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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission file number 000-19480
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MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
SHARES OUTSTANDING
TITLE OF CLASS AT AUGUST 6, 1999
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Common Stock $0.01 par value................................ 84,723,930 shares
Non-voting Common Stock $0.01 par value..................... 0 shares
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MEDAPHIS CORPORATION
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 1999
PAGE
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements.............................. 1
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998...................................... 1
Consolidated Statements of Operations for the three and
six months ended June 30, 1999 and 1998................ 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998........................... 3
Notes to Consolidated Financial Statements................ 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 11
Part II: OTHER INFORMATION
Item 1: Legal Proceedings................................. 18
Item 4: Submission of Matters to a Vote of Security
Holders................................................ 18
Item 6: Exhibits and Reports on Form 8-K.................. 18
Index to Exhibits......................................... 21
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THIS FORM 10-Q AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
MEDAPHIS CORPORATION OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT
OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z-2 AND
78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT,
BELIEF OR CURRENT EXPECTATIONS OF MEDAPHIS CORPORATION AND MEMBERS OF ITS
MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING
STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-
LOOKING STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-Q, AND ARE HEREBY
INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE
OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER
TIME.
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PART I:
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
Current Assets:
Cash and cash equivalents................................. $ 45,237 $ 54,409
Restricted cash........................................... 5,631 5,754
Accounts receivable, billed............................... 51,213 54,800
Accounts receivable, unbilled............................. 43,290 46,757
Other..................................................... 7,526 8,022
--------- ---------
Total current assets.............................. 152,897 169,742
Property and equipment, net................................. 40,347 47,954
Intangible assets........................................... 47,337 48,241
Net assets of discontinued operations....................... 8,316 11,872
Other....................................................... 5,768 8,912
--------- ---------
$ 254,665 $ 286,721
========= =========
Current Liabilities:
Accounts payable.......................................... $ 8,521 $ 8,550
Accrued compensation...................................... 18,614 21,234
Accrued expenses.......................................... 24,023 22,361
Accrued litigation settlements............................ 6,107 12,026
Current portion of long-term debt......................... 1,014 1,067
Deferred revenue.......................................... 20,116 18,289
--------- ---------
Total current liabilities......................... 78,395 83,527
Long-term debt.............................................. 175,000 175,013
Accrued litigation settlements.............................. 28,135 20,250
Other obligations........................................... 3,649 5,608
--------- ---------
Total liabilities................................. 285,179 284,398
--------- ---------
Stockholders' Equity:
Preferred stock, no par value, 20,000 authorized; none
issued................................................. -- --
Common stock, voting, $0.01 par value, 200,000 authorized;
84,045 and 78,745 issued and outstanding in 1999 and
1998, respectively..................................... 840 787
Common stock, non-voting, $0.01 par value, 600 authorized;
none issued............................................ -- --
Paid-in capital........................................... 756,507 740,014
Accumulated deficit....................................... (787,861) (738,390)
--------- ---------
(30,514) 2,411
Less treasury stock, at cost -- 15 shares in 1998........... -- 88
--------- ---------
Total stockholders' (deficit) equity.............. (30,514) 2,323
--------- ---------
$ 254,665 $ 286,721
========= =========
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue................................................. $ 82,357 $ 89,329 $163,730 $184,678
-------- -------- -------- --------
Salaries and wages...................................... 53,769 56,631 106,923 113,415
Other operating expenses................................ 27,541 25,743 57,898 56,615
Depreciation............................................ 5,654 5,657 12,440 11,818
Amortization............................................ 2,248 5,369 4,515 10,698
Interest expense, net................................... 3,879 5,849 7,783 12,223
Legal settlements....................................... 29,250 21,875 29,250 21,875
Restructuring and other charges......................... -- 1,046 -- 1,607
-------- -------- -------- --------
Total expenses................................ 122,341 122,170 218,809 228,251
-------- -------- -------- --------
Loss before income taxes................................ (39,984) (32,841) (55,079) (43,573)
Income tax benefit...................................... -- (955) (525) (5,039)
-------- -------- -------- --------
Loss from continuing operations......................... (39,984) (31,886) (54,554) (38,534)
-------- -------- -------- --------
Discontinued operations, net of tax:
Income from discontinued operations................... 357 2,070 661 3,568
Gain on sale of subsidiaries.......................... 4,017 -- 4,487 --
-------- -------- -------- --------
4,374 2,070 5,148 3,568
-------- -------- -------- --------
Loss before extraordinary item.......................... (35,610) (29,816) (49,406) (34,966)
Extraordinary item, net of tax.......................... -- -- -- (5,557)
-------- -------- -------- --------
Net loss...................................... $(35,610) $(29,816) $(49,406) $(40,523)
======== ======== ======== ========
Basic net (loss) income per common share:
Loss from continuing operations....................... $ (0.48) $ (0.41) $ (0.67) $ (0.51)
Income from discontinued operations, net of tax....... 0.05 0.02 0.06 0.04
Extraordinary item, net of tax........................ -- -- -- (0.07)
-------- -------- -------- --------
Net loss.............................................. $ (0.43) $ (0.39) $ (0.61) $ (0.54)
======== ======== ======== ========
Weighted average shares outstanding..................... 83,325 77,136 81,138 75,318
======== ======== ======== ========
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(49,406) $(40,523)
Adjustments to reconcile net loss to net cash used for
operating activities:
Income from discontinued operations....................... (661) (3,568)
Depreciation and amortization............................. 16,955 22,516
