis Board of Directors
since May 1996. From October 1996 to July 1998, Mr. McDowell also served as
Chief Executive Officer of the Company and resigned from such position on July
28, 1998. From 1992 to 1996, he was President, Chief Operating Officer and a
director of McKesson Corporation. McKesson 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.
ALLEN W. RITCHIE has served as the President and Chief Executive Officer of
the Company since July 1998. He has also been a member of the Medaphis Board of
Directors since July 1998. From April 1998 to July 1998, Mr. Ritchie served as
President and Chief Operating Officer of the Company. From January 1998 to April
1998, he served as Executive Vice President and Chief Financial Officer of the
Company. From 1991 to 1997, Mr. Ritchie served as a senior executive of AGCO
Corporation, including as President and as a member of AGCO's Board of
Directors.
WAYNE A. TANNER has served as Executive Vice President and Chief Financial
Officer of the Company since September 1998. From 1990 until he joined the
Company, Mr. Tanner was a partner with Arthur Andersen LLP. His business
experience includes financial and strategic consulting, including corporate and
operational finance, merger and acquisition assistance, troubled company and
bankruptcy consulting, resolution of complex legal disputes and accounting and
auditing services to numerous privately and publicly held companies.
RANDOLPH L. M. HUTTO has served as Executive Vice President, General
Counsel and Secretary of the Company since August 1997. From 1992 to August
1997, Mr. Hutto was employed by First Financial Management Corporation ("FFMC"),
and, by First Data Corporation after its merger with FFMC, 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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market(R)
("Nasdaq") under the symbol MEDA.
The prices in the table below represent the high and low sales price for
the Medaphis voting common stock ("Common Stock") as reported on Nasdaq 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, 1998 HIGH LOW
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First Quarter............................................. $ 12.500 $6.000
Second Quarter............................................ 11.000 5.813
Third Quarter............................................. 6.625 3.375
Fourth Quarter............................................ 4.563 2.625
YEAR ENDED DECEMBER 31, 1997 HIGH LOW
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First Quarter............................................. $14.750 $9.625
Second Quarter............................................ 10.500 3.500
Third Quarter............................................. 11.000 5.813
Fourth Quarter............................................ 8.750 4.938
The last reported sales price of the Common Stock as reported on Nasdaq on
March 12, 1999 was $3.125 per share. As of March 12, 1999, the Company's Common
Stock was held of record by 655 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 Indenture,
dated as of February 20, 1998, with respect to the Company's outstanding 9 1/2%
Senior Notes due 2005 (the "Indenture"), contains restrictions on the Company's
ability to declare or pay cash dividends on its Common Stock.
In connection with the settlement of two putative class action law suits,
the Company issued 3,955,556 shares of Common Stock on April 27, 1998 and
warrants to purchase 5,309,523 shares of Common Stock to the relevant plaintiff
class on July 8, 1998 with a total value of $52.5 million and 61,553 shares of
Common Stock to the relevant plaintiff class on November 2, 1998 with a value of
$362,500. In each case, the litigation settled was a federal securities class
action the settlement of which was subject to the review and approval of the
court having jurisdiction over the case. The securities issued in each of these
settlements was exempt from registration pursuant to Section 3(a)(10) of the
Securities Act of 1933, as amended.
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, 1998. The selected consolidated financial information of Medaphis
for each of the four fiscal years in the period ended December 31, 1998 and as
of December 31, 1998, 1997, 1996 and 1995 has been derived from the audited
consolidated financial statements of Medaphis which give retroactive effect to
the 1995 mergers with Automation Atwork ("Atwork") and Healthcare Recoveries,
Inc. ("HRI"), which was subsequently sold during 1997, and the 1996 mergers with
Rapid Systems Solutions, Inc. ("Rapid Systems"), BSG Corporation ("BSG") and
Health Data Sciences Corporation ("HDS"), all of which have been accounted for
using the pooling-of-interests method of accounting. The selected consolidated
financial data of Medaphis for the fiscal year ended and as of December 31, 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 as
poolings-of-interests. All periods present the operations of Hospital Services
and Impact (which primarily consists of Rapid Systems and BSG) as discontinued
operations. The Company's consolidated financial statements as of and for the
fiscal year in the
8
11
period ended December 31, 1994 are unaudited because the Company's predecessor
accountants withdrew its audit opinion covering this period.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
Revenue..................... $ 349,823 $ 392,420 $ 400,451 $ 369,034 $ 267,248
Salaries and wages.......... 226,894 242,228 247,204 207,332 147,724
Other operating expenses.... 126,183 123,094 130,007 106,000 68,843
Depreciation................ 23,848 22,481 20,266 9,358 5,849
Amortization................ 18,077 21,069 21,382 14,107 9,002
Interest expense, net....... 23,494 23,398 11,585 10,156 5,946
Intangible asset
impairment............... 390,641 -- -- -- --
Litigation settlements...... 35,987 52,500 -- -- --
Restructuring and other
charges.................. 5,191 16,741 119,434 48,750 --
Income (loss) from
continuing operations.... (558,957) (92,523) (99,644) (17,704) 19,446
Net income (loss) (1)....... (560,214)(2) (19,303)(3) (137,337) (2,650) 25,314
Pro forma net income
(loss)(4)................ (560,214) (19,303) (136,358) (4,780) 24,251
Weighted average shares
outstanding.............. 77,017 72,679 71,225 52,591 46,128
PER SHARE DATA(4)
Pro forma basic income
(loss) from continuing
operations............... $ (7.26) $ (1.27) $ (1.39) $ (0.34) $ 0.42
Pro forma basic net income
(loss)................... $ (7.27) $ (0.26) $ (1.91) $ (0.09) $ 0.53
AS OF DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital........................... $ 86,215 $ 64,522 $ 23,708 $ 54,909 $ 52,234
Intangible assets......................... 48,241 459,129 477,545 532,356 278,462
Total assets.............................. 286,721 847,145 901,997 908,456 571,555
Total debt................................ 176,080 200,691 271,424 153,842 148,030
Convertible subordinated debentures....... -- -- -- 63,375 63,375
Stockholders' equity...................... $ 2,323 $501,781 $508,525 $554,008 $235,970
- ---------------
(1) Reflects the income (loss) from discontinued operations of $(0.1) million, $
(0.7) million, $(37.7) million, $15.1 million and $5.9 million for 1998,
1997, 1996, 1995 and 1994, respectively, and the gain on sale of Hospital
Services, a discontinued operation, of $7.2 million in 1998.
(2) Reflects an $8.4 million extraordinary charge for the early extinguishment
of debt.
(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.
(4) In 1995 and 1996, the Company acquired Atwork, Consort Technologies, Inc
("Consort"), Intelligent Visual Computing ("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.
9
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fiscal 1998 compared to Fiscal 1997
REVENUE. Revenue classified by the Company's reportable segments is as follows:
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $264,323 $278,475
Per-Se...................................................... 85,565 99,281
HRI......................................................... -- 14,720
Eliminations................................................ (65) (56)
-------- --------
$349,823 $392,420
======== ========
Physician Services' revenue decreased by 5.1% in 1998 as compared to 1997.
This decline is attributable both to operating problems at the Company's
wholly-owned operating subsidiary, Medaphis Emergency Medicine Physician
Services (formerly known as Gottlieb's Financial Services, Inc. or GFS) (the
"Emergency Medicine" division) and to an increase in client losses within the
entire Physician Services segment. Revenue declines attributable to client
losses in 1998 at the Emergency Medicine division and Physician Services were
approximately $22.9 million and $54.7 million, respectively. In addition, the
Physician Services segment continues to be affected by the revenue pressures on
the physician accounts receivable operations resulting from an increase in
managed care. As further discussed below, management believes the client losses
and revenue pressures will continue in the near future.
Per-Se's revenue decreased 13.8% in 1998 as compared with 1997.
Approximately 70% of this decrease is a result of a slowdown in the sale of
software licenses in its scheduling product lines. Management believes this
slowdown was due primarily to certain technical problems with a prior release
within its patient scheduling product line. Management believes these problems
have been corrected and Per-Se has made progress in rebuilding its relationship
with clients. The overall revenue decline at Per-Se was also impacted by a 13%
decrease in revenue from the sale and support of clinical information systems.
In the fourth quarter of 1998, the Company sold its first license for its newly
released Patient1(TM) product; revenue from this license sale will be recognized
in 1999 over the installation period using the percentage of completion method
of accounting. The Company believes that the majority of software license sales
in 1999 and beyond will be made under contracts requiring the percentage of
completion method.
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 and none in 1998.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes
restructuring and other charges, litigation settlements, intangible asset
impairment and interest expense, classified by the Company's different operating
segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Physician Services.......................................... $ (5,846) $ (4,582)
Per-Se...................................................... (7,240) 20,310
HRI......................................................... -- 3,685
Corporate................................................... (32,093) (35,865)
-------- --------
$(45,179) $(16,452)
======== ========
The increase in the 1998 operating loss as compared to 1997 for the
Physician Services segment is directly attributable to revenue declines
resulting from the various operational issues in the Emergency Medicine division
10
13
and client losses throughout the segment. Additionally, 1998 was negatively
impacted by a $4.0 million increase in the allowance for doubtful accounts
receivable.
On July 19, 1998, FPA Medical Management and certain affiliates ("FPA")
filed for protection under Chapter 11 of the United States Bankruptcy Code. The
Emergency Medicine division is a principal vendor to a subsidiary of FPA. On
August 18, 1998, the Bankruptcy Court entered an order authorizing FPA to assume
certain vendor contracts, including the Emergency Medicine division's contract.
The Company has been paid all pre-petition receivables and is continuing to
provide services to FPA under the contract. FPA represented approximately 30% of
the Emergency Medicine division's revenue in 1998. There can, however, be no
assurance that FPA will continue to meet its obligations or that FPA will not
seek to liquidate under Chapter 7 of the Bankruptcy Code. The failure of FPA to
meet its obligations could have a material adverse effect on Physician Services.
The operating loss for Per-Se for the year ended December 31, 1998 was
primarily a result of the previously mentioned decline in software license
sales, increases in investments in new product development and an increase in
its allowance for doubtful accounts receivable. During 1998, Per-Se increased
its reserves for bad debt by $7.3 million related to various receivables,
including receivables from Allegheny Health, Education and Research Foundation
and certain affiliates ("AHERF"), which filed for protection under Chapter 11 of
the United States Bankruptcy Code. Per-Se has a number of contracts with AHERF
and is among AHERF's twenty largest unsecured creditors. The Company expects
that AHERF will reject those contracts and that the Company will have to seek to
recover pre-petition amounts outstanding as a general unsecured creditor. There
can be no assurance that the Company will realize any of these outstanding
amounts. The Company has reserved the amounts of all pre-petition accounts
receivable from AHERF.
The Company believes that Per-Se has corrected the problems in its patient
scheduling product and that it has made progress in rebuilding its relationships
with clients. These improvements are reflected in Per-Se's 43% increase in its
patient scheduling license sales in the fourth quarter of 1998 as compared with
the sales in the third quarter of 1998. In addition to completing its first
Patient1 sale during the fourth quarter of 1998, Per-Se was also named vendor of
choice for a transaction that will include both Patient1 and its new financial
management system, Business1(TM). Per-Se adopted a restructuring plan in
December 1998 that eliminated approximately 40 positions, which will help reduce
Per-Se's overhead costs in the future. See "-- Fiscal 1998 compared to Fiscal
1997 -- Restructuring and Other Charges."
The Company's corporate overhead costs decreased by 10.5% for the year
ended December 31, 1998 as compared to the previous year. This reduction is
primarily the result of fewer professional service fees and a reduction of
headcount resulting from process improvement initiatives. Management is
committed to create efficient processes and reduce costs where feasible.
Currently, management is in the process of reducing costs in the payroll
processing area where management has made the decision to outsource its payroll
processing function. As a result of the decision to outsource payroll
processing, the Company must fully depreciate the remaining cost of its current
payroll processing system over its shortened remaining useful life. This
accelerated depreciation increased depreciation expense by approximately $1.0
million in 1998 and will increase depreciation expense in the first quarter of
1999 by approximately the same amount.
