<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ----- TO -----
</TABLE>
COMMISSION FILE NUMBER 000-19480
MEDAPHIS CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2700 CUMBERLAND PARKWAY, SUITE 300 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)
</TABLE>
(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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 1996
- --------------------------------------------- ---------------------------------------------
<S> <C>
COMMON STOCK 71,696,802 SHARES
$0.01 PAR VALUE
NON-VOTING COMMON STOCK 0 SHARES
$0.01 PAR VALUE
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MEDAPHIS CORPORATION
FORM 10-Q
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Consolidated Statements of Operations for the three and nine months ended September
30, 1996 and 1995................................................................ 2
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 (As
restated, see Note 8)............................................................ 3
Consolidated Statements of Cash Flows for the nine months ended September 30, 1996
and 1995......................................................................... 4
Notes to Consolidated Financial Statements.......................................... 5
Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 15
PART II: OTHER INFORMATION
Legal Proceedings................................................................... 24
Other Information................................................................... 24
Exhibits and Reports on Form 8-K.................................................... 25
Index to Exhibits................................................................... 27
</TABLE>
This Form 10-Q contains statements which may constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Those statements include statements regarding the intent, belief or current
expectations of Medaphis Corporation and members of its management team.
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 included as
Exhibit 99 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.
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue............................................. $126,731 $140,752 $465,551 $415,131
-------- -------- -------- --------
Salaries and wages.................................. 109,615 82,625 292,843 238,112
Other operating expenses............................ 39,016 36,673 117,169 104,756
Depreciation........................................ 6,221 3,548 16,496 10,663
Amortization........................................ 4,937 4,606 14,672 13,368
Interest expense, net............................... 3,284 2,318 8,019 8,487
Restructuring and other charges..................... 24,275 14,000 41,600 45,750
-------- -------- -------- --------
Total expenses............................ 187,348 143,770 490,799 421,136
-------- -------- -------- --------
Loss before income taxes............................ (60,617) (3,018) (25,248) (6,005)
Income taxes........................................ (23,622) 70 (4,315) (2,500)
-------- -------- -------- --------
Net loss............................................ (36,995) (3,088) (20,933) (3,505)
Pro forma adjustments, principally income taxes..... 625 365 979 (3,849)
-------- -------- -------- --------
Pro forma net loss.................................. $(36,370) $ (2,723) $(19,954) $ (7,354)
======== ======== ======== ========
Pro forma net loss per common share................. $ (0.51) $ (0.05) $ (0.28) $ (0.13)
======== ======== ======== ========
Weighted average shares outstanding................. 71,665 57,696 71,123 55,962
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
(UNAUDITED) (AS RESTATED,
SEE NOTE 8)
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................................... $ 7,016 $ 19,270
Restricted cash.................................................... 12,989 15,340
Accounts receivable, billed........................................ 98,232 84,256
Accounts receivable, unbilled...................................... 101,271 89,429
Other.............................................................. 14,835 14,870
-------- --------
Total current assets....................................... 234,343 223,165
Property and equipment............................................... 131,809 97,895
Intangible assets.................................................... 481,690 455,611
Other................................................................ 18,197 18,935
-------- --------
Total assets............................................... $ 866,039 $ 795,606
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 9,387 $ 23,220
Accrued compensation............................................... 32,269 24,505
Accrued expenses................................................... 77,650 69,529
Current portion of long-term debt.................................. 9,541 10,681
-------- --------
Total current liabilities.................................. 128,847 127,935
Long-term debt and capital lease obligations......................... 245,120 150,565
Convertible subordinated debentures.................................. -- 63,375
Other obligations.................................................... 14,546 18,926
Deferred income taxes................................................ 4,013 13,499
-------- --------
Total liabilities.......................................... 392,526 374,300
-------- --------
Stockholders' Equity:
Preferred stock.................................................... -- 382
Common stock, voting, $.01 par value, 200,000 authorized; issued
and outstanding 71,663 in 1996 and 58,917 in 1995............... 717 589
Common stock, nonvoting, $.01 par value, 600 authorized; none
issued.......................................................... -- --
Paid-in capital.................................................... 496,644 426,387
Accumulated deficit................................................ (23,283) (6,052)
-------- --------
474,078 421,306
Less 15 shares of common stock in treasury, at cost................ 565 --
-------- --------
Total stockholders' equity................................. 473,513 421,306
-------- --------
$ 866,039 $ 795,606
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
MEDAPHIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $(20,933) $ (3,505)
Adjustments to reconcile net loss to net cash (used for) provided
by operating activities:
Depreciation and amortization................................... 31,168 24,031
Impairment loss on property and equipment....................... 10,361 5,030
Deferred income taxes........................................... (4,315) (3,016)
Changes in assets and liabilities, excluding effects of
acquisitions:
Decrease (increase) in restricted cash........................ 1,030 (675)
Increase in accounts receivable, billed....................... (11,630) (25,546)
Increase in accounts receivable, unbilled..................... (15,807) (62)
Decrease in accounts payable.................................. (13,177) (1,431)
Increase in accrued compensation.............................. 7,037 2,967
Increase in accrued expenses.................................. 4,212 23,231
Other, net.................................................... 4,597 (3,682)
-------- --------
Net cash (used for) provided by operating activities....... (7,457) 17,342
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired................................. (13,569) (55,804)
Purchases of property and equipment................................ (44,851) (34,704)
Software development costs......................................... (33,937) (21,754)
-------- --------
Net cash used for investing activities..................... (92,357) (112,262)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................. 6,852 142,897
Proceeds from borrowings........................................... 110,615 65,145
Principal payments of long-term debt............................... (33,429) (106,701)
Other.............................................................. 3,813 (5,664)
-------- --------
Net cash provided by financing activities.................. 87,851 95,677
-------- --------
CASH:
Net change......................................................... (11,963) 757
Balance at beginning of period (see Note 3)........................ 18,979 17,651
-------- --------
Balance at end of period................................... $ 7,016 $ 18,408
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest........................................................ $ 10,921 $ 9,857
Income taxes.................................................... 6,797 2,078
Non-cash investing and financing activities:
Liabilities assumed in purchase acquisitions.................... 2,737 5,756
Additions to capital lease obligations.......................... 14,043 3,575
Common stock issued for acquisitions............................ -- 459
Common stock issued upon conversion of subordinated
debentures..................................................... 63,375 --
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited 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
supplemental consolidated financial statements of the Company for the year ended
December 31, 1995 (as restated) included in the Company's Current Report on Form
8-K/A filed November 14, 1996. See Note 8 for a discussion of the restatement of
the Company's consolidated financial statements for the three months and year
ended December 31, 1995 and as of March 31, 1996 and June 30, 1996.
The unaudited 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. Results of operations of interim periods are not necessarily
indicative of operating results for the year.
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.
NOTE 2. LEGAL MATTERS
The United States Attorney's Office for the Central District of California
is conducting an investigation (the "Federal Investigation") of Medaphis'
billing and collection practices in its offices located in Calabasas and
Cypress, California (the "Designated Offices"). Medaphis first became aware of
the Federal Investigation when it received search warrants and grand jury
subpoenas on June 13, 1995. Although the precise scope of the Federal
Investigation is not known to the Company at this time, Medaphis believes that
the U.S. Attorney's Office is investigating allegations of billing fraud and
that the inquiry is focused upon Medaphis' billing and collection practices in
the Designated Offices. Numerous federal and state civil and criminal laws
govern medical billing and collection activities. In general, these laws provide
for various fines, penalties, multiple damages, assessments and sanctions for
violations, including possible exclusion from Medicare, Medicaid and certain
other federal and state healthcare programs. Although the Designated Offices
represent less than 2% of Medaphis' annual revenue, there can be no assurance
that the Federal Investigation will be resolved promptly, that additional
subpoenas or search warrants will not be received by Medaphis or that the
Federal Investigation will not have a material adverse effect upon the Company.
The Company recorded a charge of $12 million in the third quarter of 1995 solely
for the administrative fees, costs and expenses it anticipates incurring in
connection with the Federal Investigation and the putative class action lawsuits
which are based on the Federal Investigation. The charge is intended to cover
only the anticipated administrative expenses of the Federal Investigation and
the related lawsuits and does not include any provision for fines, penalties,
damages, assessments, judgments or sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its then-current officers and directors and the lead underwriters associated
with Medaphis' public offering of common stock in April 1995 were named as
defendants in putative shareholder class action lawsuits filed in the United
States District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of common stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the complaint
failed to state a claim upon which relief may be granted. On April 11, 1996,
certain of the named plaintiffs to the Consolidated Complaint voluntarily
5
<PAGE> 7
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contains any claims based on the Securities
Act of 1933, and the Company's underwriters and outside directors are no longer
named as defendants. On June 26, 1996, the court denied the plaintiffs' motion
to certify a plaintiffs' class. The Company believes that it has meritorious
defenses to this action. Additionally, on November 5, 1996, Medaphis, Randolph
G. Brown, former Chairman, Chief Executive Officer and President and a former
director of Medaphis, Michael R. Cote, Senior Vice President -- Finance, Chief
Financial Officer and Assistant Secretary of Medaphis, and James S. Douglass,
former Vice President, Corporate Controller and Chief Accounting Officer of
Medaphis, were named as defendants in a putative shareholder class action
lawsuit filed in Superior Court of Cobb County, State of Georgia. This lawsuit
alleges violations of federal and Georgia securities laws based on the same
public statements and filings generally described above. The lawsuit is brought
on behalf of a putative class of purchasers of Medaphis stock during the period
March 29, 1995 through June 15, 1995. Plaintiffs seek compensatory damages and
costs. The Company believes that it has meritorious defenses to this action.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis, and one or more of Randolph G.
Brown, Michael R. Cote and James S. Douglass were named as defendants in
nineteen putative shareholder class action lawsuits filed in the United States
District Court for the Northern District of Georgia, Atlanta Division.