Gain on sale of subsidiaries.............................. (4,814) --
Early extinguishment of debt.............................. -- 9,231
Non-cash legal settlement costs........................... 25,738 --
Deferred income taxes..................................... -- (7,079)
Changes in assets and liabilities, excluding effects of
acquisitions and divestitures:
Restricted cash......................................... 341 (11)
Accounts receivable, billed............................. 3,587 (4,930)
Accounts receivable, unbilled........................... 3,467 2,047
Accounts payable........................................ (29) (1,045)
Accrued compensation.................................... (2,620) (6,391)
Accrued expenses........................................ (671) (4,705)
Accrued litigation settlements.......................... (7,219) 21,875
Deferred revenue........................................ 1,827 (195)
Other, net.............................................. 1,015 838
-------- --------
Net cash used for continuing operations................. (12,490) (11,940)
Net cash used for discontinued operations............... (4,617) (657)
-------- --------
Net cash used for operating activities............. (17,107) (12,597)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (4,541) (16,797)
Software development costs.................................. (3,609) (2,165)
Proceeds from sale of subsidiaries, net..................... 12,934 --
Proceeds from sale of property and equipment................ 2,738 720
Other....................................................... -- (374)
-------- --------
Net cash provided by (used for) investing
activities........................................ 7,522 (18,616)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock............................. 503 756
Proceeds from the exercise of stock options................. 181 5,074
Proceeds from borrowings.................................... -- 294,310
Payments of debt............................................ (66) (270,678)
Debt issuance costs......................................... (205) (11,968)
-------- --------
Net cash provided by financing activities.......... 413 17,494
-------- --------
CASH AND CASH EQUIVALENTS:
Net change.................................................. (9,172) (13,719)
Balance at beginning of period.............................. 54,409 14,728
-------- --------
Balance at end of period.................................... $ 45,237 $ 1,009
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest.................................................. $ 8,391 $ 5,110
Income taxes.............................................. 940 1,282
Non-cash investing and financing activities:
Issuance of Common Stock upon funding of litigation
settlement.............................................. 15,875 52,500
Additions to capital lease obligations.................... -- 42
See notes to consolidated financial statements.
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Medaphis Corporation ("Medaphis" or the "Company") are presented in accordance
with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. For further
information, the reader of this Form 10-Q may wish to refer to the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K filed
March 19, 1999.
The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
As more thoroughly discussed in Note 2, the Medaphis Services Corporation
("Hospital Services") and Impact Innovations Group ("Impact") segments have been
presented as discontinued operations for all periods presented.
NOTE 2 -- DISCONTINUED OPERATIONS
On November 30, 1998, the Company completed the sale of Hospital Services
to NCO Group, Inc. ("NCO") for initial consideration of $107.5 million. During
the first quarter of 1999, the Company received additional consideration of $0.8
million based on Hospital Services' final closing balance sheet and payment on
certain Hospital Services accounts receivable retained by Medaphis. The
additional consideration resulted in the recognition of an additional gain of
$0.5 million, net of tax of $0.3 million. Also, Medaphis could receive a
purchase price adjustment of up to $10.0 million subject to Hospital Services'
achievement of various operational targets in 1999.
After reviewing several alternatives for Impact throughout 1998, management
concluded that a sale of this segment (comprised of two divisions: commercial
and government) would generate the greatest return to the stockholders and
finalized its plan to sell Impact. The Company sold the commercial division of
Impact to Complete Business Solutions, Inc. ("CBSI") effective April 15, 1999
for $14.4 million, net of the final closing balance sheet adjustment of $0.6
million which was paid on July 16, 1999. Management expects to complete the sale
of the government division before the end of 1999.
Pursuant to Accounting Principles Board Opinion 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" ("APB No. 30"), 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 "Income 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 used for discontinued
operations."
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Summarized financial information for the discontinued operations is as
follows (the 1999 results for Impact include the commercial division through
April 15, 1999 -- the effective date of the sale):
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
Revenue............................................. $12,555 $26,832 $20,270 $47,102
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 357 2,330 695 3,025
Income tax expense.................................. -- 955 -- 955
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 357 $ 1,375 $ 695 $ 2,070
======= ======= ======= =======
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
Revenue............................................. $33,177 $51,956 $42,704 $94,660
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 661 3,946 1,256 5,202
Income tax expense.................................. -- 1,634 -- 1,634
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 661 $ 2,312 $ 1,256 $ 3,568
======= ======= ======= =======
AS OF JUNE 30, AS OF DECEMBER 31,
1999 1998
-------------- ------------------
IMPACT IMPACT
-------------- ------------------
(IN THOUSANDS)
Current assets............................................. $ 9,883 $16,399
Total assets............................................... 11,375 21,829
Current liabilities........................................ 3,059 9,787
Total liabilities.......................................... 3,059 9,957
Net assets of discontinued operations...................... 8,316 11,872
NOTE 3 -- LEGAL MATTERS
Numerous federal and state civil and criminal laws govern medical billing
and collection activities. In general, these laws provide for various fines,
penalties, multiple damages, assessments and sanctions for violations, including
possible exclusion from Medicare, Medicaid and certain other federal and state
healthcare programs. The 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, the
Company is involved in legal proceedings and litigation arising in the ordinary
course of business and there can be no assurances that the Company will not be
subject to future customer complaints, claims and contract terminations,
employment claims or other litigation or that any such litigation will not have
a material adverse effect upon the Company or its operations.