INTEREST. Net interest expense in 1998 was approximately the same as it
was in 1997. The Company expects interest expense to decrease in 1999 due to the
repayment and termination of the Company's $100 million senior credit facility
(the "Credit Facility") with a portion of the net proceeds resulting from the
sale of Hospital Services.
INTANGIBLE ASSET IMPAIRMENT. At September 30, 1998, the Company recorded
an intangible asset impairment charge of $390.6 million to adjust the intangible
assets of the Physician Services segment to their fair value. As previously
disclosed, management regularly monitors its results of operations and other
developments within the industry to adjust its cash flow forecast, as necessary,
to determine if an adjustment is necessary to the carrying value of the
Company's intangible assets.
During the third quarter of 1998, 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 for the
11
14
Physician Services segment was still recoverable. These events included: (i)
continuing increases in the segment's operating losses due primarily to client
losses; (ii) significant litigation 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 believed the assumptions inherent in the analysis were
reasonable and supportable. The following key assumptions were used in
management's undiscounted cash flow analysis: (i) revenue was forecasted to
decline over the next five years and then remain flat; (ii) EBITDA margin was
forecasted to continue to decrease in 1999, increase slightly over the following
four years and then stabilize at a moderate margin over the remaining life of
the assets; and (iii) capital spending would be maintained in the range of 3% of
revenue. Since the undiscounted cash flow model showed an impairment of the
Company's long-lived assets, the Company used a discounted cash flow model to
measure the fair value of these long-lived assets, which was consistent with the
Company's policy. The fair value calculation determined that the fair value of
the long-lived assets was approximately $63 million. The Company wrote-off the
value of its longest lived assets first, which resulted in the write-off of all
of the Physician Services segment's goodwill and a portion of the value of its
client lists. Simultaneous with the impairment charge, the Company reduced the
estimated useful life of its remaining intangible assets for the Physician
Services segment to 10 years.
LITIGATION SETTLEMENTS. The Company accrued $19.5 million during the third
quarter of 1998 as a result of its successful settlement negotiations with the
government concerning two federal investigations into billing and collection
practices of the Company (the "California Investigation" and the "GFS
Investigation"). To settle with all parties in connection with the California
Investigation, Medaphis paid approximately $3.1 million in the fourth quarter of
1998 with the remainder to be paid in early 1999. An agreement in principle
based on the Company's ability to pay, subject to definitive documentation and
final approval by the United States, was reached in connection with the GFS
Investigation. Medaphis will pay $8.0 million upon the execution of this
definitive agreement with the balance of $7.0 million payable in eight equal
quarterly payments thereafter, plus interest.
In June 1998, the Company recorded an estimated litigation settlement
liability of $21.3 million associated with claims made on behalf of certain
former BSG shareholders. Such liability was estimated based upon a proposed
settlement of approximately 3.2 million shares of Common Stock. This settlement
was subsequently finalized for 5.0 million shares of Common Stock, and, based on
the prevailing market price, the settlement was valued at $15.9 million. A
reduction to litigation settlements totaling approximately $5.4 million was
recorded in the fourth quarter to reflect the final settlement value.
In 1997, the Company recorded a non-cash litigation settlement charge of
$52.5 million for the settlement of a class action legal matter brought against
the Company in 1996. The settlement was comprised of approximately 4.0 million
shares of Common Stock and warrants to purchase 5.3 million shares of Common
Stock at $12 per share for a five year period. See Note 10 of Notes to Financial
Statements where the above legal matters are discussed in more detail.
RESTRUCTURING AND OTHER CHARGES. In December 1998, management of Per-Se
adopted a plan to restructure its operations to align Per-Se's resources more
appropriately with future operational needs and new product development. In
order to accomplish these objectives, Per-Se's executive management terminated
approximately 35 employees, primarily in the areas of professional services and
research and development, and recorded severance costs of approximately $1.3
million.
During 1997, the Company recorded restructuring charges of approximately
$2.8 million primarily related to a plan adopted in August 1997 to combine the
operations of Per-Se and Impact (the "Per-Se Restructuring"). The objective of
the Per-Se Restructuring was to improve profitability thorough 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 $1.1 million, primarily consisting of
lease termination costs and severance costs. See "-- Discontinued Operations"
where management's decision to sell Impact is discussed in detail.
12
15
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 (the "MPSC
Restructuring Plan"); (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 through
Physician Services. During 1997, the Company recognized additional restructuring
expenses of approximately $1.7 million related to adjustments to the lease
termination costs associated with the MPSC Restructuring Plan.
As of December 31, 1998, the Company had accrued, but had not paid,
expenses of approximately $5.4 million in connection with the Company's various
restructuring plans. Such amounts consist primarily of estimated lease
termination costs which will be paid in varying amounts through 2005 and the
above-mentioned severance, the majority of which will be paid in the first half
of 1999.
Exclusive of the restructuring charges discussed above, other charges
aggregated approximately $3.9 million in 1998 as compared to $14.0 million in
1997. The primary components of the 1998 charges were: (i) $0.7 million in
non-cash property and equipment impairment charges associated with certain
properties held for sale; (ii) $2.0 million in legal costs associated with
various lawsuits and investigations (see Note 10 of Notes to Financial
Statements); and (iii) $1.2 million of severance costs, primarily related to
former executive officers. The primary components of the 1997 amounts were: (i)
$5.0 million in non-cash property and equipment impairment charges associated
with 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 Note 10 of Notes to Financial Statements); and (iii) $6.4
million of various other costs, including severance and other individually
insignificant, non-recurring items.
INCOME TAXES. Based on recent events and the current operating forecast,
the Company reassessed the recoverability of its deferred tax asset. Based on
its analysis, the Company recorded a full valuation allowance against the net
deferred tax asset. If, during future periods, management believes the Company
will generate sufficient taxable income to realize the deferred tax asset, the
Company will adjust this valuation reserve accordingly.
Effective income tax rates for the prior period presented vary from
statutory rates primarily as a result of nondeductible goodwill associated with
merger transactions consummated by the Company in previous years.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the years ended December 31, 1998 and 1997 is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997
----------------------------- ------------------------------
HOSPITAL HOSPITAL
SERVICES IMPACT TOTAL SERVICES IMPACT TOTAL
-------- ------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue..................... $100,081 $79,731 $179,812 $97,095 $101,524 $198,619
======== ======= ======== ======= ======== ========
Income (loss) from
discontinued operation
before taxes.............. 5,192 (5,263) (71) 9,508 (10,419) (911)
Income tax expense
(benefit)................. 2,079 (2,079) -- 3,910 (4,115) (205)
-------- ------- -------- ------- -------- --------
Income (loss) from
discontinued operations,
net of tax................ $ 3,113 $(3,184) $ (71) $ 5,598 $ (6,304) $ (706)
======== ======= ======== ======= ======== ========
In early 1998, management initiated a plan to focus the Company's financial
and management resources on its two core healthcare segments, in an effort to
return the Company to profitability. Management has defined its two core
segments as: Physician Services and Per-Se. Management began to seek
alternatives for the remaining non-core business segments: Hospital Services and
Impact. Although Hospital Services provided business management and accounts
receivable management services to approximately 1,200 hospitals, the Company's
management deemed the segment non-core as a substantial portion of the services
offered was bad debt collection. Impact was deemed non-core as it did not
provide consulting services to the healthcare industry.
13
16
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO for initial consideration of $107.5 million. In February 1999, the
Company received additional proceeds of $0.5 million based on the Hospital
Services final closing balance sheet. In addition, Medaphis could receive a
purchase price adjustment of up to $10.0 million subject to the achievement of
various operational targets in 1999. The Company recorded a $7.2 million gain,
net of taxes of $5.0 million, as a result of this sale. See Liquidity and
Capital Resources where the use of proceeds from this sale is discussed.
After reviewing several alternatives for Impact throughout 1998, management
concluded a sale of this segment would generate the greatest return to the
stockholders and finalized its plan to sell Impact. Management intends to have
this sale completed by the end of 1999 and does not anticipate future losses in
connection with the sale.
The results of operating for both Hospital Services and Impact have been
classified as discontinued operations for all periods presented.
EXTRAORDINARY ITEM. In February 1998, the Company used the proceeds from
the February 1998 issuance of Notes (see Liquidity and Capital Resources) and
the Credit Facility to redeem the Company's then-current debt facility. In
November 1998, the Company used $71.5 million of the $103.2 million net proceeds
received from the sale of Hospital Services to repay and terminate the Credit
Facility. The Company recorded extraordinary charges in 1998 of $8.4 million,
net of tax of $3.8 million, to write-off the unamortized costs associated with
the early extinguishment of both the Company's previous debt facility and the
Credit Facility.
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 $126.4
million. The Company recorded an extraordinary gain on the sale of HRI of $76.4
million, net of tax of $46.2 million, in the second quarter of 1997. Medaphis
had acquired HRI on August 28, 1995 through a business combination accounted for
as a pooling-of-interests.
Fiscal 1997 compared to Fiscal 1996
REVENUE. Revenue classified by the Company's reportable segments is as
follows:
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
Physician Services.......................................... $278,475 $297,737
Per-Se...................................................... 99,281 72,215
HRI......................................................... 14,720 31,419
Eliminations................................................ (56) (920)
-------- --------
$392,420 $400,451
======== ========
Physician Services' revenue for the year ended December 31, 1997 declined
6.5% from the prior year principally due to client losses outpacing the addition
of new clients. In 1997, management's emphasis had been on enhancing client
service to its existing clients and not on expanding the client base. In
addition, during 1997, the Company completed a detailed review to update the
assumptions and methodology underlying the calculation of unbilled accounts
receivable. As a result of this comprehensive analysis, the Company recorded a
$10.7 million negative adjustment to revenue and accounts receivable. The
Company experienced no comparable adjustments in 1996.
Per-Se's revenue increased 37.5% 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 its UltiCare(R) and
scheduling product lines.
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.
14
17
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes
restructuring and other charges, litigation settlements, intangible asset
impairment and interest expense, classified by the Company's operating segments
is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Physician Services.......................................... $ (4,582) $(12,715)
Per-Se...................................................... 20,310 13,454
HRI......................................................... 3,685 8,502
Corporate................................................... (35,865) (27,649)
-------- --------
$(16,452) $(18,408)
======== ========
The decrease in the operating loss for the Physician Services segment was
directly attributable to management's efforts to reduce costs by streamlining
processes and reducing the overall headcount of this segment.
Operating profit for Per-Se for the year ended December 31, 1997 increased
51.0% as compared to 1996. This increase was caused by the above mentioned
revenue growth offset by charges of $4.7 million for adjustments to unbilled
accounts receivable relating to collection issues on certain contracts.
The Company's corporate overhead costs increased by 29.7% for the year
ended December 31, 1997 as compared to the previous year. This increase is
primarily the result of higher than normal professional fees the Company
incurred to assist with various financial, operational and organizational
projects undertaken by the executive management of the Company.
INTEREST. Net interest expense was $23.4 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.
RESTRUCTURING AND OTHER CHARGES. During 1997, the Company recorded
restructuring charges of approximately $2.8 million as compared to charges in
1996 of approximately $3.4 million. See "-- Fiscal 1998 Compared to Fiscal
1997 -- Restructuring and Other Charges" for an explanation of the 1997
restructuring charges. The restructuring costs incurred in 1996 were related to
the additional expenses associated with the Reengineering Project, which had not
previously been reserved.
As of December 31, 1997, the Company had accrued, but had not paid,
expenses of approximately $5.6 million, in connection with the office
consolidation aspect of the Reengineering Project and the Per-Se Restructuring.
Such amount consisted primarily of estimated lease termination costs that will
be paid in varying amounts through 2005.
Also in 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 $71.5 million in December 1996.
Exclusive of the restructuring charges discussed above, other charges
aggregated approximately $14.0 million in 1997 as compared to $116.0 million,
including the $71.5 million of the above-mentioned software abandonment costs,
in 1996. See "-- Fiscal 1998 compared to Fiscal 1997 -- Restructuring and Other
Charges" for an explanation of the other charges in 1997. The primary components
of the 1996 amounts were: (i) $22.5 million in non-cash property and equipment
impairment charges associated with the abandonment of the Reengineering Plan;
(ii) $12.8 million in legal costs associated with various lawsuits and
investigations (see Note 10 of Notes to Financial Statements); and (iii) $9.2
million of various other costs, including pooling charges, severance and other
individually insignificant, non-recurring items.