Generally, these lawsuits allege violations of the federal securities laws in
connection with Medaphis' filings under the federal securities acts and public
disclosures concerning various subjects, including Medaphis' reengineering
project, management and operations of certain Medaphis subsidiaries, and
Medaphis' reported and projected revenues and earnings. The lawsuits are each
brought on behalf of putative classes of persons who acquired Medaphis common
stock, including persons who acquired stock either in the public market or in
connection with three of Medaphis' recent business acquisitions. Eighteen of the
actions have been consolidated, and the Company anticipates that the nineteenth
also will be consolidated. Plaintiffs seek rescissory and compensatory damages
and costs. The Company believes that it has meritorious defenses to this action.
On November 1, 1996, Medaphis, Randolph G. Brown, Robert C. Bellas, a
director of Medaphis, David R. Holbrooke, a director of Medaphis, and Richard H.
Stowe, a former director of Medaphis, were named as defendants in a shareholder
derivative action filed in the United States District Court for the Northern
District of Georgia, Atlanta Division. Generally, the lawsuit alleges that the
defendants breached their fiduciary duties, were grossly negligent and breached
various contractual obligations to the Company 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.
Plaintiffs seek compensatory damages and costs.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown, and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of Health Data Sciences Corporation. Plaintiff seeks rescissory,
compensatory and punitive damages, injunctive relief and costs. The Company
believes that it has meritorious defenses to this action.
The Company also has received written demands from various stockholders,
including stockholders of recently acquired companies. To date, these
stockholders have not filed lawsuits.
Although the Company believes that it has meritorious defenses to the
actions against and written demands placed upon the Company, there can be no
assurance that additional lawsuits will not be filed against the Company, that
the lawsuits and the written demands will not have a disruptive effect upon the
operations of the business, that the written demands and the defense of the
lawsuits will not consume the time and
6
<PAGE> 8
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
attention of the senior management of the Company or that the lawsuits will not
have a material adverse effect upon the Company.
NOTE 3. RECENT ACQUISITIONS
From January 1, 1995 through September 30, 1996, the Company acquired
either substantially all of the assets or all of the outstanding capital stock
of each of the following businesses which were recorded using the purchase
method of accounting:
<TABLE>
<CAPTION>
ACQUISITION
COMPANY ACQUIRED CONSIDERATION DATE
---------------------------------------------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
The Medico Group, Ltd............................... * April 1996
Medical Management Computer Services, Inc........... * February 1996
CBT Financial Services, Inc......................... * February 1996
The Receivables Management Division of MedQuist,
Inc............................................... $17,300 December 1995
The Halley Exchange, Inc............................ * December 1995
Billing and Professional Services, Inc.............. * October 1995
Medical Office Consultants, Inc..................... * May 1995
Computers Diversified, Inc.......................... 15,500 April 1995
Medical Management, Inc............................. 8,000 March 1995
The Decision Support Group, Inc..................... * January 1995
</TABLE>
- ---------------
* Consideration not material.
Each of the foregoing acquisitions has been recorded using the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the assets acquired and liabilities assumed based on their estimated fair value
as of the date of acquisition. The allocation of the purchase price of certain
of these acquisitions is preliminary and will be adjusted when the necessary
information is available. The operating results of the acquired businesses are
included in the Company's consolidated statements of operations from the
respective dates of acquisition.
In addition to the foregoing acquisitions, the Company acquired the
following businesses in 1996 and 1995 which were recorded using the
pooling-of-interests method of accounting:
<TABLE>
<CAPTION>
SHARES ACQUISITION
COMPANY ACQUIRED EXCHANGED DATE
-------------------------------------------------------- --------- ----------------
<S> <C> <C>
Health Data Sciences Corporation ("HDS")................ 6,215,000 June 1996
BSG Corporation ("BSG")................................. 7,539,000 May 1996
Rapid Systems Solutions, Inc. ("Rapid Systems")......... 1,135,000 April 1996
Intelligent Visual Computing, Inc. ("IVC").............. * February 1996
Medical Management Sciences, Inc. ("MMS")............... 4,000,000 December 1995
Consort Technologies, Inc. ("Consort").................. 825,000 November 1995
Healthcare Recoveries, Inc. ("HRI")..................... 3,265,000 August 1995
Automation Atwork ("Atwork")............................ 8,000,000 March 1995
</TABLE>
- ---------------
* Consideration not material.
Since these acquisitions have been recorded using the pooling-of-interests
method of accounting, no adjustments have been made to the historical carrying
amounts of assets acquired and liabilities assumed. The accompanying
consolidated financial statements have been restated to include the financial
position and operating results of Atwork, HRI, MMS, Rapid Systems, BSG and HDS
for all periods prior to the mergers. No restatement has been made for the
financial position and operating results of Consort and IVC prior to the
beginning of the fiscal year of their acquisitions due to their immateriality.
7
<PAGE> 9
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of revenue, pro forma net income (loss) and pro forma net
income (loss) per common share of the Company, as previously reported (which
includes Atwork) with the Company after restating for all material acquisitions
accounted for under the pooling-of-interests method of accounting, including the
pro forma provision for "S" corporation income taxes, is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED
30, SEPTEMBER 30,
1995 1995
------------ -------------
<S> <C> <C>
Revenue:
Medaphis, as previously reported.......................... $112,344 $ 327,866
Consort................................................... 1,024 2,804
MMS....................................................... 4,421 14,625
Rapid Systems............................................. 4,009 10,102
BSG....................................................... 17,255 51,319
HDS....................................................... 1,699 8,415
-------- --------
Combined.................................................. $140,752 $ 415,131
======== ========
Pro forma net income (loss):
Medaphis, as previously reported.......................... $ 1,072 $ (2,601)
Consort................................................... 222 751
MMS....................................................... (1,665) 355
Rapid Systems............................................. 431 724
BSG....................................................... (2,381) (2,151)
HDS....................................................... (767) (3,555)
Pro forma provision for "S" corporation income taxes...... 365 (877)
-------- --------
Combined.................................................. $ (2,723) $ (7,354)
======== ========
Pro forma net income (loss) per common share:
Medaphis, as previously reported.......................... $ 0.02 $ (0.06)
======== ========
Combined.................................................. $ (0.05) $ (0.13)
======== ========
</TABLE>
Prior to its merger with the Company, HDS reported on a fiscal period
ending March 31. HDS's financial position and operating results as of and for
the fiscal year ended March 31, 1996 was combined with the Company's financial
position and operating results as of and for the year ended December 31, 1995.
HDS's financial position and operating results for 1996, which have been
restated to a calendar year basis, have been combined with the Company's
financial position and operating results for 1996. Accordingly, HDS's operating
results for the three months ended March 31, 1996, were duplicated in the year
ended December 31, 1995 and the nine months ended September 30, 1996. HDS's
revenue and net income for the three month period ended March 31, 1996 were
$3,758,000 and $382,000, respectively. The beginning cash balance in the
accompanying statement of cash flows for the nine month period ended September
30, 1996 does not equal the December 31, 1995 cash balance as a result of the
combination of HDS's financial position as of March 31, 1996 with the financial
position of the Company as of December 31, 1995.
The following unaudited pro forma financial information presents the
results of operations of the Company for the nine months ended September 30,
1996 and 1995 as if all the material acquisitions noted above had occurred on
January 1, 1995. The pro forma information presented below does not purport to
be indicative of the results that would have been obtained if the operations had
actually been combined for the
8
<PAGE> 10
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
periods presented and is not necessarily indicative of operating results to be
expected in future periods (in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revenue........................................................ $465,551 $433,306
Pro forma net loss............................................. (19,954) (4,647)
Pro forma net loss per common share............................ $ (0.28) $ (0.08)
</TABLE>
In October 1996, the Company acquired the outstanding capital stock of Sage
Communications Corporation ("Sage"). Sage provides systems integration services
and data warehousing decision support applications, primarily to the
telecommunications industry. This transaction will be accounted for as a
purchase. The pro forma effect of Sage on the consolidated results of operations
of Medaphis for 1996 and 1995 is not significant.
NOTE 4. FINANCING TRANSACTIONS
In 1995, the Company gave notice of its intent to redeem its 6 1/2%
convertible subordinated debentures due January 1, 2000. The debentures were
convertible into shares of the Company's common stock at a conversion price of
$14.00 per share. All of the debenture holders exercised their conversion right
effective January 1, 1996, and as a result, approximately 4.5 million shares of
common stock were issued in the conversion.
The Company has amended its $250 million Senior Credit Facility to extend
the expiration date to March 17, 1998.
NOTE 5. RESTRUCTURING AND OTHER CHARGES
Components of restructuring and other charges include restructuring
charges, property and equipment impairment, pooling charges, software
abandonment, severance costs and legal and other costs. A description of each
component is as follows:
Restructuring Charges. During the third quarter of 1996, the Company
finalized its plan to restructure its client/server information technology
businesses and began to consolidate Imonics Corporation ("Imonics") and Rapid
Systems into BSG. In conjunction with this restructuring plan, the Company
recorded charges of approximately $1.3 million for the costs associated with the
termination of certain leases and $3.9 million ($1.2 million of this amount was
recorded in the second quarter of 1996) for severance costs for employees of
Imonics who have been notified of their termination. The Company also reviewed
the adequacy of existing reserves related to the Company's restructuring plan at
its operating subsidiary, Medaphis Physician Services Corporation ("MPSC"), and
reduced these reserves by approximately $2.1 million in the third quarter of
1996. During the nine months ended September 30, 1996, the Company also incurred
approximately $5.2 million of costs which were related to the Company's
reengineering project which had not previously been accrued because they did not
meet the definition of an exit activity as established by the appropriate
authoritative accounting literature.