SETTLED LEGAL MATTERS
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"). While the
Company denies
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
the contentions of the government, the Company determined it was in its best
interest to settle such claims. Accordingly, in September 1998, the Company
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,
finalized on June 21, 1999, requires the Company to pay to the United States and
the various states a total of $15.0 million. The Company paid $6.8 million to
the United States on June 29, 1999, with the balance of $8.2 million to be paid
as follows: $2.2 million, in the aggregate, to the participating states upon
execution of settlement agreements with all of the participating states, $1.2
million to the United States on each of September 30, 1999 and December 31, 1999
and $0.9 million to the United States at the end of each calendar quarter of
2000. The deferred portion of the settlement payment will bear interest at the
one-year Treasury Bill rate, 4.73% at June 30, 1999. All pending claims against
the Company by the United States and the Relator in underlying qui tam
litigation have been dismissed with prejudice and the United States has released
the Company from all 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 with the United States. The
settlement agreements with the participating states will provide for the release
of the Company by the states of all civil and administrative claims arising out
of the emergency room billing services provided by GFS from 1993 through the
date of the settlement agreement with the individual state.
In connection with the settlement in the third quarter of 1998 of an
investigation in California (the "California Investigation") and the then
pending settlement of 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 on September 2, 1998. 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.
On June 16, 1999, the Company agreed to settle certain contract claims
arising out of a 1996 contract for emergency room billing services to be
provided by Medaphis Emergency Medicine Physician Services to Spectrum
Healthcare, Inc. and Emcare, Inc., the successor to Spectrum's emergency
business. The Company paid Emcare $1.75 million in cash in exchange for a
release by Spectrum and Emcare of all claims against Medaphis Emergency Medicine
Physician Services for breach of contract.
On April 21, 1997, James F. Thacker, Alyson T. Stinson, Carol T. Shumaker,
Lori T. Caudill, William J. Dezonia, the James F. Thacker Retained Annuity Trust
and the Paulanne H. Thacker Retained Annuity Trust filed a complaint against the
Company and Randolph G. Brown in the United States District Court for the
Southern District of New York arising out of Medaphis' acquisition of Medical
Management Sciences, Inc. ("MMS") in December of 1995. The complaint was brought
on behalf of all former shareholders of MMS (the "MMS Shareholders") 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. The parties entered into a
settlement agreement on June 24, 1999 and the litigation has been dismissed with
prejudice. The settlement agreement provides for the issuance by the Company to
the MMS Shareholders of 500,000 shares of Common Stock and warrants to purchase
an additional 500,000 shares of Common Stock. In addition, the Company entered
into a five-year consulting agreement with Providence Management Corporation, a
company controlled by James F. Thacker, providing for a $300,000 up front
payment and $150,000 a year for the five-year term. The Company also paid the
MMS Shareholders $375,000 for the MMS Shareholders' interest in a malpractice
claim.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown, and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things, making material misstatements and omissions in public
and private disclosures in connection with the acquisition of Health Data
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MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Sciences Corporation ("HDS") in June of 1996. The Company and Foundation Health
Services, Inc. ("Foundation"), formerly Health Systems International, Inc., have
reached an agreement in principle to settle this litigation. The agreement
provides for the dismissal with prejudice of the pending litigation and mutual
releases by the parties. The settlement allows Foundation to realize $25.0
million from its investment in HDS, consisting of the value of 976,771 shares of
Medaphis Common Stock received by Foundation in the HDS transaction and still
owned by Foundation, $4.5 million in cash to be funded by the Company's insurers
and the balance in Medaphis Common Stock to be issued to Foundation, currently
estimated at 5,000,000 shares, subject to adjustment based on market value. The
settlement is contingent upon definitive documentation, funding by the Company's
insurers and issuance, registration and sale of the shares to be issued to
Foundation.
PENDING LEGAL MATTERS
A putative class action complaint was filed by Ernest Hecht and Stephen D.
Strandberg against Steven G. Papermaster, Robert E. Pickering, Jr., David S.
Lundeen, Norman Smith, Raymond J. Noorda, Gregory A. Grosh, Medaphis and
Randolph G. Brown on November 12, 1996 in the Superior Court, Law Division,
Essex County, State of New Jersey. The alleged class consists of persons and
entities whose options to purchase BSG Corporation ("BSG") common stock were
converted to options to purchase Medaphis Common Stock in connection with
Medaphis' acquisition of BSG. The plaintiffs initially alleged 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
granted defendants' motions, dismissing all of plaintiffs' claims with
prejudice. On May 15, 1998, the Court entered an order to that effect. The
plaintiffs appealed from this order. On December 9, 1998, the New Jersey Court
of Appeals dismissed the plaintiffs' appeal because the plaintiffs' appellate
brief was filed untimely. On May 10, 1999, the Appellate Court reinstated the
appeal. The appeal is currently pending. The Company is unable to estimate a
range of loss, if any, related to this matter.