15
18
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 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.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the years ended December 31, 1997 and 1996 is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
HOSPITAL HOSPITAL
SERVICES IMPACT TOTAL SERVICES IMPACT TOTAL
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue..................... $97,095 $101,524 $198,619 $88,946 $116,437 $205,383
======= ======== ======== ======= ======== ========
Income (loss) from
discontinued operations
before income taxes....... 9,508 (10,419) (911) 13,873 (75,872) (61,999)
Income tax expense
(benefit)................. 3,910 (4,115) (205) 5,663 (29,969) (24,306)
------- -------- -------- ------- -------- --------
Income (loss) from
discontinued operations,
net of tax................ $ 5,598 $ (6,304) $ (706) $ 8,210 $(45,903) $(37,693)
======= ======== ======== ======= ======== ========
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 $126.4 million. The Company recorded an extraordinary
gain on the sale of HRI of $76.4 million, net of tax of $46.2 million in the
second quarter of 1997. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $86.2 million at December 31, 1998,
including $54.4 million of unrestricted cash and cash equivalents. The $39.7
million increase in cash from December 31, 1997 is primarily a result of the
November 30, 1998 sale of Hospital Services.
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, commencing on August 15,
1998, and 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 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 is
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
16
19
subsidiaries. Any non-guarantor subsidiaries are insignificant individually and
in the aggregate to the consolidated financial statements.
The Company also entered into the Credit Facility on February 20, 1998. The
Company had the option of making "LIBOR" based loans or "base rate" loans under
the Credit Facility. LIBOR based loans bore interest at LIBOR plus 3.0%. Base
rate loans bore interest at prime plus 1.75%. In addition, the Company paid a
quarterly commitment fee on the unused portion on the Credit Facility ranging
from 0.25% to 0.75% per annum based on the Company's leverage ratio. On November
30, 1998, the Company used $71.5 million of the $103.2 million net proceeds
received from the sale of Hospital Services to repay and terminate the Credit
Facility.
In February 1999, the Company received an additional $0.5 million purchase
price adjustment based on Hospital Services' tangible net worth at closing. In
addition, Medaphis could receive a purchase price adjustment of up to $10.0
million subject to the achievement of various operational targets in 1999.
Under the Indenture governing the Notes, the balance of the excess sale
proceeds, as defined, from the sale of Hospital Services or any other asset sale
must be invested in the Company's business within 360 days of the sale. To the
extent that such excess proceeds are not invested, the Company is required to
offer to repurchase the Notes at par with such proceeds. Currently, it is
management's intention to invest the excess proceeds of $31.7 million from the
Hospital Services sale in the Company.
Management expects to complete the sale of Impact before the end of 1999.
The Company will either use the excess proceeds from this sale to invest in the
growth of the business or will use such proceeds to repurchase the Notes at par
within the 360 day period referred to above.
In 1998, the Company decided to transition from a computerized coding
system used by the Emergency Medicine division of Physician Services for
emergency medicine physician billing to manual coding. No material extraordinary
charges were incurred 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 Emergency
Medicine division's 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 is a party to various legal actions. See Note 10 of Notes to
Financial Statements. 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 will not have a material
adverse effect on the Company's liquidity or financial position.
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 Indenture for the Notes contains
restrictive covenants, including without limitation those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets.
The Company believes that its current cash flow is sufficient to permit the
Company to meet its operating expenses, service its debt requirements as they
become due in the next twelve months and for the long term and to invest in the
business; however, there can be no assurance that such results will be achieved.
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, restricting 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.
To enhance the Company's financial flexibility, management is currently
seeking a new credit facility that would allow Medaphis to borrow up to a
maximum of $50 million. This flexibility would give management the ability to
make prudent strategic investments in the business. Additionally, management
anticipates receiving
17
20
proceeds from the sale of Impact which will be available to invest in the
business subject to the limitations discussed above.
YEAR 2000
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 Company-wide 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. Through its Company-wide review, the Company has
identified a number of older legacy systems, all within the Physician Services
business, that will be abandoned in favor of a limited number of more efficient
processing systems, rather than make all the systems Year 2000 compatible. The
Emergency Medicine division's computerized coding system is one of the legacy
systems from which the Company has already transitioned. The Company believes
that it is on target to complete substantially all of these system migration
efforts by mid-1999. The detailed planning and inventory for the majority of the
Company's legacy systems that are being modified for Year 2000 compatibility has
been completed and such systems are in remediation. Customers, vendors and
resellers have been identified and requests for information distributed
regarding the Year 2000 readiness of such parties. Responses are expected
through the first quarter of 1999. The Company began to develop contingency
plans during the fourth quarter of 1998 and will continue developing these plans
through the second quarter of 1999 in response to assessments of the Year 2000
readiness of customers, vendors and resellers.
In the third quarter of 1998, Per-Se released Year 2000 compatible versions
of its patient scheduling and staff management products. The testing and
documentation of Per-Se's clinical information system and its radiology products
are scheduled to be completed by the end of the second quarter of 1999. A new
patient financial management system, as well as enhancements to the clinical
information system, which are not scheduled for general availability until late
1999, are being tested and documented with regard to Year 2000 support as part
of ongoing software development.
Through December 31, 1998, the Company has spent approximately $2.6 million
on its Year 2000 efforts, and it expects to spend an additional $3.5 million to
$5.0 million in 1999 on such efforts, the majority of which represents
redirection of internal resources. However, there can be no assurance that the
Company will identify all 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 revenue. 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
such problems.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
provides guidance on the accounting for the costs of computer software developed
or obtained for internal use and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not believe SOP
98-1 will have a material impact on the Company's results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). SFAS No. 133 establishes guidance on the accounting for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities and is effective for financial statements
for all fiscal quarters of fiscal years beginning after
18
21
June 15, 1999. The Company does not believe SFAS No. 133 will have a material
impact on the Company's results of operations.
On September 28, 1998, the Securities and Exchange Commission (the
"Commission") issued a press release stating "the Commission will formulate and
augment new and existing accounting rules and interpretations covering revenue
recognition, restructuring reserves, materiality, and disclosure" for all
publicly-traded companies. Until such time as the Commission staff issues such
interpretative guidelines, it is unclear what, if any, impact such
interpretative guidance will have on the Company's current accounting practices.
However, the potential changes in accounting practice being considered by the
Commission staff could have a material impact on the carrying value of the
unbilled receivables at Physician Services that historically have been
recognized using methods in accordance with generally accepted accounting
principles. Any such changes would have no effect on reported cash flow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements appear beginning at page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Management of the Company" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held on May 6, 1999 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 6, 1999 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the sections entitled
"Management Common Stock Ownership" and "Principal Stockholders" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 6, 1999 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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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, 1998 and 1997;
Consolidated Statements of Operations -- years ended December 31, 1998,
1997 and 1996;
Consolidated Statements of Cash Flows -- years ended December 31, 1998,
1997 and 1996;
Consolidated Statements of Stockholders' Equity -- years ended December
31, 1998, 1997 and 1996; 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, 1998, 1997 and 1996
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
NUMBER DOCUMENT
- ------- --------
2.1 -- Merger Agreement dated as of 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).
2.2 -- Merger Agreement dated as of March 15, 1996, among
Registrant, BSGSub, Inc. and BSG Corporation (incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form S-4, File No. 333-2506).
2.3 -- Stock Purchase Agreement dated as of October 15, 1998,
between Registrant and NCO Group, Inc. (incorporated by
reference to Exhibit 2.1 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
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 quarter 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 quarter
ended June 30, 1997).
3.6 -- Amended and Restated By-laws of Registrant (incorporated by
reference to Exhibit 3.5 to Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
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23
EXHIBIT
NUMBER DOCUMENT
- ------- --------
4.1 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, File No. 000-19480 (the
"1995 Form 10-K")).
4.2 -- Form of Option Agreement relating to Registrant's Amended
and Restated Non-Qualified Stock Option Plan.
4.3 -- Form of Option Agreement relating to Registrant's Senior
Executive Performance Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-1, File No. 33-42216).
4.4 -- Form of Option Agreement relating to Registrant's
Non-Qualified 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).
4.5 -- Form of Option Agreement relating to Registrant's Restricted
Stock Plan (incorporated by reference to Exhibit 4.5 to the
1995 Form 10-K).
4.6 -- Form of Option Agreement relating to Registrant's
Non-Employee Director Stock Option Plan.
4.7 -- 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")).
4.8 -- Form of Common Stock Purchase Warrant issued to Fredica Morf
and Ursula Nelson (incorporated by reference to Exhibit 4.19
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 000-19480 (the "1994 Form
10-K")).
4.9 -- Indenture dated as of February 20, 1998, among Registrant,
as Issuer, the Subsidiary Guarantors named in the Indenture
and State Street Bank and Trust Company, as Trustee
(including form of note) (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on March 3,
1998).
4.10 -- Warrant Agreement dated as of July 8, 1998, between
Registrant and SunTrust Bank, Atlanta, as Warrant Agent
(including form of warrant certificate) (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form
8-A filed on July 21, 1998)
4.11 -- Rights Agreement dated as of February 11, 1999, between
Registrant and American Stock Transfer & Trust Company
(including form of rights certificates) (incorporated by
reference to Exhibit 4 to Current Report on Form 8-K filed
on February 12, 1999).
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).
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 Exhibit 10.6 to Annual Report on Form 10-K for
the fiscal year ended December 31, 1993).
21
24
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.7 -- Sixth 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, 1994).
10.8 -- Seventh Amendment to Amended and Restated Medaphis
Corporation 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 Amended and Restated Medaphis
Corporation 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 Amended and Restated Medaphis Corporation
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 Amended and Restated Medaphis Corporation
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 Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the 1996 Form 10-K).
10.13 -- Twelfth Amendment to Amended and Restated Medaphis
Corporation Non-Qualified Stock Option Plan.
10.14 -- 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).
10.15 -- First Amendment to Medaphis Corporation Senior Executive
Performance Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1993).
10.16 -- 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).
10.17 -- 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).
10.18 -- 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).
10.19 -- 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).
10.20 -- 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).
10.21 -- 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).
10.22 -- Sixth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Employees of Acquired Companies
(incorporated by reference to Exhibit 10.21 to the 1996 Form
10-K).
10.23 -- Seventh Amendment to Medaphis Corporation Non-Qualified
Stock Option Plan for Employees of Acquired Companies.
10.24 -- 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).
10.25 -- First Amendment to Medaphis Corporation Non-Employee
Director Stock Option Plan.
22
25
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.26 -- Medaphis Corporation Non-Qualified Stock Option Plan for
Non-Executive Employees (incorporated by reference to
Exhibit 10.23 to the 1996 Form 10-K).
10.27 -- First Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees (incorporated by
reference to Exhibit 10.24 to the 1996 Form 10-K).
10.28 -- 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").
10.29 -- 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).
10.30 -- 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).
10.31 -- 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).
10.32 -- Sixth Amendment to Medaphis Corporation Non-Qualified Stock
Option Plan for Non-Executive Employees.
10.33 -- 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).
10.34 -- Form of Medaphis Corporation Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.19 to the 1995 Form
10-K).
10.35 -- First Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.27 on
the 1996 Form 10-K).
10.36 -- Second Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.32 to
the 1997 Form 10-K).
10.37 -- Third Amendment to Medaphis Corporation Employee Stock
Purchase Plan (incorporated by reference to Exhibit 10.33 to
the 1997 Form 10-K).
10.38 -- Retirement Savings Trust (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form S-1, File
No. 33-42216).
10.39 -- Amended and Restated Medaphis Employees' Retirement Savings
Plan (incorporated by reference to Exhibit 10.29 to the 1996
Form 10-K).
10.40 -- First Amendment to the Amended and Restated Medaphis
Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.30 to the 1996 Form 10-K).