In 1995, management approved a restructuring plan relating to the
consolidation of the Company's data processing function in MPSC. The Company
recorded a reserve for the exit costs associated with the restructuring plan of
approximately $15.0 million. During the third quarter of 1996, the Company
revised its original plan of consolidating into ten regional information
processing centers ("IPCs"). The Company has adopted a plan to downsize certain
of the existing IPCs and the costs associated with exiting these facilities will
be charged against the restructuring reserves established in 1995. The Company
has commenced a comprehensive assessment of the reengineering program designed
to ensure that the individual projects which
9
<PAGE> 11
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
make up the program are properly aligned with the overall goals and objectives
of the program. Although management remains committed to completing such
assessment in due course, there can be no assurance that the work associated
with such assessment will be completed prior to December 31, 1996.
Property and Equipment Impairment. In connection with the restructuring of
Imonics and MPSC, the Company assessed the recoverability of its long lived
assets and recorded impairment losses of approximately $6.4 million and $5.0
million during the third quarter of 1996 and first quarter of 1995,
respectively.
Pooling Charges. In connection with the IVC, Rapid Systems, BSG and HDS
pooling-of-interests transactions consummated in 1996, the Company recorded
transaction fees, costs and expenses of approximately $12.9 million. Management
finalized the estimated transaction fees, costs and expenses associated with all
the pooling-of-interests transactions consummated in 1996 and 1995 and reversed
$1.2 million and $3.6 million of these charges during the three and nine months
ended September 30, 1996, respectively. As a result of the 1995
pooling-of-interests transactions with HRI (August) and Atwork (January) the
Company incurred transaction fees, costs and expenses of approximately $2.0
million and $6.0 million, respectively.
Software Abandonment. In connection with the consolidation of Imonics into
BSG, and the adoption by Imonics of the BSG business model, the Company
abandoned certain software development projects and recorded a charge in the
third quarter of 1996 for the write-off of approximately $6.9 million of
capitalized software development costs related to these projects.
Severance Costs. In 1995, MPSC formalized an involuntary severance benefit
plan. The Company has recorded charges of approximately $2.0 million and $5.0
million for the three months ended September 30, 1996 and nine months ended
September 30, 1995, respectively, to accrue the estimated involuntary severance
benefits which had accumulated.
Legal and Other Costs The Company has recorded a charge of $5.0 million in
the third quarter of 1996 for the administrative fees, costs and expenses it
anticipates incurring in connection with various putative class action lawsuits
which have been filed against the Company and certain of its current and former
officers, one of whom was also a director, since August 14, 1996. The Company
also recorded a charge of $12.0 million in the third quarter of 1995 for the
administrative fees, costs and expenses it anticipated incurring in connection
with the Federal Investigation and various putative class action lawsuits which
are based on the Federal Investigation.
During the three month period ended September 30, 1996, the Company
canceled an initiative to develop an on-line practice management system. The
Company recorded a $2.0 million charge relating to the deferred costs associated
with this project. The Company also accrued $1.3 million for certain liabilities
associated with the Company's billing and accounts receivable management
services operations.
10
<PAGE> 12
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following chart reflects the additions, adjustments and costs applied
against the restructuring reserve for the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
RESERVE COSTS RESERVE
BALANCE ADDITION APPLIED BALANCE
DECEMBER 31, TO RESERVE AGAINST SEPTEMBER 30,
1995 RESERVE ADJUSTMENTS(1) RESERVE 1996
------------ -------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease terminations.......... $ 5,990 $1,320 $ 2,008 $(2,201) $ 7,117
Incremental costs associated
with discontinued client
contracts................. 4,691 -- (2,690) (2,001) --
Severance................... -- 3,902 -- (2,176) 1,726
Other....................... 1,788 208 (1,369) (627) --
------- ------ ------- ------- -------
$ 12,469 $5,430 $ (2,051) $(7,005) $ 8,843
======= ====== ======= ======= =======
</TABLE>
- ---------------
(1) Adjustments reflect the reallocation and reduction of reserves.
NOTE 6. INCOME TAXES
In 1995 and 1996, Medaphis acquired Atwork, MMS, Rapid Systems and BSG in
merger transactions which were accounted for as poolings-of-interests. Prior to
such mergers, Atwork, MMS, Rapid Systems and a company acquired by BSG prior to
the BSG merger had elected "S" corporation status under the Internal Revenue
Code for income tax purposes. As a result of such mergers (or, in the case of
the company acquired by BSG, its acquisition by BSG), the "S" corporation
elections of such companies terminated. Pro forma net loss and pro forma net
loss per common share are presented as if the entities had been "C" corporations
during the three and nine months ended September 30, 1996 and 1995. The effect
of the tax status change associated with the acquisition of Rapid Systems is
reflected in income taxes in the three and nine months ended September 30, 1996
with an offsetting benefit recorded within pro forma adjustments.
NOTE 7. LINES OF BUSINESS
The Company operates in three major lines of business: Services (providing
healthcare transaction processing services to physicians, hospitals and payors),
BSG Group (client/server information technology services), and HIT (healthcare
information technology and hardware sales). Total revenue includes only sales to
unaffiliated customers as reported in the Company's consolidated statements of
operations. Operating profit represents total revenue less operating expenses
excluding restructuring and other charges. Corporate items include general
corporate expenses. Corporate assets consist primarily of cash, deferred
financing costs, fixed assets, miscellaneous prepaids and receivables and real
estate purchased in acquisitions. Information concerning operations in these
lines of business is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Services.................................... $102,832 $101,735 $321,020 $305,080
BSG Group................................... 11,637 28,479 90,880 74,476
HIT......................................... 13,070 11,084 55,726 36,862
Corporate and eliminations.................. (808) (546) (2,075) (1,287)
-------- -------- -------- --------
$126,731 $140,752 $465,551 $415,131
======== ======== ======== ========
</TABLE>
11
<PAGE> 13
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating profit (loss):
Services.................................... $ 2,985 $ 9,179 $ 36,454 $ 40,975
BSG Group................................... (30,762) 3,893 (20,592) 6,987
HIT......................................... 1,475 2,729 23,598 7,473
Corporate................................... (6,756) (2,501) (15,089) (7,203)
-------- -------- -------- --------
$(33,058) $ 13,300 $ 24,371 $ 48,232
======== ======== ======== ========
Interest expense, net......................... 3,284 2,318 8,019 8,487
-------- -------- -------- --------
Restructuring and other charges:
Services.................................... 4,352 14,000 7,908 39,000
BSG Group................................... 15,280 -- 24,733 --
HIT......................................... (357) -- 3,959 6,750
Corporate................................... 5,000 -- 5,000 --
-------- -------- -------- --------
24,275 14,000 41,600 45,750
-------- -------- -------- --------
Loss before income taxes...................... $(60,617) $ (3,018) $(25,248) $ (6,005)
======== ======== ======== ========
Depreciation and amortization:
Services.................................... $ 7,069 $ 5,356 $ 20,237 $ 16,156
BSG Group................................... 2,656 1,690 6,782 4,833
HIT......................................... 1,200 1,008 3,562 2,751
Corporate................................... 233 100 587 291
-------- -------- -------- --------
$ 11,158 $ 8,154 $ 31,168 $ 24,031
======== ======== ======== ========
Capital expenditures:
Services.................................... $ 4,689 $ 11,239 $ 24,566 $ 22,483
BSG Group................................... 4,628 4,466 16,566 10,238
HIT......................................... 642 269 2,134 1,130
Corporate................................... 322 298 1,585 853
-------- -------- -------- --------
$ 10,281 $ 16,272 $ 44,851 $ 34,704
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Identifiable assets:
Services.................................... $678,870 $578,711
BSG Group................................... 96,728 65,524
HIT......................................... 76,727 69,661
Corporate................................... 13,714 8,849
-------- --------
$866,039 $722,745
======== ========
</TABLE>
In March 1996, a European joint venture formed by Imonics (the "Joint
Venture") entered into a software licensing and a software engineering contract.
Included in the BSG Group's revenue during the three and nine months ended
September 30, 1996 is a charge against revenue of approximately $9.3 million and
revenue of approximately $4.5 million, respectively, relating to the Company's
share of net earnings of the Joint Venture. Also included in the BSG Group's
revenue for the three and nine months ended September 30,
12
<PAGE> 14
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 are charges of $7.5 million for the expected renegotiation of various
contracts and adjustments to bad debt reserves.
The BSG Group also accrued $6.0 million of salaries and wages for the
expected costs needed to complete two of Imonics' software engineering projects.
NOTE 8. RESTATEMENT OF 1995 CONSOLIDATED FINANCIAL STATEMENTS AND 1996 BALANCE
SHEETS
The Company has restated its financial statements for the three months and
year ended December 31, 1995. The restatement results primarily from a software
licensing agreement entered into by Imonics in December 1995 for which the
Company recognized associated license fee revenue in 1995. Subsequent to the
issuance of the Company's 1995 consolidated financial statements, management
discovered unauthorized correspondence made by an Imonics employee which created
a contingency for the license fee payable under this agreement. Such contingency
precluded recognition of license fee revenue in 1995 associated with this
agreement. The Company currently is in the process of amending certain filings
made pursuant to the Securities Exchange Act of 1934, as amended, which contain
financial information affected by the restatement. The Company is also required
to restate its balance sheets as of March 31, 1996 and its balance sheet as of
June 30, 1996 contained in the March 31, 1996 and June 30, 1996 Forms 10-Q,
respectively, for the effect of the 1995 restatement adjustments. The previously
recognized license fee revenue and certain other adjustments previously
considered immaterial are included as part of the adjustments to the Company's
previously reported results of operations and financial position. The
significant effects of the restatement are as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
For the Three Months Ended December 31, 1995:
Revenue................................................. $ 149,172 $ 144,746
Income before income taxes.............................. 10,711 2,171
Net income (loss)....................................... 3,008 (2,116)
Pro forma net income (loss)............................. 3,974 (1,150)
Pro forma net income (loss) per common share............ 0.06 (0.02)
For the Year Ended December 31, 1995:
Revenue................................................. 564,303 559,877
Income (loss) before income taxes....................... 4,706 (3,834)
Net loss................................................ (497) (5,621)
Pro forma net loss...................................... (3,380) (8,504)
Pro forma net loss per common share..................... (0.06) (0.15)
As of December 31, 1995:
Total current assets.................................... 228,357 223,165
Total assets............................................ 801,869 795,606
Total current liabilities............................... 125,658 127,935
Total liabilities....................................... 375,439 374,300
Total stockholders' equity.............................. 426,430 421,306
As of March 31, 1996:
Total current assets.................................... 199,934 194,742
Total assets............................................ 779,966 773,703
Total current liabilities............................... 98,321 100,598
Total liabilities....................................... 324,786 323,647
Total stockholders' equity.............................. 455,180 450,056
</TABLE>
13
<PAGE> 15
MEDAPHIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
As of June 30, 1996:
Total current assets.................................... 271,452 266,260
Total assets............................................ 909,964 903,701
Total current liabilities............................... 107,106 109,383
Total liabilities....................................... 391,136 389,997
Total stockholders' equity.............................. $ 518,828 $ 513,704
</TABLE>
14
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Medaphis Corporation ("Medaphis" or the "Company") provides transaction
processing and client/ server information technology systems and services for
clients in multiple vertical markets, initially concentrated in healthcare.