In September 1996, Medaphis Physician Services Corporation ("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 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
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10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
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. (later known as 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 counter claimed
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 sold Impact Innovations Group, Inc.
effective April 15, 1999 but remains responsible for this litigation. The
Company is unable to estimate a possible range of loss, if any.
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
lawsuits, written demands and the pending governmental investigation will not
have a disruptive effect upon the operations of the business, that written
demands, the defense of lawsuits and the pending investigation will not consume
the time and attention of the senior management of the Company, or that the
resolution of lawsuits, 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. There can be no assurance that the agreement in
principle reached with respect to the Foundation litigation 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.
NOTE 4 -- RESTRUCTURING AND OTHER CHARGES
The description of the type and amount of restructuring costs recorded and
applied against each reserve in the six months ended June 30, 1999 is as
follows:
RESERVE RESERVE
BALANCE COSTS APPLIED BALANCE
DECEMBER 31, 1998 AGAINST RESERVE JUNE 30, 1999
----------------- --------------- -------------
(IN THOUSANDS)
Lease termination costs........................ $4,292 $ (364) $3,928
Severance...................................... 1,148 (719) 429
------ ------- ------
$5,440 $(1,083) $4,357
====== ======= ======
During the three and six months ended June 30, 1998, the Company recorded
approximately $0.2 million of restructuring costs for the reorganization of
several corporate and operating division departments.
In June 1998, management analyzed the adequacy of its legal matters
reserves and recorded a net increase of $0.7 million for the legal and
administrative fees, costs and expenses associated with various legal matters.
The Company recorded charges of $0.2 million and $0.7 million in the three
and six months ended June 30, 1998, respectively, for severance costs associated
with former executive management.
NOTE 5 -- LONG TERM DEBT
Under the indenture governing the 9 1/2% $175 million of Senior Notes due
2005 (the "Notes"), the balance of the excess sale proceeds, as defined, from
the sale of Hospital Services, the commercial division of Impact or from the
sale of any other asset having a fair value in excess of $1.0 million, 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
8
11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
required to offer to repurchase the Notes at par with such proceeds. Currently,
it is management's intention to invest the excess proceeds from the November
1998 sale of Hospital Services and the April 1999 sale of the commercial
division of Impact in the Company.
NOTE 6 -- INCOME TAXES
Based on recent events and the current operating forecast, the Company does
not believe it is more likely than not that net operating losses (NOLs) will be
realized; therefore a tax benefit has not been recognized related to the NOLs
during the three and six months ended June 30, 1999.
During the first quarter of 1998, the Company recorded a tax benefit
related to NOLs which was subsequently reserved for in the quarter ended
September 30, 1998.
NOTE 7 -- STOCKHOLDERS' EQUITY
On April 14, 1999, the Company issued 5,000,000 shares of Common Stock in
accordance with the January 13, 1999 settlement agreement of a previously
resolved legal matter. As a result of the issuance of the shares, non-current
accrued litigation settlements was reduced by $15.9 million with a corresponding
increase in stockholders' equity in the second quarter of 1999.
On July 13, 1999, the Company issued 500,000 shares of Common Stock and is
required to issue warrants to purchase an additional 500,000 shares of Common
Stock in accordance with the June 24, 1999 settlement of the legal matter
related to Medaphis' acquisition of MMS. Upon of the issuance of the shares and
the warrants, non-current accrued litigation settlements will be reduced by $4.0
million with a corresponding increase in stockholders' equity in the third
quarter of 1999.
In July 1999, the Company reached an agreement in principle to settle its
legal dispute with Foundation resulting from the Company's acquisition of HDS in
1996. The settlement allows Foundation to realize $25.0 million from its
investment in HDS, consisting of the value of 976,771 shares of Medaphis Common
Stock received by Foundation in the HDS transaction and still owned by
Foundation, $4.5 million in cash to be funded by the Company's insurers and the
balance in Medaphis Common Stock to be issued to Foundation, currently estimated
at 5,000,000 shares, subject to adjustment based on market value. Upon the
issuance of the shares, non-current accrued litigation settlements will be
reduced and stockholders' equity will be increased based on the market value of
the Company's Common Stock.
NOTE 8 -- 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 Per-Se Technologies ("Per-Se") and Medaphis Physician Services
("Physician Services") segments. Per-Se provides application software and
electronic commerce solutions to healthcare providers. The Per-Se segment
includes the results of the electronic commerce group for all periods presented.
Some parts of this group had previously been included in the Physician Services
and Hospital Services 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. Also, certain expenses
previously included in Corporate overhead have been reclassified to Per-Se and
Physician Services for all periods presented.
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.