10.41 -- Form of Second Amendment to the Amended and Restated
Medaphis Employees' Retirement Savings Plan (incorporated by
reference to Exhibit 10.31 to the 1996 Form 10-K).
10.42 -- 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).
10.43 -- 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).
10.44 -- 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).
10.45 -- Employment Agreement by and between Registrant and David E.
McDowell, dated November 19, 1996 (incorporated by reference
to Exhibit 10.49 to the 1996 Form 10-K).
10.46 -- 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).
10.47 -- 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).
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26
EXHIBIT
NUMBER DOCUMENT
- ------- --------
10.48 -- Employment Agreement dated July 27, 1998, between Registrant
and Wayne A. Tanner (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.49 -- Medaphis Deferred Compensation Plan (incorporated by
reference to Exhibit 99 to Registration Statement on Form
S-8, Registration No. 33-90874).
10.50 -- 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).
10.51 -- 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).
10.52 -- Third Amendment to the Medaphis Corporation Deferred
Compensation Plan (incorporated by reference to Exhibit
10.76 to the 1997 Form 10-K).
10.53 -- 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).
10.54 -- 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).
10.55 -- 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).
10.56 -- Impact Innovations Key Employee Incentive Plan (incorporated
by reference to Exhibit 10.2 to Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
10.57 -- Medaphis Corporation Long Term Incentive Plan (incorporated
by reference to Exhibit 10.3 to Quarterly Report on Form
10-Q for the quarter ended September 30, 1998).
10.58 -- Corporate Integrity Agreement between the Office of the
Inspector General of the Department of Health and Human
Services and Registrant (incorporated by reference to
Exhibit 10.4 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
21 -- Subsidiaries of Registrant
23.1 -- Consent of PricewaterhouseCoopers LLP.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- 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.
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended December 31,
1998:
FINANCIAL
ITEM REPORTED STATEMENTS FILED DATE OF REPORT
------------- ---------------- -----------------
Intangible impairment, government investigation
settlements, tax reserves, and restructuring and
other unusual charges............................. No October 23, 1998
Sale of Hospital Division to NCO Group, Inc......... No November 30, 1998
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27
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: March 19, 1999 By: /s/ WAYNE A. TANNER
------------------------------------
Wayne A. Tanner
Executive Vice President and
Chief Financial Officer
25
28
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 19, 1999 /s/ DAVID E. MCDOWELL
------------------------------------------------------
David E. McDowell
Chairman and Director
March 19, 1999 /s/ ALLEN W. RITCHIE
------------------------------------------------------
Allen W. Ritchie
President, Chief Executive Officer, and Director
March 19, 1999 /s/ WAYNE A. TANNER
------------------------------------------------------
Wayne A. Tanner
Executive Vice President and
Chief Financial Officer
March 19, 1999 /s/ JAMES W. FITZGIBBONS
------------------------------------------------------
James W. FitzGibbons
Vice President and Controller
(Principal Accounting Officer)
March 19, 1999 /s/ DENNIS A. PRYOR
------------------------------------------------------
Dennis A. Pryor
Vice Chairman and Director
March 19, 1999 /s/ RODERICK M. HILLS
------------------------------------------------------
Roderick M. Hills
Director
March 19, 1999 /s/ DAVID R. HOLBROOKE, M.D.
------------------------------------------------------
David R. Holbrooke, M.D.
Director
March 19, 1999 /s/ JOHN C. POPE
------------------------------------------------------
John C. Pope
Director
March 19, 1999 /s/ C. CHRISTOPHER TROWER
------------------------------------------------------
C. Christopher Trower
Director
26
29
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, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Medaphis Corporation and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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 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."
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 10, 1999
F-1
30
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
DECEMBER 31,
---------------------
1998 1997
--------- ---------
Current Assets:
Cash and cash equivalents................................. $ 54,409 $ 14,729
Restricted cash........................................... 5,754 2,218
Accounts receivable, billed (less allowances of $17,160
and $7,336)............................................ 54,800 68,600
Accounts receivable, unbilled............................. 46,757 60,228
Other..................................................... 8,022 11,088
--------- ---------
Total current assets.............................. 169,742 156,863
Property and equipment...................................... 47,954 52,365
Deferred income taxes....................................... -- 60,857
Intangible assets........................................... 48,241 459,129
Net assets of discontinued operations....................... 11,872 108,158
Other....................................................... 8,912 9,773
--------- ---------
$ 286,721 $ 847,145
========= =========
Current Liabilities:
Accounts payable.......................................... $ 8,550 $ 9,064
Accrued compensation...................................... 21,234 26,626
Accrued expenses.......................................... 22,361 29,054
Accrued litigation settlements............................ 12,026 --
Current portion of long-term debt......................... 1,067 11,432
Deferred revenue.......................................... 18,289 16,165
--------- ---------
Total current liabilities......................... 83,527 92,341
Long-term debt.............................................. 175,013 189,259
Accrued litigation settlements.............................. 20,250 52,500
Other obligations........................................... 5,608 11,264
--------- ---------
Total liabilities................................. 284,398 345,364
--------- ---------
Commitments and contingencies (Notes 9 and 10)
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized,
78,745 and 73,204 issued and outstanding in 1998 and
1997, respectively..................................... 787 732
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 740,014 678,998
Accumulated deficit....................................... (738,390) (177,949)
--------- ---------
2,411 501,781
Less treasury stock, at cost -- 15 shares in 1998......... 88 --
--------- ---------
Total stockholders' equity........................ 2,323 501,781
--------- ---------
$ 286,721 $ 847,145
========= =========
See notes to consolidated financial statements.
F-2
31
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- -------- ---------
Revenue..................................................... $ 349,823 $392,420 $ 400,451
--------- -------- ---------
Salaries and wages.......................................... 226,894 242,228 247,204
Other operating expenses.................................... 126,183 123,094 130,007
Depreciation................................................ 23,848 22,481 20,266
Amortization................................................ 18,077 21,069 21,382
Interest expense, net....................................... 23,494 23,398 11,585
Intangible asset impairment................................. 390,641 -- --
Litigation settlements...................................... 35,987 52,500 --
Restructuring and other charges............................. 5,191 16,741 119,434
--------- -------- ---------
Total expenses.................................... 850,315 501,511 549,878
--------- -------- ---------
Loss before income taxes.................................... (500,492) (109,091) (149,427)
Income tax expense (benefit)................................ 58,465 (16,568) (49,783)
--------- -------- ---------
Loss from continuing operations............................. (558,957) (92,523) (99,644)
--------- -------- ---------
Discontinued operations, net of tax:
Loss from discontinued operations......................... (71) (706) (37,693)
Gain on sale of Hospital Services......................... 7,214 -- --
--------- -------- ---------
7,143 (706) (37,693)
--------- -------- ---------
Loss before extraordinary item and cumulative effect of
accounting change......................................... (551,814) (93,229) (137,337)
Extraordinary items, net of tax............................. (8,400) 76,391 --
Cumulative effect of accounting change, net of tax.......... -- (2,465) --
--------- -------- ---------
Net loss.......................................... (560,214) (19,303) (137,337)
--------- -------- ---------
Pro forma tax adjustments................................... -- -- 979
--------- -------- ---------
Pro forma net loss.......................................... $(560,214) $(19,303) $(136,358)
========= ======== =========
Pro forma basic net income (loss) per share:
Pro forma basic loss from continuing operations........... $ (7.26) $ (1.27) $ (1.39)
Income (loss) from discontinued operations, net of tax.... 0.09 (0.01) (0.52)
Extraordinary items, net of tax........................... (0.10) 1.05 --
Cumulative effect of accounting change, net of tax........ -- (0.03) --
--------- -------- ---------
Pro forma basic net loss.................................. $ (7.27) $ (0.26) $ (1.91)
========= ======== =========
Weighted average shares outstanding......................... 77,017 72,679 71,225
========= ======== =========
See notes to consolidated financial statements.
F-3
32
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(560,214) $ (19,303) $(137,337)
Adjustments to reconcile net loss to net cash used for
operating activities:
Loss from discontinued operations......................... 71 706 37,693
Depreciation and amortization............................. 41,925 43,550 41,648
Gain on sale of Hospital Services in 1998 and HRI in
1997.................................................... (12,229) (122,583) --
Impairment losses on long-lived assets.................... 391,322 7,098 107,414
Cumulative effect of accounting change.................... -- 4,094 --
Early extinguishment of debt.............................. 12,145 -- --
Deferred income taxes..................................... 58,465 15,492 (77,663)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash......................................... (2,504) (1,698) (6,152)
Accounts receivable, billed............................. 13,800 (6,055) (6,885)
Accounts receivable, unbilled........................... 13,471 1,054 4,604
Accounts payable........................................ (514) 1,382 (8,989)
Accrued compensation.................................... (5,392) 6,031 3,470
Accrued expenses........................................ (3,712) (22,539) 15,630
Accrued litigation settlements.......................... 32,639 52,500 --
Deferred revenue........................................ 2,124 9,216 2,758
Other, net.............................................. 6,966 6,961 8,764
--------- --------- ---------
Net cash used for continuing operations................. (11,637) (24,094) (15,045)
Net cash provided by (used for) discontinued
operations........................................... 5,240 4,114 (32,923)
--------- --------- ---------
Net cash used for operating activities............. (6,397) (19,980) (47,968)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired.......................... (670) (6,103) (14,573)
Purchases of property and equipment......................... (23,789) (10,995) (31,292)
Net proceeds from sale of Hospital Services in 1998 and HRI
in 1997................................................... 103,204 126,375 --
Proceeds from sale of property and equipment................ 915 3,644 --
Software development costs.................................. (4,515) (5,203) (30,517)
--------- --------- ---------
Net cash provided by (used for) investing
activities...................................... 75,145 107,718 (76,382)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock............................. 1,447 1,216 --
Proceeds from the exercise of stock options................. 5,688 6,104 10,744
Proceeds from borrowings.................................... 386,969 327,325 124,559
Payments of debt............................................ (410,712) (398,058) (24,814)
Repurchase of stock and warrants............................ -- -- (5,591)
Debt issuance costs......................................... (12,460) (13,596) --
Other....................................................... -- -- 5,547
--------- --------- ---------
Net cash (used for) provided by financing
activities...................................... (29,068) (77,009) 110,445
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Net change.................................................. 39,680 10,729 (13,905)
Balance at beginning of period.............................. 14,729 4,000 17,905
--------- --------- ---------
Balance at end of period.................................... $ 54,409 $ 14,729 $ 4,000
========= ========= =========
See notes to consolidated financial statements.
F-4
33
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,
1995................... 58,917 $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................... 71,705 717 -- -- 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................... 73,204 732 -- -- 678,998 (177,949) -- 501,781
Issuance of common
stock.................. 272 3 -- -- 1,444 -- -- 1,447
Exercise of stock
options................ 1,242 12 -- -- 5,582 (49) 143 5,688
Funding of litigation
settlements............ 3,985 40 -- -- 53,587 -- (70) 53,557
Net loss................. -- -- -- -- -- (560,214) -- (560,214)
Other.................... 42 -- -- -- 403 (178) (161) 64
------ ---- -------- ----- -------- --------- ------- ---------
BALANCE AT DECEMBER 31,
1998................... 78,745 $787 -- $ -- $740,014 $(738,390) $ (88) $ 2,323
====== ==== ======== ===== ======== ========= ======= =========
See notes to consolidated financial statements.
F-5
34
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. 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. Medaphis completed the sale of Medaphis Services
Corporation ("Hospital Services") and formalized its plan to sell Impact
Innovations Group ("Impact"), its consulting services segment. The Company
intends to consummate the sale of Impact before the end of 1999. The results of
these segments are classified as discontinued operations for all periods
presented. See Note 2 for further discussion of the Company's discontinued
operations.
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.
For software license sales where no significant contractual obligations
remain outstanding, the Company recognizes revenue upon shipment. For contracts
under which the Company is required to make significant production, modification
or customization changes, revenue from software licenses is recognized using the
percentage-of-completion method over the implementation period. Where services
are considered essential to the functionality of the arrangement, the software
license is recognized over the implementation period using the percentage of
completion method. 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 upon shipment; such terms result in an unbilled receivable at
the date the revenue is recognized. Revenue from software implementation
services is recognized as the services are performed. Software maintenance
payments received in advance are deferred and recognized ratably over the term
of the maintenance agreement, which is typically one year.