Medaphis' healthcare transaction services are designed to assist its clients
with the business management functions associated with the delivery of
healthcare services, thereby permitting physicians and hospitals to focus on
providing quality medical services to their patients. The Company's healthcare
transaction processing services also includes the provision of subrogation and
related recovery services primarily to healthcare payors. Medaphis' healthcare
information systems include patient centered clinical information management
systems and enterprise wide patient and employee scheduling systems. These
systems are designed to improve efficiency and the quality of care within
hospitals and emerging integrated healthcare delivery systems. The Company's
client/server information technology services are designed to effect fundamental
business process transformation and innovation through the rapid, high impact
development, delivery, deployment and maintenance of client/server technology
and the careful, deliberate transfer of the processes and related technology to
its clients.
Medaphis' business is impacted by trends in the U.S. healthcare industry.
As healthcare expenditures have grown as a percentage of the U.S. gross national
product, public and private healthcare cost containment measures have applied
pressure to the margins of healthcare providers. Historically, some payors have
willingly paid the prices established by providers while other payors, notably
the government and managed care companies, have paid far less than established
prices (in some cases less than the average cost of providing the services). As
a consequence, prices charged to payors willing to pay established prices have
increased in order to recover the cost of services purchased by the government
and others but not paid by them (i.e., "cost shifting"). Increasing complexity
in the reimbursement system and assumption of greater payment responsibility by
individuals have caused healthcare providers to experience increased receivables
and bad debt levels and higher business office costs. 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 foregoing,
management believes that the revenue recognized by the Company's clients
continues to be adversely affected by increased managed care and other industry
factors impacting healthcare providers in the United States. At the same time,
the process of submitting healthcare claims for reimbursement to third party
payors in accordance with applicable industry and regulatory standards continues
to grow in complexity and become more costly. Management believes that the
decline in revenue experienced by the Company's clients, the increasing
complexity and costs associated with providing billing and accounts receivable
management services to healthcare providers and the Company's on-going
reengineering project have placed pressure on the rate of revenue growth and
margins in the Company's physician operations which are the subject of such
reengineering project. Due to these revenue and margin pressures, Medaphis
Physician Services Corporation ("MPSC") has not significantly contributed to the
Company's operating profit since the second half of 1995.
During the second half of 1995 and the first half of 1996, the Company was
able to offset the margin and revenue pressures experienced at MPSC through
expanded growth in its client/server information technology services and
information management operations. Much of this growth came from the signing of
new systems integration and healthcare information systems contracts which have
included significant initial license fees as well as through strategic
acquisitions. Given the size and complexity of the large-scale systems
integration and healthcare information system contracts entered into by the
Company and the license fees associated therewith, management believes that the
results of operations for the Company's BSG Group (client/server information
technology services) and healthcare information technology division ("HIT") may
be subject to significant quarterly fluctuations based upon the timing of
receipt of such contracts. However, management also anticipates that the
episodic nature of the Company's existing systems integration operations should
be partially offset over time by the results of operations of BSG Corporation
("BSG") and Rapid Systems Solutions, Inc. ("Rapid Systems"), which historically
have had a larger number of smaller systems integration projects which have not
included significant initial license fees, and the adoption by Imonics
Corporation ("Imonics") of the BSG business model.
15
<PAGE> 17
The Company initiated a reengineering program focused upon its billing and
accounts receivable management operations in early 1995. The reengineering
program involves office consolidation, workflow, process and operational
improvements and new technology development. The overall goals of the
reengineering program are to increase the operating efficiency and enhance the
quality and productivity of the Company's billing and accounts receivable
management services operations. To date, the Company has spent approximately
$62.0 million on the development of software applications and technology and
approximately $42.0 million on hardware and equipment for the reengineering
program. The Company has encountered difficulties with the program. These
difficulties have included, among others, delays in achieving the targeted
consolidation of offices, delays in the development and implementation of
software applications and technology which achieve efficiencies and enhance
productivity in a scaled operating environment and delays in the implementation
of improved operational processes. As a result, management has commenced a
comprehensive assessment of the reengineering program designed to ensure that
the individual projects making up the program are properly aligned with overall
goals and objectives of the program. It is anticipated that this assessment will
include review of the total number, size and geographic location of the
Company's information processing centers ("IPCs") and a comprehensive assessment
of the various software development and technology projects forming a part of
the program. Although management remains committed to completing such assessment
in due course, there can be no assurance that the work associated with such
assessment will be completed prior to December 31, 1996. While this assessment
is underway, management has significantly reduced the level of expenditures on
the reengineering program. As part of this assessment, the Company has adopted a
plan to downsize certain of its existing IPCs and to charge the exit costs
incurred in connection with such downsizing in future periods against the
restructuring reserve established by the Company in the first quarter of 1995.
In terms of the on-going assessment of the software development and technology
projects, management anticipates that such assessment may result in
reaffirmation and continuation of certain projects, revisions to certain
projects to better align such projects with the overall goals of the program
and/or abandonment of certain projects. To the extent a software development or
technology project is abandoned in the future, the Company would incur a charge
relating to the abandonment and disposition of such project. To the extent the
Company incurs such a charge, there can be no assurance that such charge will
not be material.
The U.S. healthcare industry continues to experience tremendous change as
both federal and state governments, as well as private industry, work to bring
more efficiency and effectiveness to the healthcare system. Medaphis continues
to evaluate governmental and industry reform initiatives in an effort to
position itself to take advantage of the opportunities created thereby.
RESULTS OF OPERATIONS
The following table shows the percentage of certain items reflected in the
Company's Consolidated Statements of Operations to revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue........................................... 100.0% 100.0% 100.0% 100.0%
Salaries and wages................................ 86.5 58.7 62.9 57.4
Other operating expenses.......................... 30.8 26.1 25.2 25.2
Depreciation...................................... 4.9 2.5 3.5 2.6
Amortization...................................... 3.9 3.3 3.2 3.2
Interest expense, net............................. 2.6 1.6 1.7 2.0
Restructuring and other charges................... 19.1 9.9 8.9 11.0
----- ----- ----- -----
Loss before income taxes.......................... (47.8) (2.1) (5.4) (1.4)
Income taxes...................................... (18.6) -- (0.9) (0.6)
----- ----- ----- -----
Net loss.......................................... (29.2) (2.1) (4.5) (0.8)
Pro forma adjustments............................. 0.5 0.2 0.2 (0.9)
----- ----- ----- -----
Pro forma net loss................................ (28.7)% (1.9)% (4.3)% (1.7)%
===== ===== ===== =====
</TABLE>
16
<PAGE> 18
Revenue. Revenue classified by the Company's different operating segments
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Services.................................... $102,832 $101,735 $321,020 $305,080
BSG Group................................... 11,637 28,479 90,880 74,476
HIT......................................... 13,070 11,084 55,726 36,862
Corporate and eliminations.................. (808) (546) (2,075) (1,287)
-------- -------- -------- --------
$126,731 $140,752 $465,551 $415,131
======== ======== ======== ========
</TABLE>
Revenue for the three month period ended September 30, 1996 declined 10% to
$126.7 million as compared with $140.8 million in the same period in 1995.
Revenue for the three month period ended September 30, 1996 includes charges of
$16.8 million related primarily to the renegotiation of a systems integration
contract entered into by a European joint venture formed by Imonics (the "Joint
Venture"). Excluding these charges, revenue increased 2% to $143.5 million in
the third quarter of 1996 as compared with $140.8 million in the third quarter
of 1995. Revenue increased 12% to $465.6 million in the nine month period ended
September 30, 1996 as compared with $415.1 million in the same period in 1995.
Year to date revenue growth in 1996 as compared with 1995 results from: (i)
acquisitions; (ii) increases in sales to information management and systems
integration clients; and (iii) net increases in the number of business
management services clients. The Company has consummated 18 business
combinations during the period from January 1, 1995 through September 30, 1996.
Services' revenue in the third quarter of 1996 was flat as compared with
the same period of 1995. This is largely attributable to slower than expected
new business sales. Services operations experienced minimal net business growth
as new sales were largely offset by client losses. A substantial portion of
Services' revenue is recurring in nature.
The decline in the BSG Group's revenue during the third quarter of 1996
compared with 1995 reflects the $16.8 million charge related primarily to the
renegotiation of a systems integration contract entered into by the Joint
Venture. Excluding these charges, the revenue recorded in the third quarter of
1996 would have been approximately the same as the third quarter of 1995. The
BSG Group's third quarter 1996 revenues were affected by, among other things,
the efforts of the BSG Group's management team to reorganize Imonics.