9
12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Information concerning the operations in these reportable segments is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
Revenue:
Per-Se........................................ $ 23,788 $ 22,999 $ 46,561 $ 50,659
Physician Services............................ 61,462 69,152 122,919 139,702
Eliminations.................................. (2,893) (2,822) (5,750) (5,683)
-------- -------- -------- --------
$ 82,357 $ 89,329 $163,730 $184,678
======== ======== ======== ========
Operating profit (loss) (1):
Per-Se........................................ $ (271) $ (531) $ (2,946) $ 1,476
Physician Services............................ (1,667) 951 (4,506) 1,242
Corporate..................................... (4,917) (4,491) (10,594) (10,586)
-------- -------- -------- --------
$ (6,855) $ (4,071) $(18,046) $ (7,868)
======== ======== ======== ========
Interest expense, net........................... $ 3,879 $ 5,849 $ 7,783 $ 12,223
======== ======== ======== ========
Restructuring and other charges (including legal
settlements):
Per-Se........................................ $ -- $ 162 $ -- $ 162
Physician Services............................ 1,750 -- 1,750 --
Corporate..................................... 27,500 22,759 27,500 23,320
-------- -------- -------- --------
$ 29,250 $ 22,921 $ 29,250 $ 23,482
======== ======== ======== ========
Loss before income taxes........................ $(39,984) $(32,841) $(55,079) $(43,573)
======== ======== ======== ========
Depreciation and amortization:
Per-Se........................................ $ 2,343 $ 2,274 $ 4,671 $ 4,596
Physician Services............................ 4,561 7,826 9,114 16,147
Corporate..................................... 998 926 3,170 1,773
-------- -------- -------- --------
$ 7,902 $ 11,026 $ 16,955 $ 22,516
======== ======== ======== ========
Capital expenditures:
Per-Se........................................ $ 448 $ 873 $ 928 $ 2,788
Physician Services............................ 1,899 804 3,141 12,059
Corporate..................................... 79 1,135 472 1,950
-------- -------- -------- --------
$ 2,426 $ 2,812 $ 4,541 $ 16,797
======== ======== ======== ========
AS OF
-----------------------
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
Identifiable Assets:
Per-Se.................................................... $ 60,589 $ 65,320
Physician Services........................................ 124,419 134,485
Corporate (2)............................................. 69,657 86,916
-------- --------
$254,665 $286,721
======== ========
- ---------------
(1) Excludes restructuring and other charges, legal settlements and interest
expense.
(2) Includes net assets of $8,316 and $11,872, respectively, related to the
discontinued operations.
10
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 further support the Company's competitive position. 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 Per-Se Technologies ("Per-Se") and Medaphis Physician Services
("Physician Services").
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. 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.
The Company provides consulting services through its non-core business
segment, Impact Innovations Group ("Impact"). After reviewing several
alternatives for Impact throughout 1998, management concluded a sale of this
segment (comprised of two divisions: commercial and government) would generate
the greatest return to the stockholders and finalized its plan to sell Impact.
The Company sold the commercial division of Impact to Complete Business
Solutions, Inc. ("CBSI") effective April 15, 1999 for $14.4 million, net of the
final closing balance sheet adjustment of $0.6 million which was paid on July
16, 1999. Management expects to complete the sale of the government division
before the end of 1999.
Medaphis markets its services and products primarily to physician
enterprises, integrated delivery networks, hospitals, long-term care facilities,
home health agencies and managed care organizations.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to three months ended June 30, 1998
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
THREE MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
Per-Se...................................................... $23,788 $22,999
Physician Services.......................................... 61,462 69,152
Eliminations................................................ (2,893) (2,822)
------- -------
$82,357 $89,329
======= =======
Per-Se's revenue increased 3.4% to $23.8 million in the second quarter of
1999 from $23.0 million in the same period in 1998. This increase is a result of
higher internal and external electronic commerce transaction volume, increased
software consulting services and higher software maintenance revenue. These
increases were partially offset by lower software license revenue due to more
contracts requiring percentage of completion accounting.
Physician Services' revenue decreased 11.1% to $61.5 million in the second
quarter of 1999 from $69.2 million in the same period in 1998. The decline in
revenue is attributable to operating issues resulting in client discontinuances
throughout 1998 primarily at the Company's wholly-owned operating subsidiary,
Medaphis Emergency Medicine Physician Services (formerly known as Gottlieb's
Financial Services, Inc. or GFS) (the
11
14
"Emergency Medicine division"). These discontinuances were partially offset by
the addition of new business during the first half of 1999, which, on an
annualized basis, exceeded discontinuances over that same period. The Physician
Services segment continues to be affected by the revenue pressures on the
physician accounts receivable operation resulting from an increase in managed
care. Management believes the client discontinuances, both Company and client
initiated, and revenue pressure will continue in the near term. Client
discontinuances initiated by the Company are a result of management's ongoing
review and evaluation process of unprofitable or marginally profitable clients
that yield returns unacceptable to management.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes legal
settlements, restructuring and other charges and interest expense, classified by
the Company's reportable segments is as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Per-Se...................................................... $ (271) $ (531)
Physician Services.......................................... (1,667) 951
Corporate................................................... (4,917) (4,491)
------- -------
$(6,855) $(4,071)
======= =======
Per-Se had an operating loss of $0.3 million for the three months ended
June 30, 1999 as compared to a loss of $0.5 million for the same period in 1998.