Revenue from systems integration contracts is 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 that
such losses are determined. Revenue for which customers have not yet been
invoiced is reflected as unbilled accounts receivable 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
35
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. In 1998, the Company also had restrictions on $4.5 million of
its cash as security for certain of the Company's letters of credit.
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 ten years
for furniture and fixtures, three to ten 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 over its estimated useful life using
the straight-line method. The Company is amortizing its remaining goodwill of
$11.1 million over its remaining useful life of 16 years. 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 its goodwill. Client lists are amortized using the straight-line method over
their estimated period of benefit, 10 years.
The Company monitors events and changes in circumstances that could
indicate the carrying amounts of the 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, such as those events present
during each of the past three years, the Company assesses the recoverability of
the 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, as was the case during 1998, 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. See Note 6 where the 1998 impairment of
intangibles assets is discussed in detail. No impairment losses that were
related to goodwill or clients lists from continuing operations were recorded in
the two-year period ended December 31, 1997.
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software developed by
Per-Se for resale. Software development costs are capitalized upon the
establishment of technological feasibility for each product and capitalization
ceases when the product or process is available for general release to
customers. 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 13, 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 in assessing the likelihood that tax
F-7
36
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
benefits will be realized in the future. See Note 14 where the Company discusses
the realizability of the deferred tax assets.
PRO FORMA PROVISION FOR INCOME TAXES. In 1996, the Company acquired
Intelligent Visual Computing, Inc. ("IVC"), Rapid Systems Solutions, Inc.
("Rapid Systems") and BSG Corporation ("BSG") in merger transactions accounted
for as poolings-of-interests. Prior to the mergers, IVC, Rapid Systems and a
company acquired by BSG prior to the merger between BSG and the Company 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
benefit for income taxes, taken together with reported income tax benefit,
presents the combined pro forma tax benefit of such entities as if they had been
"C" corporations during all of 1996.
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 a new accounting principle 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 that 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 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 adopted SFAS No. 131 during
the year ended December 31, 1997 and, as required, restated prior years for
comparability. See Note 17 where the Company discloses information about its
reportable segments.
COMPREHENSIVE INCOME. On January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. The
Company's net loss, as presented in the Consolidated Statements of Operations,
approximates the Company's other comprehensive income amount, as defined, for
all periods presented.
2. DISCONTINUED OPERATIONS AND DIVESTITURES
In early 1998, management initiated a plan to focus the Company's financial
and management resources on its two core healthcare segments, in an effort to
return the Company to profitability. Management has defined its two core
segments as: Physician Services and Per-Se. Management began to seek
alternatives for the remaining non-core business segments: Hospital Services and
Impact. Although Hospital Services provided business management and accounts
receivable management services to approximately 1,200 hospitals, the Company's
management deemed the segment non-core as a substantial portion of the services
offered was bad debt collection. Impact was deemed non-core as it did not
provide consulting services to the healthcare industry.
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. In
February 1999, the Company received additional proceeds of $0.5
F-8
37
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million based on the Hospital Services final closing balance sheet. In addition,
Medaphis could receive a purchase price adjustment of up to $10.0 million
subject to the achievement of various operational targets in 1999. The Company
recorded a $7.2 million gain, net of taxes of $5.0 million, as a result of this
sale. See Note 8 where the use of proceeds from this sale is discussed.
After reviewing several alternatives for Impact throughout 1998, management
concluded a sale of this segment would generate the greatest return to the
stockholders and finalized its plan to sell Impact. Management intends to have
this sale completed by the end of 1999 and does not anticipate future losses in
connection with the sale.
Pursuant to APB No. 30, Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, the consolidated financial
statements of the Company have been presented to reflect both Hospital Services
and Impact as discontinued operations for all periods presented.
The net operating results of these segments have been reported in the
Consolidated Statements of Operations as "Loss from discontinued operations";
the net assets have been reported in the Consolidated Balance Sheets as "Net
assets of discontinued operations"; and the net cash flows have been reported in
the Consolidated Statements of Cash Flows as "Net cash provided by (used for)
discontinued operations."
Summarized financial information for the discontinued operations is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------ ------------------------------
HOSPITAL HOSPITAL HOSPITAL
SERVICES IMPACT TOTAL SERVICES IMPACT TOTAL SERVICES IMPACT TOTAL
-------- ------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Revenue............... $100,081 $79,731 $179,812 $97,095 $101,524 $198,619 $88,946 $116,437 $205,383
======== ======= ======== ======= ======== ======== ======= ======== ========
Income (loss) from
discontinued
operations before
income taxes........ 5,192 (5,263) (71) 9,508 (10,419) (911) 13,873 (75,872) (61,999)
Income tax expense
(benefit)........... 2,079 (2,079) -- 3,910 (4,115) (205) 5,663 (29,969) (24,306)
-------- ------- -------- ------- -------- -------- ------- -------- --------
Income (loss) from
discontinued
operations, net of
tax................. $ 3,113 $(3,184) $ (71) $ 5,598 $ (6,304) $ (706) $ 8,210 $(45,903) $(37,693)
======== ======= ======== ======= ======== ======== ======= ======== ========
AS OF DECEMBER 31,
--------------------------------------------
1998 1997
------------ -----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------------ -------- ------- --------
(IN THOUSANDS)
Current assets....................................... $16,399 $ 35,102 $20,471 $ 55,573
Total assets......................................... 21,829 103,681 31,359 135,040
Current liabilities.................................. 9,787 12,624 13,974 26,598
Total liabilities.................................... 9,957 12,816 14,066 26,882
Net assets of discontinued operations................ 11,872 90,865 17,293 108,158
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 $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
then-current debt facility. At the time of the sale, HRI was not a separate
reportable segment.
F-9
38
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. BUSINESS COMBINATIONS
The Company combined with four businesses in 1996 that 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
- ------- --------- -------------
Health Data Sciences Corporation ("HDS").................... 6,215,000 June 1996
BSG......................................................... 7,539,000 May 1996
Rapid Systems............................................... 1,135,000 April 1996
IVC......................................................... * February 1996
- ---------------
* 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 1996 financial statements have been presented to
include the operating results of the significant mergers, Rapid Systems, BSG and
HDS, for all periods prior to the mergers.
Prior to its merger with the Company, HDS reported on a fiscal year 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 year 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, 1996 and 1995. HDS's revenue
and net income for that three-month period were $3,758,000 and $382,000,
respectively.
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
4. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges are as follows:
1998 1997 1996
------ ------- --------
(IN THOUSANDS)
Restructuring charges..................................... $1,289 $ 2,759 $ 3,424
Software abandonment...................................... -- -- 71,507
Property and equipment impairment......................... 681 4,959 22,457
Legal costs............................................... 1,999 2,600 12,800
Pooling charges........................................... -- (17) 2,951
Severance costs........................................... 1,222 2,524 3,913
Other..................................................... -- 3,916 2,382
------ ------- --------
$5,191 $16,741 $119,434
====== ======= ========
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 compo-
F-10
39
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nents 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"). In August 1996,
the Company revised the MPSC Restructuring Plan and increased its lease
termination costs by $2.1 million and reduced the incremental costs associated
with discontinued client contracts and other reserves by $2.7 million and $1.1
million, respectively. During the first half of 1996, the Company incurred $5.1
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.
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 $0.5
million for the costs associated with the termination of certain leases and $0.6
million for severance costs related to approximately 10 employees who had been
notified of their termination.
In 1998, Per-Se recorded approximately $1.3 million of restructuring costs
for severance when management decided to restructure its operations to more
appropriately align Per-Se's resources with future operational needs and new
product development. The severance costs relate to approximately 35 employees,
primarily in the areas of professional services and research and development,
who had been notified of their termination.
A description of the type and amount of restructuring costs recorded at the
commitment date and subsequently incurred for all of the restructurings
discussed above are as follows:
RESERVE COSTS RESERVE COSTS RESERVE
BALANCE APPLIED BALANCE APPLIED BALANCE
JANUARY 1, RESERVE AGAINST DECEMBER 31, RESERVE AGAINST DECEMBER 31, RESERVE
1996 ADJUSTMENTS RESERVES 1996 ADJUSTMENTS RESERVE 1997 ADJUSTMENTS
---------- ----------- -------- ------------ ----------- ------- ------------ -----------
(IN THOUSANDS)
Lease termination
costs.............. $ 5,990 $2,128 $ (2,804) $5,314 $2,176 $(2,035) $5,455 $ --
Incremental costs
associated with
discontinued client
contracts.......... 4,691 (2,690) (2,001) -- -- -- -- --
Severance............ -- -- -- -- 583 (425) 158 1,289
Other................ 1,788 3,986 (5,774) -- -- -- -- --
------- ------ -------- ------ ------ ------- ------ ------
$12,469 $3,424 $(10,579) $5,314 $2,759 $(2,460) $5,613 $1,289
======= ====== ======== ====== ====== ======= ====== ======
COSTS RESERVE
APPLIED BALANCE
AGAINST DECEMBER 31,
RESERVE 1998
------- ------------
(IN THOUSANDS)
Lease termination
costs.............. $(1,163) $4,292
Incremental costs
associated with
discontinued client
contracts.......... -- --
Severance............ (299) 1,148
Other................ -- --
------- ------
$(1,462) $5,440
======= ======
The terminated leases have various expiration dates through 2005 and the
majority of the severance will be paid in the first half of 1999.
Software Abandonment. 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, the Company abandoned
certain software development projects and recorded charges for the write-off of
$71.5 million of capitalized software development costs related to these
projects.
Property and Equipment Impairment. In connection with the abandonment of
the Reengineering Project in 1996, the Company assessed the recoverability of
certain of its long-lived assets and recorded impairment losses of approximately
$22.5 million.
In connection with the Company's assessment of the recoverability of
certain of its long-lived assets, the Company recorded a charge of $5.0 million
for impairment losses during 1997.
F-11
40
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, the Company recorded a charge of $0.7 million related to the
write-down of certain properties held for sale to their net realizable value.
Legal Costs. In 1996, the Company accrued $2.0 million for the legal and
administrative fees, costs and expenses associated with the California
Investigation (see Note 10). 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 that had
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 various other legal matters. Also in 1996,
the Company had recorded a $1.2 million charge in anticipation of the settlement
of a 1995 class action lawsuit.
In 1997, the Company recorded charges of $3.0 million for the legal and
administrative fees, costs and expenses it has incurred and planned to incur in
connection with the GFS Investigation (see Note 10).
Also in 1997, the Company evaluated the adequacy of the reserves
established for the California Investigation and other legal matters and reduced
these reserves by $3.4 million. The Company also increased its reserve for the
1996 Lawsuits by $3.0 million (See Note 10).
In 1998, the Company recorded charges of $2.0 million related to the legal
and administrative fees, costs and expenses associated with the settlement of
various other legal matters described in Note 10.
Pooling Charges. In 1995 and 1996, Medaphis acquired several 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 those transactions. Such
estimates were adjusted based on actual charges. The impact of these charges and
subsequent adjustments are set forth below as (income)/expense:
1998 1997 1996
---- ---- ------
(IN THOUSANDS)
Atwork..................................................... $ -- $ -- $ (430)
HRI........................................................ -- -- (778)
Consort.................................................... -- -- (529)
HDS........................................................ -- (17) 4,688
---- ---- ------
$ -- $(17) $2,951
==== ==== ======
Severance Costs. In 1995, management of MPSC formalized an involuntary
severance benefit plan. The Company recorded charges of approximately $0.5
million and $0.9 million in 1997 and 1996, respectively, in accordance with
Statement of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, to reflect the expense for employees' rights to
involuntary severance benefits that have accumulated to date.
In 1998, 1997 and 1996, the Company recorded charges of $1.2 million, $2.0
million and $3.0 million, respectively, for severance costs associated with
former executive management.