HIT's revenue increased 18% in the third quarter of 1996 compared with the
same period in 1995. This increase is primarily the result of an increase in
recurring systems maintenance revenue. Included in HIT's revenue for the nine
months ended September 30, 1996 is approximately $14.5 million of one-time fees
associated with the licensing of Health Data Sciences Corporation's ("HDS")
healthcare information system.
Salaries and Wages. Salaries and wages for the three and nine month
periods ended September 30, 1996 increased to 86.5% of revenue in the third
quarter of 1996 from 58.7% in the third quarter of 1995 and increased to 62.9%
of revenue in the nine month period ended September 30, 1996 from 57.4% in the
same period in 1995. This increase was compounded by the $16.8 million charge
against revenue and a $6.0 million charge to salaries and wages expense for the
costs needed to complete two of Imonics' software engineering projects.
Excluding these charges, salaries and wages increased to 72.2% and 59.5% of
revenue for the three and nine month periods ended September 30, 1996. Such
increases are due in part to increased employment levels across the Company and
an increase in the use of independent contractors by Imonics to perform systems
integration services for its clients. Generally, the use of independent
contractors to perform such tasks is more costly than staffing such work with
employees.
During the third quarter of 1996, management undertook various profit
improvement initiatives, including the reorganization of Imonics. Such actions
resulted in a reduction in the Company's work force of approximately 430
employees and outside consultants who were working on various projects during
the third quarter with annualized salary and wage costs and estimated forecasted
annualized outside consultant fees approximating $30 million, some of which had
been capitalized in prior periods.
17
<PAGE> 19
Other Operating Expenses. Other operating expenses increased to 30.8% of
revenue in the third quarter of 1996 from 26.1% in the third quarter of 1995 and
remained at 25.2% of revenue in the nine month period ended September 30, 1996
as compared with the same period in 1995. Excluding the impact of the charges
against revenue recorded in the third quarter of 1996, other operating expenses
were 27.2% of revenue for the three month period ended September 30, 1996. Other
operating expenses are primarily comprised of postage, facility and equipment
rental, telecommunications, travel, office supplies, legal, accounting and other
outside professional services. On a year to date basis in 1996 as compared with
1995, the Company experienced improved operating leverage of such costs
resulting from increased revenues in 1996 as compared with 1995.
Depreciation. Depreciation expense was $6.2 million in the third quarter
of 1996 as compared with $3.5 million in the third quarter of 1995 and $16.5
million in the nine month period ended September 30, 1996 as compared with $10.7
million in the same period of 1995. This increase reflects the Company's
investment in property and equipment to support growth in its business,
including acquisitions.
In connection with the Company's reengineering project, management
currently anticipates that depreciation expense will increase by approximately
$2.5 million per quarter from current levels beginning in the fourth quarter of
1996 and continuing through 2000. This increase relates to the new computer and
other equipment acquired for the reengineering project.
Amortization. Amortization of intangible assets, which are primarily
associated with the Company's acquisitions and internally developed software,
was $4.9 million in the third quarter of 1996 as compared with $4.6 million in
the third quarter of 1995 and $14.7 million in the nine month period ended
September 30, 1996 as compared with $13.4 million in the same period in 1995.
The increase is primarily due to increased amortization of the Company's
capitalized software. To date, the Company has capitalized approximately $62.0
million in software development costs primarily incurred in connection with the
reengineering project. The Company has not amortized any portion of these costs.
Management currently anticipates that amortization expense in 1997 and
thereafter will increase in future periods as a result of the reengineering
project. The Company intends to amortize the software applications developed in
connection with this project over their estimated useful lives of five to seven
years.
Interest. Net interest expense was $3.3 million in the third quarter of
1996 as compared with $2.3 million in the same period of 1995. This increase
resulted from increased borrowings under the Senior Credit Facility to finance
acquisitions and funding of the Company's reengineering project. Net interest
expense decreased to $8.0 million in the nine month period ended September 30,
1996 as compared with $8.5 million in the same period in 1995. The decrease is
primarily due to the conversion of the Company's subordinated debentures into
common stock on January 1, 1996. Management anticipates that future interest
expense will increase as a result of changes in interest rates, increased
borrowings under the Senior Credit Facility and continued investment in the
Company's reengineering project.
Restructuring and Other Charges. Components of restructuring and other
charges include restructuring charges, property and equipment impairment,
pooling charges, software abandonment, severance costs and legal and other
costs. A description of each component is as follows:
Restructuring Charges. During the third quarter of 1996, the
Company finalized its plan to restructure its client/server
information technology businesses and began to consolidate Imonics and
Rapid Systems into BSG. In conjunction with this restructuring plan,
the Company recorded charges of approximately $1.3 million for the
costs associated with the termination of certain leases and $3.9
million ($1.2 million of this amount was recorded in the second
quarter of 1996) for severance costs for employees of Imonics who have
been notified of their termination. The Company also reviewed the
adequacy of existing reserves related to the Company's restructuring
plan at MPSC, and reduced these reserves by approximately $2.1 million
in the third quarter of 1996. During the nine months ended September
30, 1996, the Company also incurred approximately $5.2 million of
costs which were related to the Company's reengineering project which
had not previously been accrued because they did not meet the
definition of an exit activity as established by the appropriate
authoritative accounting literature.
18
<PAGE> 20
In 1995, management approved a restructuring plan relating to the
consolidation of the Company's data processing function in MPSC. The
Company recorded a reserve for the exit costs associated with the
restructuring plan of approximately $15.0 million. During the third
quarter of 1996, the Company revised its original plan of
consolidating into ten regional IPCs. The Company has adopted a plan
to downsize certain of the existing IPCs and the costs associated with
exiting these facilities will be charged against the restructuring
reserves established in 1995. The Company has commenced a
comprehensive assessment of the reengineering program designed to
ensure that the individual projects which make up the program are
properly aligned with the overall goals and objectives of the program.
Although management remains committed to completing such assessment in
due course, there can be no assurance that the work associated with
such assessment will be completed prior to December 31, 1996.
Property and Equipment Impairment. In connection with the
restructuring of Imonics and MPSC, the Company assessed the
recoverability of its long lived assets and recorded impairment losses
of approximately $6.4 million and $5.0 million during the third
quarter of 1996 and first quarter of 1995, respectively.
Pooling Charges. In connection with the Intelligent Visual
Computing, Inc. ("IVC"), Rapid Systems, BSG and HDS
pooling-of-interests transactions consummated in 1996, the Company
recorded transaction fees, costs and expenses of approximately $12.9
million. Management finalized the estimated transaction fees, costs
and expenses associated with all the pooling-of-interests transactions
consummated in 1995 and 1996 and reversed $1.2 million and $3.6
million of these charges during the three and nine months ended
September 30, 1996, respectively. As a result of the 1995
pooling-of-interests transactions with Healthcare Recoveries, Inc.
(August) and Automation Atwork (January) the Company incurred
transaction fees, costs and expenses of approximately $2.0 million and
$6.0 million, respectively.
Software Abandonment. In connection with the consolidation of
Imonics into BSG, and the adoption by Imonics of the BSG business
model, the Company abandoned certain software development projects and
recorded a charge in the third quarter of 1996 for the write-off of
approximately $6.9 million of capitalized software development costs
related to these projects.
Severance Costs. In 1995, MPSC formalized an involuntary
severance benefit plan. The Company has recorded charges of
approximately $2.0 million and $5.0 million for the three months ended
September 30, 1996 and nine months ended September 30, 1995,
respectively, to accrue the estimated involuntary severance benefits
which had accumulated.
Legal and Other Costs The Company has recorded a charge of $5.0
million in the third quarter of 1996 for the administrative fees,
costs and expenses it anticipates incurring in connection with various
putative class action lawsuits which have been filed against the
Company and certain of its current and former officers, one of whom
was also a director, since August 14, 1996. The Company also recorded
a charge of $12.0 million in the third quarter of 1995 for the
administrative fees, costs and expenses it anticipated incurring in
connection with the investigation by the United States Attorney's
Office for the Central District of California of Medaphis' billing and
collection practices in its offices located in Calabasas and Cypress,
California (the "Federal Investigation") and various putative class
action lawsuits which are based on the Federal Investigation.
During the three month period ended September 30, 1996, the
Company canceled an initiative to develop an on-line practice
management system. The Company recorded a $2.0 million charge relating
to the deferred costs associated with this project. The Company also
accrued $1.3 million for certain liabilities associated with the
Company's billing and accounts receivable management services
operations.
Loss Before Income Taxes. The Company's loss before income taxes was 47.8%
of revenue in the third quarter of 1996 as compared with 2.1% of revenue in the
third quarter of 1995. The loss before income taxes was 5.4% of revenue for the
nine month period ended September 30, 1996 as compared with 1.4% of revenue
19
<PAGE> 21
in the same period in 1995. The 1996 periods include restructuring and other
charges approximating $24.3 million and $41.6 million for the three and nine
months ended September 30, 1996, respectively. The 1996 periods also include
charges of $16.8 million to revenue and $6.0 million to salaries and wages
associated with the reorganization of Imonics. Excluding the effects of
restructuring and other charges and charges associated with the reorganization
of Imonics, income (loss) before income taxes was $(13.5) million and $11.0
million for the three months ended September 30, 1996 and 1995, respectively,
and $39.2 million and $39.7 million for the nine months ended September 30, 1996
and 1995, respectively.
Income Taxes. Effective income tax rates for the periods presented vary
from statutory rates primarily as a result of nondeductible expenses associated
with merger transactions consummated by the Company in 1996 and previous years.
Pro forma adjustments for income taxes have been provided for companies which
elected to be treated as "S" Corporations under the Internal Revenue Code prior
to merging with the Company.
RECENT ACQUISITIONS
On February 12, 1996, the Company acquired substantially all of the assets
and assumed certain of the related liabilities of Medical Management Computer
Services, Inc. ("MMCS"). MMCS provides billing and accounts receivable
management services primarily to emergency room physicians.