This decrease was primarily a result of the previously mentioned overall revenue
increase during the quarter.
Physician Services' had an operating loss of $1.7 million for the three
months ended June 30, 1999 as compared to a profit of $1.0 million for the same
period in 1998. The decrease is attributable to the revenue declines previously
discussed and increased expenses associated with the assimilation of the
Company's multiple operating systems. The decrease was partially offset by lower
salaries and wages attributable to staff reductions and lower amortization
expense resulting from the intangible asset impairment charge of $390.6 million
for the quarter ended September 30, 1998.
The Company's overhead increased 9.5% for the three months ended June 30,
1999 as compared to the to the same period in 1998. This increase is related to
the Company's year 2000 efforts and severance costs associated with downsizing
the corporate function. For the quarter ended June 30, 1998, certain corporate
overhead expenses of $1.7 million and $1.0 million have been reclassified to
Physician Services and Per-Se, respectively.
INTEREST. Net interest expense was $3.9 million in the second quarter of
1999 as compared with $5.8 million in the second quarter of 1998. The decrease
is attributable to less debt outstanding and interest income of $0.7 million
generated from the short-term investment of cash.
LEGAL SETTLEMENTS. In June 1999, the Company recorded legal settlement
charges of $21.5 million and $6.0 million related to litigation arising from
Medaphis' June 1996 acquisition of Health Data Sciences Corporation ("HDS") and
December 1995 acquisition of Medical Management Sciences, Inc. ("MMS"),
respectively. In addition, the Company paid $1.8 million to settle contract
claims against the Emergency Medicine division which arose in January 1998 from
a 1996 contract dispute in the ordinary course of business.
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 Corporation ("BSG") shareholders in connection with Medaphis'
acquisition of BSG in June 1996. 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 of 1998 to reflect the final
settlement value.
Also in June 1998, the Company recorded $0.6 million in connection with the
settlement of two other legal matters.
12
15
RESTRUCTURING AND OTHER CHARGES. During the three months ended June 30,
1998, the Company recorded approximately $0.2 million of restructuring costs for
the reorganization of several corporate and operating division departments.
In June 1998, management analyzed the adequacy of its legal matters
reserves and recorded a net increase of $0.7 million for the legal and
administrative fees, costs and expenses associated with various legal matters.
The Company recorded charges of $0.2 million in the three months ended June
30, 1998 for severance costs associated with former executive management.
INCOME TAXES. Based on recent events and the current operating forecast,
the Company does not believe it is more likely than not that net operating
losses (NOLs) will be realized; therefore a tax benefit has not been recognized
related to the NOLs during the three months ended June 30, 1999. During the
second quarter of 1998, the Company began to fully reserve all tax benefits
generated.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the three-month periods ended June 30, 1999 and 1998
is as follows (the 1999 results for Impact include the commercial division
through April 15, 1999 -- the effective date of the sale):
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
Revenue............................................. $12,555 $26,832 $20,270 $47,102
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 357 2,330 695 3,025
Income tax expense.................................. -- 955 -- 955
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 357 $ 1,375 $ 695 $ 2,070
======= ======= ======= =======
On November 30, 1998, the Company completed the sale of Medaphis Services
Corporation ("Hospital Services") to NCO Group, Inc. ("NCO") for initial
consideration of $107.5 million. During the first quarter of 1999, the Company
received additional consideration of $0.8 million based on Hospital Services'
final closing balance sheet and payment on certain Hospital Services accounts
receivable retained by Medaphis. The additional consideration resulted in the
recognition of an additional gain of $0.5 million, net of tax of $0.3 million.
Also, Medaphis could receive a purchase price adjustment of up to $10.0 million
subject to Hospital Services' achievement of various operational targets in
1999.
The Company sold the commercial division of Impact to Complete Business
Solutions, Inc. ("CBSI") effective April 15, 1999 for $14.4 million, net of the
final closing balance sheet adjustment of $0.6 million which was paid July 16,
1999. Management expects to complete the sale of the government division of
Impact before the end of 1999.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
REVENUE. Revenue classified by the Company's different operating segments
is as follows:
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
-------- --------
(IN THOUSANDS)
Per-Se................................................. $ 46,561 $ 50,659
Physician Services..................................... 122,919 139,702
Eliminations........................................... (5,750) (5,683)
-------- --------
$163,730 $184,678
======== ========
Per-Se's revenue decreased 8.1% to $46.6 million for the six months ended
June 30, 1999 from $50.7 million in the same period in 1998. This decrease is
primarily a result of lower software license revenue from the Ulticare
13
16
product line and more contracts requiring percentage of completion accounting.
The decrease in software license revenue was partially offset by higher software
maintenance revenue and electronic commerce revenue.
Physician Services' revenue decreased 12.0% to $122.9 million for the six
months ended June 30, 1999 from $139.7 million in the same period in 1998. The
decline in revenue is attributable to operating issues resulting in client
discontinuances throughout 1998 primarily at the Emergency Medicine division.