F-12
41
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1998 1997
-------- --------
(IN THOUSANDS)
Land........................................................ $ 3,861 $ 2,508
Buildings................................................... 7,865 4,854
Furniture and fixtures...................................... 15,201 14,921
Equipment................................................... 95,383 75,688
Leasehold improvements...................................... 8,662 11,304
-------- --------
130,972 109,275
Less accumulated depreciation............................... 83,018 56,910
-------- --------
$ 47,954 $ 52,365
======== ========
6. INTANGIBLE ASSETS AND IMPAIRMENT CHARGE
Intangible assets consists of the following:
1998 1997
------- --------
(IN THOUSANDS)
Goodwill.................................................... $12,317 $431,745
Client lists................................................ 39,681 69,604
Software development costs.................................. 37,316 32,801
------- --------
89,314 534,150
Less accumulated amortization............................... 41,073 75,021
------- --------
$48,241 $459,129
======= ========
At September 30, 1998, the Company recorded an intangible asset impairment
charge of $390.6 million to adjust the intangible assets of the Physician
Services segment to their fair value. As previously disclosed, management
regularly monitors its results of operations and other developments within the
industry to adjust its cash flow forecast, as necessary, to determine if an
adjustment is necessary to the carrying value of the Company's intangible
assets.
During the third quarter of 1998, 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 for the Physician Services
segment was still recoverable. These events included: (i) continuing increases
in the segment's operating losses due primarily to client losses; (ii)
significant litigation 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
believed the assumptions inherent in the analysis were reasonable and
supportable. The following key assumptions were used in management's
undiscounted cash flow analysis: (i) revenue was forecasted to decline over the
next five years and then remain flat; (ii) EBITDA margin was forecasted to
continue to decrease in 1999, increase slightly over the following four years
and then stabilize at a moderate margin over the remaining life of the assets;
and (iii) capital spending would be maintained in the range of 3% of revenue.
Since the undiscounted cash flow model showed an impairment of the Company's
long-lived assets, the Company used a discounted cash flow model to measure the
fair value of these long-lived assets, which was consistent with the Company's
policy. The fair value calculation determined that the fair value of the
long-lived assets was approximately $63 million. The Company wrote-off the value
of its longest lived assets first, which resulted in the write-off of all of the
Physician Services segment's goodwill and a portion
F-13
42
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the value of its client lists. Simultaneous with the impairment charge, the
Company reduced the estimated useful life of its remaining intangible assets for
the Physician Services segment to 10 years.
Expenditures on capitalized software development costs were approximately
$4.5 million, $5.2 million and $30.5 million in 1998, 1997 and 1996,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $5.0 million, $4.5 million and $3.8 million in 1998, 1997 and
1996, respectively. The unamortized balance of software development costs at
December 31, 1998 and 1997 was $11.8 million and $12.2 million, respectively.
The Company recorded research and development expenses of approximately
$10.8 million, $4.5 million and $3.2 million in 1998, 1997 and 1996,
respectively.
7. ACCRUED EXPENSES
Accrued expenses consists of the following:
1998 1997
------- -------
(IN THOUSANDS)
Interest.................................................... $ 6,253 $ 711
Accrued restructuring and severance costs................... 3,711 6,752
Accrued legal costs......................................... 1,222 7,546
Funds due clients........................................... 753 --
Accrued costs of businesses acquired........................ 574 1,818
Deferred income taxes....................................... -- 2,392
Other....................................................... 9,848 9,835
------- -------
$22,361 $29,054
======= =======
8. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
-------- --------
(IN THOUSANDS)
9 1/2% Senior Notes due 2005 (the "Notes").................. $175,000 $ --
Borrowings under the credit facility........................ -- 185,000
Capital lease obligations, weighted average effective
interest rates of 7.7% and 8.7%........................... 135 14,746
Other....................................................... 945 945
-------- --------
176,080 200,691
Less current portion........................................ 1,067 11,432
-------- --------
$175,013 $189,259
======== ========
On February 20, 1998, the Company sold the Notes. The Notes bear interest
at the rate of 9 1/2% per annum, payable semi-annually on February 15 and August
15, which commenced on August 15, 1998 and 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.
F-14
43
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payment of principal, of premium, if any, and interest on the Notes is
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
inconsequential individually and in the aggregate to the consolidated financial
statements.
At December 31, 1998, the estimated fair value of the Notes is
approximately $140 million based on the quoted market price for these Notes.
Although the fair value of the Notes is less than the carrying amount,
settlement at the reported fair value may not be possible. The carrying amounts
of the remaining debt reflected in the consolidated balance sheets approximate
fair value of such instruments due to the variable rate nature of substantially
all of this debt.
The Company also entered into a new $100 million credit facility (the
"Credit Facility") on February 20, 1998. The Company used the proceeds from the
offering of the Notes, together with the initial borrowing under the Credit
Facility and available cash, to repay the $210 million borrowings under the
then-current debt facility plus accrued interest. The Company had the option of
making "LIBOR" based loans or "base rate" loans under the Credit Facility. LIBOR
based loans bore interest at LIBOR plus 3.0%. Base rate loans bore interest at
prime plus 1.75%. In addition, the Company paid a quarterly commitment fee on
the unused portion of the Credit Facility ranging from 0.25% to 0.75% per annum
based on the Company's leverage ratio. On November 30, 1998, the Company used
$71.5 million of the $103.2 million net proceeds received from the sale of
Hospital Services to repay and terminate the Credit Facility. The Company
recorded charges of $8.4 million, net of tax of $3.8 million, to write-off the
unamortized costs associated with both the Company's previous debt facility and
the Credit Facility.
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 1998, 1997, and 1996 were
$2.5 million, $3.0 million and $0.3 million, respectively.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1998 and 1997, the net book value of equipment subject to
capital leases totaled $0.2 million and $17.8 million, respectively.
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
1999........................................................ $ 1,067
2000........................................................ 13
2001........................................................ --
2002........................................................ --
2003........................................................ --
Thereafter.................................................. 175,000
--------
$176,080
========
F-15
44
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases, which expire at various dates through 2008. Rent expense was $15.3
million, $17.9 million and $17.6 million for the years ended December 31, 1998,
1997 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
1999........................................................ $16,364
2000........................................................ 10,784
2001........................................................ 7,775
2002........................................................ 6,331
2003........................................................ 4,597
Thereafter.................................................. 9,841
-------
$55,692
=======
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.
Settled Legal Matters
Beginning in June 1995, the United States Attorney's Office for the Central
District of California conducted 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"). 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 appropriate state or states may
elect to intervene fully or partially in qui tam litigation and proceed with the
action.
During the third quarter of 1998, the Company reached an agreement to
settle with the United States, the State of California and the Relators on all
claims related to the California Investigation and underlying qui tam
litigation. Such settlements provide for the payment by the Company of $3.6
million in the aggregate ($3.1 million of which was paid in the fourth quarter
of 1998), the dismissal of all pending proceedings against the Company and the
release of various other claims arising out of the California Investigation. As
part of these settlements, CompMed, Inc., a company acquired by the Company in
1992, pled guilty to a single criminal count.
The Company learned in March 1997 that the United States Department of
Justice and the United States Attorney in Grand Rapids, Michigan were
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 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, 1997 and 1996, GFS represented approximately 7% of Medaphis' revenue. During
those years, GFS processed approximately 6.25 million and 5.6 million claims,
respectively, approximately 2.3 million and 2 million of which, respectively,
were
F-16
45
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made to government programs. The government requested that GFS voluntarily
produce records, and GFS complied with that request.
While the Company denied the contentions of the government, the Company
determined it was in its best interest to settle such claims. Accordingly, the
Company has reached an agreement in principle with the United States to settle
the matters related to the GFS Investigation on an ability to pay basis. The
settlement, which is subject to definitive documentation, requires the Company
to pay to the United States and the various states a total of $15 million, of
which $8 million will be paid within 10 days of the execution of a definitive
settlement agreement among the parties, with the balance of $7 million being
paid in eight equal quarterly installments commencing in 1999. The deferred
portion of the settlement payment will bear interest at the one-year Treasury
Bill rate. The definitive settlement agreement will provide for the dismissal
with prejudice of claims against the Company and the release by the United
States of civil and administrative claims arising out of the emergency room
billing of government programs services provided by GFS from 1993 through the
date of the settlement agreement.
The Company recorded a litigation settlement charge of $19.5 million in the
quarter ended September 30, 1998 in connection with the settlement of the
California Investigation and the agreement in principle with respect to the GFS
Investigation.
In connection with the settlement in the third quarter of 1998 of the
California Investigation and the agreement in principle to settle the GFS
Investigation, the Company entered into a Corporate Integrity Agreement with the
Office of the Inspector General of the Department of Health and Human Services.
This Agreement, which has a term of sixty-five months, provides that the
government will not seek to exclude the Company from participation in
governmental health care programs based on the conduct alleged in the California
and GFS Investigations and requires the Company to continue its existing
compliance program, augmented by an annual third-party review and additional
reporting requirements.
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 1997, the parties entered into a Stipulation and Agreement of Settlement
(the "Stipulation") to settle the 1996 putative shareholder class action
litigation which was the subject of the Consolidated Second Amended Complaint on
a class-wide basis for $20 million in cash (paid by the Company's directors' and
officers' liability insurance carriers), 3,955,556 shares of Medaphis' voting
common stock ("Common Stock"), and warrants to purchase 5,309,523 shares of
Common Stock at $12 per share for a five-year period.
The Company recorded a $52.5 million charge in 1997 in connection with the
Stipulation. This charge was comprised of the following: (i) $30.2 million
representing the fair value of the Common Stock on the date that the material
terms of the agreement were reached 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%. In April 1998, the Company
issued both the Common Stock and warrants.
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 parties entered into
a Stipulation and Settlement Agreement
F-17
46
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dated June 26, 1998 (the "Derivative Settlement") to settle the Derivative Suit.
The Derivative Settlement provides for the enactment of procedures for
governance of the Audit Committee of the Board of Directors and for such
attorney's fees and expenses as may be awarded by the court in an amount not to
exceed $250,000. On September 29, 1998, the court granted final approval to the
settlement and ordered all claims dismissed. In November 1998, the Company's
directors' and officers' liability insurance carrier paid $250,000 to the
plaintiff pursuant to the Derivative Settlement.
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 sought unspecified
compensatory and punitive damages, as well as fees, interest and other costs. On
April 18, 1997, the Medaphis 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 federal
securities laws and common law and new parties, including former officers of
Medaphis, Medaphis' former independent accountants 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 to that effect. The plaintiffs appealed from
this order. On December 9, 1998, the New Jersey Court of Appeals ruled in favor
of the Medaphis and BSG defendants, dismissing the plaintiffs' appeal.
On February 28, 1997, Steven G. Papermaster, Raymond J. Noorda and two
entities they control (collectively, the "BSG Principals") 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 March 31, 1999. 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. In June 1998, the Company
recorded an estimated litigation settlement liability of $21.3 million
associated with the claims made on behalf of the BSG Principals. Such liability
was estimated based on a proposed settlement of approximately 3.2 million shares
of Common Stock valued at the then-current market price.
On November 9, 1998, the parties entered into a letter of intent with
respect to the settlement of the BSG Principals' claims. The terms of the letter
of intent, which vary from the basis of which the settlement liability was
estimated, provide for the payment by the Company to the BSG Principals of 4.5
million shares of Common Stock and $2.5 million in cash, to be funded by the
Company's directors' and officers' liability insurance. The settlement was
subject to definitive documentation and to the consent and approval of the
Company's insurer and its funding of the cash portion of the settlement. On
January 13, 1999, the parties entered into a definitive settlement agreement
reflecting the terms of the letter of intent (the "Settlement Agreement"). On
January 13, 1999, the parties amended the Settlement Agreement to provide for
the issuance of an additional 500,000 shares of Common Stock in lieu of the $2.5
million cash payment in the event the Company's officers' and directors'
liability insurance carrier denied coverage or otherwise refused to consent to
the settlement and fund the $2.5 million cash payment. The Company had
previously estimated this liability at $21.3 million, but, based on the issuance
of 5.0 million shares of Common Stock in the settlement and the price of the
Common Stock on the date
F-18
47
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Settlement Agreement, the Company reduced this liability in the fourth
quarter of 1998 by $5.4 million. The entire $15.9 million liability is
classified as non-current since such obligation will be settled with Common
Stock.