On February 20, 1996, the Company acquired substantially all of the assets
and assumed certain of the related liabilities of CBT Financial Services, Inc.
("CBT"). CBT provides collection and billing services primarily to hospitals.
On April 16, 1996, the Company acquired the outstanding capital stock of
The Medico Group, Ltd. ("MEDICO"). MEDICO provides billing and accounts
receivable management services primarily to anesthesiologists.
On October 8, 1996, the Company acquired the outstanding capital stock of
Sage Communications Corporation ("Sage"). Sage provides systems integration
services and data warehousing decision support applications, primarily to the
telecommunications industry.
Each of the foregoing acquisitions was or will be recorded using the
purchase method of accounting and, accordingly, the purchase price has been or
will be allocated to the assets acquired and liabilities assumed based on their
estimated fair market value at the date of the acquisitions.
On February 29, 1996, the Company exchanged shares of its common stock for
all of the outstanding shares of common stock of IVC. IVC provides systems
integration and work flow engineering systems and services to clients in the
healthcare and other industries. This transaction has been accounted for using
the pooling-of-interests method of accounting.
On April 3, 1996, the Company exchanged approximately 1.1 million shares of
its common stock for all of the outstanding shares of common stock of Rapid
Systems. Rapid Systems is a client server/systems integration company whose core
competencies include: network design, integration and management; database
design and development; graphical user interface application design, development
and implementation; and strategic systems engineering and computer security.
During 1995, Rapid Systems had revenue of $14.7 million. This transaction has
been accounted for using the pooling-of-interests method of accounting and,
accordingly, the financial statements of the Company have been restated to
reflect the operations of Rapid Systems.
On May 6, 1996, the Company exchanged approximately 7.5 million shares of
its common stock for all of the outstanding shares of common stock of BSG. In
addition, the Company assumed BSG stock options representing approximately 2.3
million additional shares of the Company's common stock. BSG provides
information technology and change management services to organizations seeking
to transform their operations through the strategic use of client/server and
other advanced technologies. During 1995, BSG had revenue of $69.7 million. This
transaction has been accounted for using the pooling-of-interests method of
20
<PAGE> 22
accounting and, accordingly, the financial statements of the Company have been
restated to reflect the operations of BSG.
On June 29, 1996, the Company exchanged approximately 6.2 million shares of
its common stock for all of the outstanding shares of common stock of HDS. In
addition, the Company assumed HDS stock options representing approximately
433,000 additional shares of the Company's common stock. HDS is a developer and
supplier of advanced healthcare information systems which address a healthcare
enterprise's clinical information needs through the integrated monitoring,
scheduling, documentation and control of patient care. During 1995, HDS had
revenue of $12.2 million. This transaction has been accounted for using the
pooling-of-interests method of accounting and, accordingly, the financial
statements of the Company have been restated to reflect the operations of HDS.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $105.5 million at September 30, 1996,
including $7.0 million of cash.
The Company used $7.5 million in cash for operating activities in the nine
months ended September 30, 1996. The decrease in the Company's operating cash
flows resulted from the increased levels of working capital committed to the
Company's technology systems operations, expenditures related to restructuring,
merger and other charges, and the ongoing revenue and margin pressures at MPSC.
Management expects the continued use of cash to fund restructuring and merger
costs, growth of the Company's technology systems operations and to support
operations of MPSC until further progress is made in the Company's reengineering
project and the improvement of MPSC's overall operations. Management expects to
fund such cash requirements through cash flows from operations and, to the
extent necessary, through amounts available for borrowing under the Senior
Credit Facility.
At September 30, 1996, approximately $224 million of borrowings were
outstanding under the Company's $250 million Senior Credit Facility. Amounts
available for borrowing under the Senior Credit Facility may be used for
expansion of the Company's business and general corporate purposes. The Company
has amended its Senior Credit Facility to extend its expiration date to March
17, 1998. Management is currently exploring alternatives designed to increase
the resources available to the Company to meet its anticipated liquidity and
capital resource needs. These alternatives include, among others, discussions
with its senior lenders to increase the size of its Senior Credit Facility and
modify the covenants contained therein, expanded use of lease lines to finance
equipment purchases and reductions in planned expenditures.
In December 1995, the Company gave notice of its intent to redeem its
6 1/2% convertible subordinated debentures due January 1, 2000. The debentures
were convertible into shares of the Company's common stock at a conversion price
of $14.00 per share. All of the debenture holders exercised their conversion
rights effective January 1, 1996, and as a result, approximately 4.5 million
shares of common stock were issued in the conversion.
The Company has commenced a comprehensive reengineering project. As part of
this project, the Company initially anticipated consolidating MPSC's processing
functions currently being performed in approximately 300 local business offices
into approximately ten or less regional processing centers. The Company has
commenced a comprehensive assessment of the reengineering program designed to
ensure that the individual projects making up the program are properly aligned
with the overall goals and objectives of the program. It is anticipated that
this assessment will include review of the total number, size and geographic
location of the Company's IPCs and a comprehensive assessment of the various
software development and technology projects forming a part of the program.
Although management remains committed to completing such assessment in due
course, there can be no assurance that the work associated with such assessment
will be completed prior to December 31, 1996. While this assessment is underway,
management has significantly reduced the level of expenditures on the
reengineering program. As part of this assessment, the Company has adopted a
plan to downsize certain of the existing IPCs and to charge the exit costs
incurred in future periods in connection with such downsizing against the
restructuring reserve established by the Company in the first quarter of 1995.
In terms of the on-going assessment of the software development and technology
projects,
21
<PAGE> 23
management anticipates that such assessment may result in reaffirmation and
continuation of certain projects, revisions to certain projects to better align
such projects with the overall goals of the program and/or abandonment of
certain projects. To the extent a software development or technology project is
abandoned in the future, the Company would incur a charge relating to the
abandonment and disposition of such project. To the extent the Company incurs
such a charge, there can be no assurance that such charge will not be material.
The remaining costs related to the project are expected to be financed through
the Company's Senior Credit Facility, future operating cash flows and capital
lease financing.
During the three months ended September 30, 1996, the Company capitalized
approximately $7.5 million of software development costs associated with the
development or enhancement of software to be used in the processing function of
the Company's business management services or otherwise sold externally by the
Company.
Substantially all the Company's capital expenditures have related either to
acquisitions of healthcare business management service companies and technology
companies, the reengineering project discussed above or to the expansion,
improvement or maintenance of existing facilities. The Company has financed its
growth through cash flows from operations, the issuance of debt and equity
securities and borrowings.
OTHER MATTERS
The Company has restated its financial statements for the three months and
year ended December 31, 1995. The restatement results primarily from a software
licensing agreement entered into by Imonics in December 1995 for which the
Company recognized associated license fee revenue in 1995. Subsequent to the
issuance of the Company's 1995 consolidated financial statements, management
discovered unauthorized correspondence made by an Imonics employee which created
a contingency for the license fee payable under this agreement. Such contingency
precluded recognition of license fee revenue in 1995 associated with this
agreement. The Company currently is in the process of amending certain filings
made pursuant to the Securities Exchange Act of 1934, as amended, which contain
financial information affected by the restatement. The Company is also required
to restate its balance sheets as of March 31, 1996 and June 30, 1996 contained
in the March 31, 1996 and June 30, 1996 Forms 10-Q, respectively, for the effect
of the 1995 restatement adjustments. The previously recognized license fee
revenue and certain other adjustments previously considered immaterial are
included as part of the adjustments to the Company's previously reported results
of operations and financial position. The significant effects of the restatement
are as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
For the Three Months Ended December 31, 1995:
Revenue................................................. $ 149,172 $ 144,746
Income before income taxes.............................. 10,711 2,171
Net income (loss)....................................... 3,008 (2,116)
Pro forma net income (loss)............................. 3,974 (1,150)
Pro forma net income (loss) per common share............ 0.06 (0.02)
For the Year Ended December 31, 1995:
Revenue................................................. 564,303 559,877
Income (loss) before income taxes....................... 4,706 (3,834)
Net loss................................................ (497) (5,621)
Pro forma net loss...................................... (3,380) (8,504)
Pro forma net loss per common share..................... (0.06) (0.15)
As of December 31, 1995:
Total current assets.................................... 228,357 223,165
Total assets............................................ 801,869 795,606
Total current liabilities............................... 125,658 127,935
Total liabilities....................................... 375,439 374,300
Total stockholders' equity.............................. 426,430 421,306
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
As of March 31, 1996:
Total current assets.................................... 199,934 194,742
Total assets............................................ 779,966 773,703
Total current liabilities............................... 98,321 100,598
Total liabilities....................................... 324,786 323,647
Total stockholders' equity.............................. 455,180 450,056
As of June 30, 1996:
Total current assets.................................... 271,452 266,260
Total assets............................................ 909,964 903,701
Total current liabilities............................... 107,106 109,383
Total liabilities....................................... 391,136 389,997
Total stockholders' equity.............................. $ 518,828 $ 513,704
</TABLE>
23
<PAGE> 25
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis, and one or more of Randolph G.
Brown, former Chairman, Chief Executive Officer and President and a former
director of Medaphis, Michael R. Cote, Senior Vice President -- Finance, Chief
Financial Officer and Assistant Secretary of Medaphis, and James S. Douglass,
former Vice President, Corporate Controller and Chief Accounting Officer of
Medaphis were named as defendants in nineteen putative shareholder class action
lawsuits filed in the United States District Court for the Northern District of
Georgia, Atlanta Division. Generally, these lawsuits allege violations of the
federal securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures concerning various subjects, including
Medaphis' re-engineering project, management and operations of certain Medaphis
subsidiaries, and Medaphis' reported and projected revenues and earnings. The
lawsuits are each brought on behalf of putative classes of persons who acquired
Medaphis common stock, including persons who acquired stock either in the public
market or in connection with three of Medaphis' recent business acquisitions.