These discontinuances were partially offset by the addition of new business
during the first half of 1999, which, on an annualized basis, exceeded
discontinuances over that same period. The Physician Services segment continues
to be affected by the revenue pressures on the physician accounts receivable
operation resulting from an increase in managed care. Management believes the
client discontinuances, both Company and client initiated, and revenue pressure
will continue in the near term. Client discontinuances initiated by the Company
are a result of management's ongoing review and evaluation process of
unprofitable or marginally profitable clients resulting in unreasonable returns.
OPERATING PROFIT (LOSS). Operating profit (loss), which excludes legal
settlements, restructuring and other charges and interest expense, classified by
the Company's reportable segments is as follows:
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Per-Se...................................................... $ (2,946) $ 1,476
Physician Services.......................................... (4,506) 1,242
Corporate................................................... (10,594) (10,586)
-------- --------
$(18,046) $ (7,868)
======== ========
Per-Se had an operating loss of $2.9 million for the six months ended June
30, 1999 as compared to a profit of $1.5 million for the same period in 1998.
The decline was primarily a result of the previously mentioned decrease in
revenue.
Physician Services' had an operating loss of $4.5 million for the six
months ended June 30, 1999 as compared to a profit of $1.2 million for the same
period in 1998. The decrease is attributable to the revenue declines previously
discussed and increased expenses associated with the assimilation of the
Company's multiple operating systems. The decrease was partially offset by lower
salaries and wages attributable to staff reductions and lower amortization
expense resulting from the intangible asset impairment charge of $390.6 million
for the quarter ended September 30, 1998.
For the six months ended June 30, 1998, certain corporate overhead expenses
of $3.2 million and $1.5 million have been reclassified to Physician Services
and Per-Se, respectively.
INTEREST. Net interest expense was $7.8 million for the six-month period
ended June 30, 1999 as compared to $12.2 million in the same period of 1998. The
decrease is primarily related to less debt outstanding and interest income of
$1.3 million generated from the short-term investment of cash.
LEGAL SETTLEMENTS. In June 1999, the Company recorded legal settlement
charges of $21.5 million and $6.0 million related to Medaphis' June 1996
acquisition of HDS and December 1995 acquisition of MMS, respectively. In
addition, the Company paid $1.8 million to settle contract claims against the
Emergency Medicine division which arose in January 1998 from a 1996 contract
dispute in the ordinary course of business.
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.
Also in June 1998, the Company recorded $0.6 million in connection with the
settlement of two other legal matters.
14
17
RESTRUCTURING AND OTHER CHARGES. During the six months ended June 30,
1998, the Company recorded approximately $0.2 million of restructuring costs for
the reorganization of several corporate and operating division departments.
In June 1998, management analyzed the adequacy of its legal matters
reserves and recorded a net increase of $0.7 million for the legal and
administrative fees, costs and expenses associated with various legal matters.
The Company recorded charges of $0.7 million in the six months ended June
30, 1998 for severance costs associated with former executive management.
INCOME TAXES. Based on recent events and the current operating forecast,
the Company does not believe it is more likely than not that net operating
losses (NOLs) will be realized; therefore a tax benefit has not been recognized
related to the NOLs during the six months ended June 30, 1999.
During the six months ended June 30, 1998, the Company recorded a tax
benefit related to NOLs, which was subsequently reserved for in the quarter
ended September 30, 1998.
DISCONTINUED OPERATIONS. Summarized financial information for the
discontinued operations for the six-month periods ended June 30, 1999 and 1998
is as follows (the 1999 results for Impact include the commercial division
through April 15, 1999 -- the effective date of the sale):
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------
1999 1998
------- ----------------------------
HOSPITAL
IMPACT SERVICES IMPACT TOTAL
------- -------- ------- -------
(IN THOUSANDS)
Revenue............................................. $33,177 $51,956 $42,704 $94,660
======= ======= ======= =======
Income from discontinued operations before income
taxes............................................. 661 3,946 1,256 5,202
Income tax expense.................................. -- 1,634 -- 1,634
------- ------- ------- -------
Income from discontinued operations, net of tax..... $ 661 $ 2,312 $ 1,256 $ 3,568
======= ======= ======= =======
EXTRAORDINARY ITEM. During the six months ended June 30, 1998, the Company
recorded a charge of $5.6 million, net of tax of $3.6 million, to write-off the
unamortized costs associated with the Company's then-current debt facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $74.5 million at June 30, 1999,
including $45.2 million of unrestricted cash and cash equivalents. The $9.2
million decrease in cash and cash equivalents from December 31, 1998 is
primarily a result of the payment of a semi-annual interest payment required
under the 9 1/2% $175 million of Senior Notes due February 15, 2005 (the
"Notes") and payments made upon the execution of the definitive agreement
related to the government investigation of allegations concerning the Company's
wholly-owned subsidiary, GFS.
The Company sold the commercial division of Impact to Complete Business
Solutions, Inc. ("CBSI") effective April 15, 1999 for $14.4 million, net of the
final closing balance sheet adjustment of $0.6 million which was paid on July
16, 1999. Management expects to complete the sale of the government division of
Impact before the end of 1999.
Under the Indenture governing the Notes, the balance of the excess sale
proceeds, as defined, from the sale of Hospital Services, the commercial
division of Impact or the sale of any other asset having a fair value in excess
of $1.0 million, 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 estimated excess proceeds
in the Company. As of June 30, 1999, excess proceeds related to the sale of
Hospital Services were approximately $16.0 million and must be invested by
November 25, 1999. The excess proceeds from the sale of the commercial division
of Impact were approximately $12.5 million at June 30, 1999 and must be invested
by April 15, 2000.