On August 12, 1997, George D. Stickle 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 asserted claims under federal securities laws on behalf
of all persons who purchased or otherwise acquired Common Stock between February
6, 1996 and October 21, 1996. The complaint also asserted claims 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 Common
Stock between February 6, 1996 and October 21, 1996. The complaint sought
rescission, unspecified rescissory and compensatory damages, and interest, fees
and other costs. The parties entered into a Stipulation and Agreement of
Settlement dated June 26, 1998 (the "Stickle Stipulation") to settle the Stickle
putative class action suit on a class wide basis for $137,500 in cash (to be
paid by the Company's directors' and officers' liability insurance carrier) and
61,553 shares of Common Stock. The Company recorded a litigation settlement
charge of approximately $0.4 million in the quarter ended June 30, 1998 in
connection with this agreement. On June 26, 1998, the court entered an order
substituting Peter Gladkin as lead plaintiff in lieu of George Stickle, granted
preliminary approval of the settlement and conditionally certified the class for
settlement purposes only. On September 29, 1998, the court granted final
approval to the settlement and ordered all claims dismissed. In November 1998,
the Company's directors' and officers' liability insurance carrier paid $137,500
to the plaintiff and 61,553 shares of Common Stock were issued.
A number of the former stockholders of RSSI opted out of the settlement of
the 1996 Class Action against the Company and made claims against the Company,
alleging securities fraud and other potential causes of action in connection
with the acquisition. The Company has settled with each of such former RSSI
stockholders for a total of $444,000 in cash, in the aggregate, and the
forgiveness of certain indebtedness. The Company recorded a litigation
settlement charge of $1.2 million in the quarter ended September 30, 1998 in
connection with this settlement.
Pending Legal Matters
The Company and its clients from time to time have received, and the
Company anticipates that they will receive in the future, official inquiries
(including subpoenas, search warrants, as well as informal requests) concerning
particular billing and collection practices related to certain subsidiaries of
the Company and its many clients. In addition, there can be no assurances that
the Company will not be subject to customer complaints, claims and contract
terminations.
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, which primarily impacts certain managed care
plans, 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 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.
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
F-19
48
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 federal securities laws, but the Company believes that it has
substantial defenses to the alleged damages relating to such federal securities
laws claims. The Company continues discussions with the parties in this matter
in an attempt to reach a fair settlement as expeditiously as possible. However,
there are no assurances that a settlement acceptable to the Company can be
reached or that any settlement reached will not have a material adverse effect
on the Company. The Company is unable to estimate a possible range of loss.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shaumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint was brought
on behalf of all former shareholders of MMS who exchanged their MMS holdings for
unregistered shares of Common Stock. In general, the complaint alleged common
law fraud and violations of the federal securities laws in connection with the
merger. In addition, the complaint alleged breaches of contract relating to the
merger agreement and a registration rights agreement, as well as tortious
interference with economic advantage and declaratory judgment. Defendants filed
a motion to dismiss the complaint. On September 29, 1998, the Court granted
Defendants' motion to dismiss with respect to all securities law, fraud and tort
claims. The Court gave plaintiffs twenty days to serve an amended complaint.
Plaintiffs filed their amended complaint on October 19, 1998. Plaintiffs
informed the Court, however, that while they reserve the right to appeal the
Court's order of partial dismissal, they are neither amending nor pursuing any
of the fraud or tortious interference claims that the Court dismissed in its
September 29, 1998 order. Plaintiffs filed a Revised Supplemental Amended
Complaint on November 20, 1998. On December 7, 1998, Medaphis filed its answer
and counterclaim. The Counterclaim-Defendants filed their answer on January 11,
1999. Discovery is now proceeding. The Company continues discussions with the
parties in this matter in an attempt to reach a fair settlement as expeditiously
as possible. However, there are no assurances that a settlement acceptable to
the Company can be reached or that any settlement reached will not have a
material adverse effect on the Company.
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 and the November 19, 1997 and December 23, 1997 restatements of the
Company's financial statements. The Company has cooperated with the Commission
in its investigation and will continue to do so.
On January 28, 1998, SCI Management Corporation filed a complaint against
BSG Alliance/IT, Inc. (now Impact Innovations Group, Inc.) seeking recovery for
alleged damages in connection with work performed by Impact under a consulting
contract. Impact denies any liability to SCI and has counterclaimed for unpaid
fees and expenses, interest and attorneys' fees. Pursuant to the contract, the
case is pending before the American Arbitration Association and discovery is
proceeding. The Company is unable to estimate a possible range of loss, if any.
F-20
49
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 investigation will
not have a disruptive effect upon the operations of the business, that the
written demands, the defense of the lawsuits and the pending investigation 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 investigation will not have a material adverse effect upon the
Company, including, without limitation, the Company's results of operations,
financial position and cash flow. The can be no assurance that the agreement in
principle reached with respect to the GFS Investigation will be concluded and
implemented. Failure to reach definitive agreement or otherwise not to conclude
and implement such agreement in principle could have a material adverse effect
upon the Company. Because the Company is unable to estimate a range of loss with
respect to certain of the pending claims, the Company has not accrued any
amounts for any damages, settlements, penalties or awards with respect to such
unsettled claims, except as otherwise disclosed.
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 The Nasdaq Stock
Market(R) 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 Common Stock and 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 Common Stock from 100 million to
200 million shares.
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 that 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. STOCKHOLDERS' RIGHTS PLAN
On January 21, 1999, the Company's Board of Directors approved a
stockholders' rights plan (the "Rights Plan"). Pursuant to the Rights Plan, the
Company will declare a dividend of one right for each outstanding share of
Common Stock to stockholders of record at the close of business on February 16,
1999 (the "Record Date").
F-21
50
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each right entitles the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, without par value (the "Series A Preferred
Stock"), at a purchase price of $25 per Unit, subject to adjustment.
Initially, the rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate rights certificates will
be distributed. Subject to certain exceptions specified in the Rights Plan, the
rights will separate from the Common Stock and a distribution date will occur
upon the earlier of (i) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding shares of Common
Stock other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders or the date a
person has entered into an agreement or arrangement with the Company or any
subsidiary of the Company providing for an Acquisition Transaction (the "Stock
Acquisition Date") or (ii) 10 business days following the commencement of a
tender offer.
In the event that a person becomes an Acquiring Person, except pursuant to
an offer for all outstanding shares of Common Stock which the independent
directors determine to be fair and not inadequate to and to otherwise be in the
best interests of the Company and its stockholders, after receiving advice from
one or more investment banking firms (a "Qualifying Offer"), each holder of a
right will thereafter have the right to receive, upon exercise, Common Stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a value equal to two times the exercise price of the right.
Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company or in the event of the redemption of the
rights as set forth above.
13. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies and a Non-Qualified Stock Option Plan for Non-Executive Employees.
Granted options expire 10 to 11 years after the date of grant and generally vest
over a three-to-five-year period. The total number of options available for
future grant under these stock options plans was approximately 3.3 million.
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 Director Plan provides for an initial grant of 10,000 options at
a strike price corresponding to the average of the fair market values for the
five trading days prior to the date of the grant. Additionally, each
non-employee director receives an annual grant of 2,000 options at each
subsequent annual meeting in which the non-employee director is a member of the
Board of Directors. All options granted under the Director Plan vest over a
five-year period and expire 11 years from the date of grant. As of December 31,
1998, the Company had 41,600 options available for future grant under this plan.
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.
Currently, there are 80,000 options exercisable that will expire January 16,
2001.
F-22
51
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity related to all stock option plans, excluding the Impact
Innovations Key Employee Incentive Plan (the "IIG Plan") and warrants, is
summarized as follows (shares in thousands):
1998 1997 1996
-------------------------- -------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
Options outstanding as of
January 1.................. 9,179 $6.02 11,214 $8.86 9,559 $12.27
Granted...................... 5,993 5.41 9,403 6.21 7,023 11.55
Exercised.................... (1,242) 4.64 (1,303) 4.76 (1,536) 7.95
Canceled..................... (2,761) 7.02 (10,135) 9.51 (3,832) 22.66
------- ------- -------
Options outstanding as of
December 31................ 11,169 $5.56 9,179 $6.02 11,214 $ 8.86
======= ======= =======
Options exercisable as of
December 31................ 3,833 $5.66 2,903 $5.56 3,100 $ 7.53
======= ======= =======
Weighted-average fair value
of options granted during
the year................. $ 2.51 $ 3.05 $ 6.38
The following table summarizes information about stock options outstanding
at December 31, 1998, excluding the IIG Plan options and warrants (shares in
thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED- NUMBER
NUMBER AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- ------------------------ -------------- ----------- --------- -------------- ---------
$0.10 to $2.00.................. 403 2.48 $ 1.02 398 $ 1.01
$2.61 to $4.35.................. 2,397 10.03 3.17 313 3.80
$4.59 to $7.50.................. 7,042 8.12 5.73 2,620 5.60
$8.50 to $9.875................. 1,054 8.68 9.55 355 9.52
$10.00 to $45.00................ 273 7.30 13.23 147 13.96
------ -----
$0.10 to $45.00................. 11,169 8.36 5.56 3,833 5.66
====== =====
On October 25, 1996, the Company changed the exercise price to $9.875 on
approximately 2.1 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 had an exercise price of $5.50 and above. The
revised exercise price of $5.375 was established by reference to the closing
price of the Company's Common Stock on April 25, 1997. The outstanding options
held by current executive officers of the Company were adjusted as part of such
option restrike, but no adjustments were made to any options held by directors
or former employees of the Company. In approving the adjustment, the
Compensation Committee relied upon the views of its outside advisors with
respect to the legal, accounting and compensation issues associated with the
action and took into consideration, among other things, the following factors:
(i) the Company historically had paid salaries which were at or below market
levels and had made up for lower salaries through stock option grants to
employees; (ii) the Company historically had used stock options as its principal
long-term incentive program; (iii) the highly skilled employees of the Company
possessed marketable skills; and (iv) senior management of the Company believed
that there was potential for increased attrition among its key employees and
that adjustment of the exercise price of the outstanding options would
significantly help to mitigate such risk.
F-23
52
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 28, 1998, the Company adopted the IIG Plan, a non-qualified stock
option plan for Impact employees. The plan's purpose is to provide eligible
employees with opportunities to share in the value, to assist in attracting and
retaining outstanding personnel, to align the interests of Impact employees with
Medaphis and its stockholders, and to provide incentives and rewards to
employees for performances required to complete a change of control event
involving Impact. The IIG Plan has 1,500,000 shares of Impact stock reserved for
issuance or approximately 15% of the total capitalization of Impact. The strike
price of the options under the IIG Plan is determined by the fair market value
("FMV") of Impact on the date of grant. IIG Plan options vest on the third
anniversary of the grant date and expire on the 10th anniversary of the grant
date. In the event of a change of control, all options outstanding under the IIG
Plan become fully vested and immediately exercisable. If a change of control
does not take place by the third anniversary of the grant date, any options
outstanding will be converted into options under the Medaphis Corporation
Non-Qualified Stock Option Plan for Non-Executive Employees at a fixed exchange
ratio and shall have an exercise price equal to the FMV of Common Stock as of
the original date of grant.
Activity related to the IIG Plan is summarized as follows (in thousands):
1998
-------------------------
IMPACT WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ ----------------
Options outstanding as of January 1......................... -- --
Granted..................................................... 1,168 $5.00
Exercised................................................... -- --
Canceled.................................................... (185) 5.00
-----
Options outstanding as of December 31....................... 983 $5.00
=====
Options exercisable as of December 31....................... --
Weighted-average fair value of options granted during the
year...................................................... $1.64
As of December 31, 1998, the Impact options outstanding are equivalent to
328,000 shares of Common Stock with a weighted average exercise price of $5.23.