Eighteen of the actions have been consolidated, and the Company anticipates that
the nineteenth also will be consolidated. Plaintiffs seek rescissory and
compensatory damages and costs.
On November 1, 1996, Medaphis, Randolph G. Brown, Robert C. Bellas, a
director of Medaphis, David R. Holbrooke, a director of Medaphis, and Richard H.
Stowe, a former director of Medaphis, were named as defendants in a shareholder
derivative action filed in the United States District Court for the Northern
District of Georgia, Atlanta Division. Generally, the lawsuit alleges that the
defendants breached their fiduciary duties, were grossly negligent, and breached
various contractual obligations to the Company 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.
Plaintiffs seek compensatory damages and costs.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown, and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges that
the defendants violated federal and California securities laws and common law
by, among other things more fully described in the complaint, making material
misstatements and omissions in public and private disclosures in connection with
the acquisition of Health Data Sciences Corporation. Plaintiff seeks rescissory,
compensatory and punitive damages, injunctive relief and costs.
Although the Company believes it has meritorious defenses to the actions
against the Company, there can be no assurance that additional lawsuits will not
be filed against the Company, that the lawsuits will not have a disruptive
effect upon the business, that the defense of the lawsuits will not consume the
time and attention of the senior management of the Company or that the lawsuits
will not have a material adverse effect upon the Company.
ITEM 5. OTHER INFORMATION
On October 24, 1996, the Compensation Committee of the Board of Directors
of the Company approved an adjustment of the exercise price for certain
outstanding employee stock options which have an exercise price of $15 and
above. No adjustment was made to any options held by executive officers or
directors of the Company. The revised exercise price of $9.875 was established
by reference to the closing price of the Company's common stock on October 25,
1996. 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 had historically 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 which made them
highly mobile; and (iv) senior management of the Company believed that
24
<PAGE> 26
there was potential for increased attrition among its key employees and that
adjustment of the exercise price of outstanding options would significantly help
to mitigate such risk.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<C> <C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of Registrant's Registration Statement on Form S-1, File
No. 33-42216).
3.2 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3 of Registrant's Quarterly
Report on Form 10-Q for the Quarterly Period Ended March 31, 1993).
3.3 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3.3 of Registrant's Registration
Statement on Form 8-A/A, filed on May 22, 1996).
3.4 -- Certificate of Amendment of Amended and Restated Certificate of Incorporation of
the Registrant (incorporated by reference to Exhibit 4.4 of the Registrant's
Registration Statement on Form S-8, File No. 333-03213).
3.5 -- Amended and Restated By-Laws of Registrant (incorporated by reference to Exhibit
3.2 of Registrant's 1992 Form 10-K, File No. 000-19480).
10.1 -- Fifth Modification of Amended and Restated Credit Agreement among the Registrant
and the Lenders named therein, dated October 10, 1996.
10.2 -- Sixth Modification of Amended and Restated Credit Agreement among the Registrant
and the Lenders named therein, dated October 31, 1996.
10.3 -- Employment Agreement by and between Registrant and Michael L. Douglas, dated as
of June 24, 1996.
10.4 -- Restricted Stock Agreement by and between Registrant and Michael L. Douglas,
dated as of June 26, 1996.
11 -- Statement regarding Computation of Earnings Per Share.
27 -- Financial Data Schedule (for SEC use only).
99 -- Safe Harbor Compliance Statement for Forward-Looking Statements.
</TABLE>
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K have been filed by the Company during the
quarter ended September 30, 1996:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
ITEM REPORTED FILED DATE OF REPORT FILE DATE
---------------------------------------------- ---------- -------------- -------------
<S> <C> <C> <C>
Acquisition of HDS............................ Yes(1) June 29, 1996 July 3, 1996
Consolidated Supplemental Financial Statements
to give effect for the acquisition of HDS... Yes(2) June 29, 1996 July 9, 1996
</TABLE>
- ---------------
(1) Pro Forma Combined Financial Statements of the Company for the years ended
December 31, 1995, 1994, and 1993 (unaudited) were filed.
(2) Supplemental Consolidated Financial Data of the Company (audited) for the
years ended December 31, 1995, 1994 and 1993 were filed.
25
<PAGE> 27
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.
<TABLE>
<S> <C>
Date: November 14, 1996 MEDAPHIS CORPORATION
-----------------------------------------------
(Registrant)
Date: November 14, 1996 /s/ David E. McDowell
-----------------------------------------------
David E. McDowell
Chairman and Chief Executive Officer
Date: November 14, 1996 /s/ Michael R. Cote
-----------------------------------------------
Michael R. Cote
Senior Vice President -- Finance, Chief
Financial Officer and Assistant Secretary
</TABLE>
26
<PAGE> 1
EXHIBIT 10.1
FIFTH MODIFICATION OF
AMENDED AND RESTATED CREDIT AGREEMENT
THIS MODIFICATION is made and entered into as of this 10th day of
October, 1996, among MEDAPHIS CORPORATION, a Delaware corporation (hereinafter
referred to as the "Borrower"), the banks and other lending institutions listed
on Annex I attached to the Credit Agreement described below (collectively, the
"Lenders") and SUNTRUST BANK, ATLANTA, a Georgia banking corporation formerly
known as Trust Company Bank, in its capacity as the Agent for the Lenders
pursuant to Article X of such Credit Agreement (the "Agent").
STATEMENT OF FACTS
Pursuant to that certain Amended and Restated Credit Agreement, dated
as of August 13, 1993, among Borrower, the Lenders signatory thereto and the
Agent, as amended by the First Modification of Amended and Restated Credit
Agreement, dated as of July 1, 1994, among such parties, the Second
Modification of Amended and Restated Credit Agreement, dated as of November 23,
1994, among such parties, the Third Modification of Amended and Restated Credit
Agreement dated as of March 17, 1995 among such parties, and the Fourth
Modification of Amended and Restated Credit Agreement dated as of January 31,
1996, among such parties (collectively, the "Credit Agreement"), such Lenders
agreed to provide Borrower with certain credit facilities on the terms and
conditions set forth in the Credit Agreement (all capitalized terms used in
this Modification and which are not otherwise expressly defined herein shall
have the respective meanings given such terms in the Credit Agreement).
The parties are entering into this Modification in order to extend the
Credit Expiration Date from March 17, 1997 to March 17, 1998, all in accordance
with and subject to the terms and conditions hereinafter set forth in this
Modification.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants herein set forth, as well as for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties do hereby agree as follows:
STATEMENT OF TERMS
SECTION 1. MODIFICATION OF CREDIT AGREEMENT. Subject to the terms and
conditions of this Modification (including without limitation the fulfillment
of the conditions precedent to the effectiveness of this Modification which are
set forth in Section 3 below), the parties hereby agree to modify the Credit
Agreement in the following respects:
(A) Section 1.01 of the Credit Agreement shall be amended by deleting
the definition therein of the term "Credit Expiration Date" and by substituting
in lieu thereof the following new definition of such term:
<PAGE> 2
"Credit Expiration Date" shall mean March 17, 1998,
as such date may be extended, accelerated or amended from
time to time pursuant to this Agreement.
(B) Schedule 6.01(b) and Schedule 6.01(c) to the Credit Agreement
shall be deleted and the new Schedule 6.01(b) and Schedule 6.01(c) attached
hereto shall be substituted in lieu thereof respectively.
SECTION 2. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Modification
shall become effective, from and after the date hereof, upon the satisfaction
of each and every one of the following conditions to such effectiveness:
(A) The Agent shall have received the following documents in form and
substance reasonably satisfactory to the Agent (collectively, the "Supplemental
Credit Documents"):
(i) This Modification duly completed and executed by
Borrower, the Agent and the Lenders;
(ii) The written consent of each of the Guarantors to the
execution, delivery and performance of this Modification which consent
shall be evidenced by such Guarantor's signing one or more
counterparts of this Modification in the appropriate space indicated
below;
(iii) A certificate of the Borrower in substantially the form
of Attachment 1 attached hereto, duly executed and appropriately
completed; and
(iv) An opinion letter from the Associate General Counsel for
the Borrower and the Guarantors in the form of Attachment 2 attached
hereto (subject to such changes therein as may be acceptable to the
Agent and the Lenders);
(B) Each and every representation and warranty of Borrower set forth
in Section 3 below shall be true and correct in all material respects as of the
date of and after giving effect to this Modification; and
(C) There shall not exist as of the date of and after giving effect to
this Modification any Default or Event of Default under the Credit Agreement as
amended by this Modification (other than any Default or Event of Default which
may arise by virtue of the charges anticipated to be taken by Borrower in its
third fiscal quarter of 1996).
SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to the Lenders and the Agent that (a) each of Borrower
and the Guarantors has all requisite corporate power and authority to execute
and deliver the Supplemental Credit Documents to which it is a party and to
perform its obligations under such Supplemental Credit Documents, and the
Supplemental Credit Documents to which each such Credit Party is a party have
been duly authorized by all requisite corporate action on the part of such
Credit Party, have been duly executed and delivered by authorized officers of
such Credit Party, and constitute valid obligations of such
-2-
<PAGE> 3
Credit Party, legally binding upon and enforceable against such Credit Party in
accordance with their terms, except as such enforceability may be limited by
any applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally or by
general principles of equity; and (b) after giving effect to this Modification,
(i) no Default or Event of Default is existing under the Credit Agreement on
and as of the date of this Modification (other than any Default or Event of
Default which may arise by virtue of the charges anticipated to be taken by
Borrower in its third fiscal quarter of 1996) and (ii) the representations and
warranties of the Borrower set forth in Article VI of the Credit Agreement are
true and correct in all material respects on and as of the date of this
Modification as if made on and as of each of such date (except as to the extent
that any of such representations or warranties relates to a specific prior date
or period).