15
18
The Company is a party to various legal actions. See Note 3 of Notes to
Consolidated 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, including, without limitation, the Company's
results of operations, financial position or cash flow and liquidity.
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 position 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. This flexibility would give management the
ability to make prudent strategic investments in the business. Additionally,
management anticipates receiving proceeds from the sale of the government
division 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 ("Systems Assimilation"), 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 the third quarter of
1999. The detailed planning and inventory for all of the Company's legacy
systems that are being modified for Year 2000 compatibility have been completed.
These legacy systems have been remediated and are in final testing. Customers,
vendors and resellers have been identified and requests for information
distributed regarding the Year 2000 readiness of such parties. Responses have
been received throughout the first and second quarters of 1999 and follow up is
planned for the remainder of the year. The Company began to develop contingency
plans during the fourth quarter of 1998 and will continue developing these plans
through the third quarter of 1999 in response to assessments of the Year 2000
readiness of customers, vendors and resellers.
In the second quarter of 1999, Per-Se completed testing and documentation
of Year 2000 compatible versions of the clinical information system and the
radiology information system. Those releases, along with Year 2000 compatible
versions of the patient scheduling and staff management products, are currently
available to customers. Year 2000 testing for products that will be generally
available late in 1999 or early in 2000 will be done as a routine part of
quality assurance and documentation.
16
19
Through June 30, 1999, the Company has spent approximately $8.8 million on
its Year 2000 and Systems Assimilation efforts, and it expects to spend an
additional $4.0 million to $6.0 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.
17
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this Item is included in Note 3 of Notes to
Consolidated Financial Statements in Item 1 on pages 5 to 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 6, 1999. The
following directors were elected at such meeting:
BOARD VOTES VOTES VOTES
NOMINEE TERM FOR AGAINST WITHHELD
- ------- ------------ ---------- ------- ---------
Roderick M. Hills....................... Through 1999 57,636,378 -- 1,413,711
David R. Holbrooke, M.D................. Through 1999 57,651,264 -- 1,398,825
David E. McDowell....................... Through 1999 57,376,680 -- 1,673,409
Kevin E. Moley.......................... Through 1999 57,649,920 -- 1,400,169
John C. Pope............................ Through 1999 57,659,018 -- 1,391,071
Allen W. Ritchie........................ Through 1999 57,658,870 -- 1,391,219
C. Christopher Trower................... Through 1999 57,646,783 -- 1,403,306
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NO. DOCUMENT
- ------- --------
2.1 -- 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).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions Inc.,
E-Business Solutions.com, Inc., Impact Innovations Holdings,
Inc. and Registrant (incorporated by reference to Exhibit
2.1 to Current Report on Form 8-K filed on May 5, 1999).
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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21
EXHIBIT
NO. DOCUMENT
- ------- --------
4.1 -- 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).
4.2 -- 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)
4.3 -- 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).
4.4 -- Registration Rights Letter Agreement, dated as of May 3,
1999, by and among NFT Ventures Inc., Raymond J. Noorda,
Mark Rogers, NP Ventures, Ltd., Steven G. Papermaster and
the Registrant (incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3, File No. 333-78775).
10.1 -- Settlement Agreement and Full and Complete Release dated
June 24, 1999, among James F. Thacker, et al., and
Registrant.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
The Company filed the following report on Form 8-K during the quarter ended
June 30, 1999:
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILING DATE
- ------------- ---------- -------------- -----------
Sale of Impact Innovations' commercial division to
Complete Business Solutions, Inc........................ No April 20, 1999 May 5, 1999
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22
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MEDAPHIS CORPORATION
(Registrant)
By: /s/ WAYNE A. TANNER
------------------------------------
Wayne A. Tanner
Executive Vice President and
Chief Financial Officer
By: /s/ MICHAEL A. SNYDER
------------------------------------
Michael A. Snyder
Vice President and Controller
(Chief Accounting Officer)
Date: August 12, 1999
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23
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- ------- -----------------------
2.1 -- 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).
2.2 -- Stock Purchase Agreement dated as of April 20, 1999, among
Complete Business Solutions Inc., E-Business Solutions.com,
Inc., Impact Innovations Holdings, Inc. and Registrant
(incorporated by reference to Exhibit 2.1 to Current Report
on Form 8-K filed on May 5, 1999).
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).
4.1 -- 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).
4.2 -- 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)
4.3 -- 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).
4.4 -- Registration Rights Letter Agreement, dated as of May 3,
1999, by and among NFT Ventures Inc., Raymond J. Noorda,
Mark Rogers, NP Ventures, Ltd., Steven G. Papermaster and
the Registrant (incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3, File No. 333-78775).
10.1 -- Settlement Agreement and Full and Complete Release dated
June 24, 1999, among James F. Thacker, et al., and
Registrant.
27 -- Financial Data Schedule (for SEC use only)
99.1 -- Safe Harbor Compliance Statement for Forward-Looking
Statements.
21