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 to employees with an exercise price equal to the quoted market
price of the 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:
1998 1997 1996
----- ----- -----
Expected life (years)..................................... 3.74 4.33 4.88
Risk-free interest rate................................... 5.09% 6.39% 6.25%
Dividend rate............................................. 0.00% 0.00% 0.00%
Expected volatility....................................... 61.66% 54.09% 46.88%
During 1998, in connection with the settlement of a putative class action
law suit, the Company issued warrants to purchase 5,309,523 shares of Common
Stock. These warrants are currently exercisable at an exercise price of $12.00
per share and will expire in 2003.
F-24
53
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:
1998 1997 1996
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma net loss:
As reported................................... $(560,214) $(19,303) $(136,358)
Pro forma -- for SFAS No. 123................. $(573,791) $(34,374) $(143,121)
Pro forma basic net loss per share:
As reported................................... $ (7.27) $ (0.26) $ (1.91)
Pro forma -- for SFAS No. 123................. $ (7.45) $ (0.47) $ (2.01)
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.
14. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
Current:
Federal................................................... $ -- $ 943 $ 635
State..................................................... 1,234 6,092 2,533
Deferred:
Federal................................................... (127,783) 10,629 (69,068)
State..................................................... (17,524) 1,620 (9,338)
Foreign................................................... -- 380 146
Valuation allowance......................................... 203,772 8,126 24
--------- -------- --------
Total income tax expense (benefit).......................... 59,699 27,790 (75,068)
Income tax benefit (expense) on extraordinary item.......... 3,779 (46,192) --
Cumulative effect of accounting change...................... -- 1,629 --
Income tax (expense) benefit on discontinued operations,
including sale of Hospital Services....................... (5,013) 205 24,306
Pro forma tax adjustments................................... -- -- 979
--------- -------- --------
Income tax expense (benefit) on continuing operations....... $ 58,465 $(16,568) $(49,783)
========= ======== ========
In 1996, the Company acquired IVC, Rapid Systems, and BSG in merger
transactions accounted for as pooling-of-interests. Prior to the mergers, IVC,
Rapid Systems, and a company acquired by BSG prior to the BSG Merger had elected
"S" corporation status for income tax purposes. As a result of 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 operation as if each of these entities had been a "C"
corporation during the periods presented.
F-25
54
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:
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
Income tax benefit at federal statutory rate................ $(175,172) $(38,182) $(52,299)
State taxes, net of federal benefit......................... (24,024) (5,236) (7,322)
Nondeductible goodwill amortization......................... 2,927 3,241 2,666
Nondeductible deal costs of business combinations........... -- (38) 3,529
Nondeductible litigation settlement......................... 6,900 13,097 --
Nondeductible write-off of goodwill......................... 43,558 -- --
Valuation allowance......................................... 203,772 8,126 24
Foreign..................................................... -- 541 146
Other....................................................... 504 1,883 3,473
--------- -------- --------
$ 58,465 $(16,568) $(49,783)
========= ======== ========
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 at December 31, 1998 and 1997
are as follows:
1998 1997
--------- --------
(IN THOUSANDS)
CURRENT:
Accounts receivable, unbilled............................... $ (27,095) $(25,954)
Acquisition accruals........................................ 461 522
Accrued expenses............................................ 38,978 20,695
Valuation allowance......................................... (24,279) --
Other....................................................... 11,935 2,345
--------- --------
$ -- $ (2,392)
========= ========
NONCURRENT:
Net operating loss carryforwards............................ $ 126,093 $108,278
Valuation allowance......................................... (205,953) (26,460)
Depreciation and amortization............................... 77,847 (21,010)
Other....................................................... 2,013 49
--------- --------
$ -- $ 60,857
========= ========
At December 31, 1998, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $317 million,
which consist of $249 million of consolidated NOLs and $68 million of separate
return limitation year NOLs. The NOLs will expire at various dates between 2004
and 2018. 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 experienced ownership changes as defined under Section 382 of the
Internal Revenue Code in 1987, 1991 and 1994. As a result of the ownership
changes, NOLs, which were incurred prior to the date of the change, are subject
to annual limitations on their future use. However, such ownership changes do
not have a meaningful effect on the future use of the consolidated NOLs.
As of December 31, 1998, the Company has a deferred tax asset of $230.2
million, which is offset by a valuation allowance of $230.2 million. Realization
of the deferred tax asset is dependent upon the Company generating sufficient
taxable income prior to the expiration of the NOLs. Based on recent events and
the current operating forecasts, the Company does not believe it is more likely
than not that the deferred tax asset will be realized. Therefore, the Company
recorded a full valuation allowance against the net deferred tax asset. If,
during
F-26
55
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future periods, management believes the Company will generate sufficient taxable
income to realize the deferred tax asset, the Company will adjust this valuation
reserve accordingly.
15. 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 $1.7 million, $1.9 million and $1.9 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company maintains a noncontributory money purchase pension plan that
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 were $0.7 million, $0.9 million
and $1.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
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 lesser
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 1,000,000 of which 404,670 shares remain
available for sale in 1999 and subsequent years. Stockholder approval is
required to increase the number of shares reserved for sale under the ESPP.
16. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
1998 1997 1996
------ ------ -------
(IN THOUSANDS)
Non-cash investing and financing activities:
Liabilities assumed in acquisitions....................... $ -- $ -- $ 2,888
Additions to capital lease obligations.................... 42 -- 15,705
Common Stock issued upon funding of litigation
settlements............................................ 53,557 -- --
Conversion of subordinated debentures..................... -- -- 63,375
Cash paid for:
Interest (net of amounts capitalized of $4,092 for
1996).................................................. 15,371 19,835 14,762
Income taxes.............................................. 1,484 10,747 7,314
17. SEGMENT REPORTING
The Company's reportable segments are strategic business units that offer
different products and services. Medaphis provides its services and products
through its Physician Services and Per-Se segments. The Physician Services
segment provides business management services and claims processing to
hospital-based physicians including the collection of clinical data, data input,
medical coding, billing, cash collections and accounts receivable management.
Per-Se provides application software and electronic commerce solutions to
healthcare providers. The Per-Se segment includes the results of the newly
formed electronic commerce group, for all periods presented. Some parts of this
group had previously been included in the Physician and Hospital Services
segments. HRI provided subrogation and related recovery services primarily to
healthcare payors and was sold on May 28, 1997.
Medaphis evaluates each segment's performance based on operating profit or
loss. The Company also accounts for intersegment sales as if the sales were to
third parties.
F-27
56
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information concerning the operations in these reportable segments is as
follows:
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
Revenue:
Physician Services................................. $ 264,323 $ 278,475 $ 297,737
Per-Se............................................. 85,565 99,281 72,215
HRI................................................ -- 14,720 31,419
Eliminations....................................... (65) (56) (920)
--------- --------- ---------
$ 349,823 $ 392,420 $ 400,451
========= ========= =========
Operating profit (loss)(1):
Physician Services................................. $ (5,846) $ (4,582) $ (12,715)
Per-Se............................................. (7,240) 20,310 13,454
HRI................................................ -- 3,685 8,502
Corporate.......................................... (32,093) (35,865) (27,649)
--------- --------- ---------
$ (45,179) $ (16,452) $ (18,408)
========= ========= =========
Interest expense, net................................ $ 23,494 $ 23,398 $ 11,585
========= ========= =========
Restructuring and other charges (including intangible
asset impairment and litigation settlements):
Physician Services................................. $ 411,139 $ 7,394 $ 98,951
Per-Se............................................. 1,245 1,006 4,024
HRI................................................ -- -- (778)
Corporate.......................................... 19,435 60,841 17,237
--------- --------- ---------
$ 431,819 $ 69,241 $ 119,434
========= ========= =========
Loss before income taxes............................. $(500,492) $(109,091) $(149,427)
========= ========= =========
Depreciation and amortization:
Physician Services................................. $ 28,340 $ 34,360 $ 32,284
Per-Se............................................. 9,254 6,888 6,494
HRI................................................ -- 401 883
Corporate.......................................... 4,331 1,901 1,987
--------- --------- ---------
$ 41,925 $ 43,550 $ 41,648
========= ========= =========
Capital expenditures:
Physician Services................................. $ 15,836 $ 5,646 $ 23,106
Per-Se............................................. 5,163 2,786 3,854
HRI................................................ -- 108 1,448
Corporate.......................................... 2,790 2,455 2,903
--------- --------- ---------
$ 23,789 $ 10,995 $ 31,311
========= ========= =========
1998 1997
-------- --------
(IN THOUSANDS)
Identifiable Assets:
Physician Services........................................ $134,485 $563,884
Per-Se.................................................... 65,320 75,964
Corporate(2).............................................. 86,916 207,297
-------- --------
$286,721 $847,145
======== ========
- ---------------
(1) Excludes restructuring and other charges, litigation settlements, intangible
asset impairment and interest expense.
(2) Includes net assets of $11,872 and $108,158, respectively, related to the
discontinued operations.
F-28
57
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998(1)(2)
Revenue..................................... $ 95,347 $ 89,330 $ 81,980 $ 83,166
Net loss from continuing operations......... (6,645) (31,886) (513,158)(3) (7,268)
Discontinued operations..................... 1,494 2,071 (2,847) 6,425(4)
Extraordinary items......................... (5,557) -- -- (2,843)
Net loss.................................... (10,708) (29,815) (516,005) (3,686)
Net loss per common share from continuing
operations................................ (0.09) (0.41) (6.52) (0.09)
Discontinued operations per common share.... 0.02 0.02 (0.04) 0.08
Extraordinary item per common share......... (0.08) -- -- (0.04)
Net loss per common share................... $ (0.15) $ (0.39) $ (6.56) $ (0.05)
Weighted average shares outstanding....... 73,479 77,136 78,655 78,727
1997(5)
Revenue..................................... $101,473 $104,130 $ 83,863 $102,954
Net loss from continuing operations......... (4,686) (3,216) (78,031)(6) (6,590)
Discontinued operations..................... 1,621 1,955 (3,178) (1,104)
Extraordinary item.......................... -- 76,391 -- --
Cumulative effect of accounting change...... -- -- -- (2,465)
Net loss.................................... (3,065) 75,130 (81,209) (10,159)
Net loss per common share from continuing
operations................................ (0.06) (0.04) (1.07) (0.09)
Discontinued operations per common share.... 0.02 0.03 (0.04) (0.02)
Extraordinary item per common share......... -- 1.05 -- --
Cumulative effect of accounting change per
common share.............................. -- -- -- (0.03)
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 March 31, 1998, June 30, 1998, September 30,
1998 and December 31, 1998 included the impact of $0.6 million, $1.0
million, $1.8 million and $1.8 million, respectively, of restructuring and
other charges. See Note 4 for a detailed explanation of these charges.
(2) The quarterly periods ended June 30, 1998, September 30, 1998 and December
31, 1998 also included the impact of $21.9 million, $19.5 million and $(5.4)
million, respectively, of charges for litigation settlements (see Note 10).
(3) The quarterly period ended September 30, 1998 also included the impact of a
$390.6 million intangible asset impairment charge (see Note 6).
(4) The quarterly period ended December 31, 1998 also included the gain on the
sale of Hospital Services of $7.2 million, net of tax (see Note 2).
(5) The quarterly periods ended June 30, 1997, September 30, 1997 and December
31, 1997 included the impact of $2.8 million, $11.4 million and $2.5
million, respectively, of restructuring and other charges. See Note 4 for a
detailed explanation of these charges.
(6) 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-29
58
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Medaphis Corporation:
Our audits of the consolidated financial statements referred to in our
report dated February 10, 1999 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.
PricewaterhouseCoopers LLP
Atlanta, Georgia
February 10, 1999
F-30
59
MEDAPHIS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1998
Allowance for doubtful accounts............. $10,746 $ 14,269 -- $(4,292) $ 20,723
Valuation allowance for deferred taxes...... 26,460 203,772 -- -- 230,232
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts............. $ 8,146 $ 6,459 $43 $(3,902) $ 10,746
Valuation allowance for deferred taxes...... 18,334 8,126 -- -- 26,460
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts............. $ 3,449 $ 5,930 $72 $(1,305) $ 8,146
Valuation allowance for deferred............ 18,310 24 -- -- 18,334
F-31