SECTION 4. NO WAIVER. Borrower acknowledges that nothing contained
herein is a waiver by the Lenders of any Default or Event of Default which may
arise by virtue of the charges anticipated to be taken by Borrower in its third
quarter of 1996.
SECTION 5. AGENT EXPENSES. Without limiting its obligations under the
Credit Agreement, the Borrower agrees to pay on demand all of the Agent's
reasonable attorneys' fees and expenses and all other reasonable out-of-pocket
costs incurred by the Agent in connection with its evaluation, negotiation,
documentation or consummation of this Modification, the other Supplemental
Credit Documents and the transactions contemplated hereby or thereby.
SECTION 6. CHANGE IN LENDER. The parties acknowledge that on or about
January 31, 1996, Bank South was merged with and into NationsBank of Georgia,
N.A., with the latter being the surviving corporation (such surviving
corporation being herein called "NationsBank"), and that NationsBank also has
changed its name to NationsBank, N.A. (South). As a result of such merger,
NationsBank has acquired and assumed all of Bank South's rights and obligations
under the Credit Agreement. Annex I to the Credit Agreement is hereby deleted
and replaced with Annex I attached hereto, which revised annex reflects such
acquisition and assumption. Upon NationsBank's surrender to the Agent of its
and Bank South's existing Revolving Loan Notes, Borrower shall execute and
deliver to NationsBank a replacement Revolving Loan Note payable to such Lender
in the stated principal amount equal to its and Bank South's combined Revolving
Loan Commitment.
SECTION 7. MISCELLANEOUS. (A) Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect, and each
reference to the Credit Agreement in the Credit Agreement and the other Credit
Documents shall be deemed to be a reference to the Credit Agreement as hereby
amended and as the same may be further amended, supplemented or otherwise
modified and in effect from time to time hereafter.
(B) This Modification may be executed in a number of several
counterparts, each of which shall be identical and all of which when taken
together shall constitute one and the same instrument, and any of the parties
hereto may execute this Modification by signing one or more of such
counterparts.
(C) This Modification shall be governed by, and construed in
accordance with, the internal laws of the State of Georgia (without giving
effect to its conflicts of law rules).
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Modification
to be executed as of the day and year first above written and Borrower has
caused its seal to be hereunto affixed as of such date.
BORROWER:
(CORPORATE SEAL) MEDAPHIS CORPORATION
ATTEST:
By: /s/ MEDAPHIS CORPORATION
------------------------------
/s/ Peggy B. Sherman
- --------------------------
Assistant Secretary
AGENT:
SUNTRUST BANK, ATLANTA, AS AGENT
By: /s/ SUNTRUST BANK, ATLANTA
------------------------------
LENDERS:
SUNTRUST BANK, ATLANTA,
AS A LENDER
By: /s/ SUNTRUST BANK, ATLANTA
------------------------------
(Signatures continued on following page)
-4-
<PAGE> 5
(Signatures continued from preceding page)
THE CHASE MANHATTAN BANK, N.A.,
AS A LENDER
By: /s/ THE CHASE MANHATTAN BANK, N.A.
-----------------------------------
CREDITANSTALT-BANKVEREIN, AS A LENDER
By: /s/ CREDITANSTALT-BANKVEREIN
------------------------------
NATIONSBANK, N.A. (SOUTH), AS A LENDER
By: /s/ NATIONSBANK, N.A. (SOUTH)
------------------------------
PNC BANK, N.A., AS A LENDER
By: /s/ PNC BANK, N.A.
------------------------------
WACHOVIA BANK OF GEORGIA, N.A., AS A LENDER
By: /s/ WACHOVIA BANK OF GEORGIA, N.A.
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EXHIBIT 10.2
SIXTH MODIFICATION OF
AMENDED AND RESTATED CREDIT AGREEMENT
THIS MODIFICATION (the "Modification") is made and entered into as of
this 21st day of October, 1996, among MEDAPHIS CORPORATION, a Delaware
corporation (hereinafter referred to as the "Borrower"), the banks and other
lending institutions listed on Annex I attached to the Credit Agreement
described below (collectively, the "Lenders") and SUNTRUST BANK, ATLANTA, a
Georgia banking corporation formerly known as Trust Company Bank, in its
capacity as the Agent for the Lenders pursuant to Article X of such Credit
Agreement (the "Agent").
STATEMENT OF FACTS
Pursuant to that certain Amended and Restated Credit Agreement, dated
as of August 13, 1993, among Borrower, the Lenders signatory thereto and the
Agent, as amended by the First Modification of Amended and Restated Credit
Agreement, dated as of July 1, 1994, among such parties, the Second
Modification of Amended and Restated Credit Agreement, dated as of November 23,
1994, among such parties, the Third Modification of Amended and Restated Credit
Agreement dated as of March 17, 1995, among such parties, the Fourth
Modification of Amended and Restated Credit Agreement dated as of January 31,
1996 and the Fifth Modification of Amended and Restated Credit Agreement dated
as of October 21, 1996 (collectively, the "Credit Agreement"), such Lenders
agreed to provide Borrower with certain credit facilities on the terms and
conditions set forth in the Credit Agreement (all capitalized terms used in
this Modification and which are not otherwise expressly defined herein shall
have the respective meanings given such terms in the Credit Agreement).
The parties are entering into this Modification in order to make
certain changes in the Credit Agreement, all in accordance with and subject to
the terms and conditions hereinafter set forth in this Modification.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants herein set forth, as well as for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties do hereby agree as follows:
STATEMENT OF TERMS
Section 1. Modifications of Credit Agreement. Subject to the terms and
conditions of this Modification (including without limitation the fulfillment
of the conditions precedent to the effectiveness of this Modification which are
set forth in Section 2 below), the parties hereby agree to modify the Credit
Agreement, effective as of September 30, 1996, in the following respects:
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(A) Section 1.01 of the Credit Agreement shall be amended by
adding thereto, in the appropriate alphabetical order, the
following new term:
"Acquired Companies" shall mean, collectively, Consort
Technologies, Inc., Medical Management Sciences, Inc., The
Halley Exchange, Inc., Intelligent Visual Computing, Inc.,
Rapid Systems Solutions, Inc., BSG Corporation, and Health
Data Sciences Corporation.
(B) Section 1.01 of the Credit Agreement shall be further amended
by deleting the definitions therein of the term "Consolidated
Net Income (Loss)" and by substituting, in lieu thereof, the
following new definition of such term:
"Consolidated Net Income (Loss)" shall mean, for any fiscal
period of the Borrower, the net income (or loss) of the
Consolidated Companies on a consolidated basis for such
period (taken as a single accounting period) determined in
conformity with GAAP, but excluding therefrom (to the extent
otherwise included therein) (i) any gains or losses, together
with any related provisions for taxes, realized upon any sale
of assets other than in the ordinary course of business, (ii)
any income or loss of any Person acquired prior to the date
such Person becomes a Subsidiary of the Borrower or is merged
into or consolidated with the Borrower or any of its
Subsidiaries or all or substantially all of such Person's
assets are acquired by the Borrower or any of its
Subsidiaries, (iii) the amount, net of Federal, state and
local income tax effects, in actual expenses incurred in
connection with the purchase of the Acquired Companies, which
actual net expenses shall not exceed the pretax equivalent of
$22,000,000 and only to the extent that these charges were
incurred during the fiscal period being measured, and (iv)
actual restructuring charges, net of Federal, state and local
income tax effects, incurred in the third quarter of 1996
ending September 30, 1996, which actual charges shall not
exceed the pretax equivalent of $44,000,000.
Section 2. Conditions Precedent to Effectiveness. This Modification
shall become effective, from and after the date hereof, upon the satisfaction
of each and every one of the following conditions to such effectiveness:
(a) The Agent shall have received the following documents in
form and substance reasonably satisfactory to the Agent (collectively,
the "Supplemental Credit Documents"):
(i) 10 counterparts of this Modification duly
completed and executed by Borrower, the Agent and the Lenders;
(ii) The written consent of each of the Guarantors
to the execution, delivery and performance of this
Modification, which written consent shall be
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evidenced by each Guarantor's signing one or more
counterparts of this Modification in the appropriate space
indicated below;
(iii) Certificates of the Borrower in substantially
the form of Attachment 1 attached hereto, duly executed and
appropriately completed; and
(iv) Resolutions of the Board of Directors or other
governing body of the Borrower approving this Modification
certified by the Secretary of the Borrower.
(b) Copies of all additional agreements, instruments and
documents which the Agent may reasonable request, such documents, when
appropriate, to be certified by appropriate governmental authorities.
(c) All proceedings of the Borrower relating to the matters
provided for herein shall be satisfactory to the Lenders, the Agent
and their counsel.
SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants to the Lenders and the Agent that (a) each of Borrower
and the Guarantors has all requisite corporate power and authority to execute
and deliver this Modification to which it is a party and to perform its
obligations under such Modification, and the Modification to which each such
Credit Party is a party have been duly authorized by all requisite corporate
action on the part of such Credit Party, have been duly executed and delivered
by authorized officers of such Credit Party, and constitute valid obligations
of such Credit Party, legally binding upon and enforceable against such Credit
Party in accordance with their terms, except as such enforceability may be
limited by any applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally or
by general principles of equity; and (b) after giving effect to this
Modification, (i) no Default or Event of Default is existing under the Credit
Agreement on and as of the date of this Modification and (ii) the
representations and warranties of the Borrower set forth in Article VI of the
Credit Agreement are true and correct in all material respects on and as of the
date of this Modification as if made on and as of each of such date (except as
to the extent that any of such representations or warranties relates to a
specific prior date or period).
SECTION 4. AGENT EXPENSES. Without limiting its obligations under the
Credit Agreement, the Borrower agrees to pay on demand all of the reasonable
attorneys fees and expenses and all other reasonable out-of-pocket costs
incurred by the Agent and NationsBank, N.A. (South), a national banking
association, in connection with the evaluation, negotiation, documentation or
consummation of this Modification, the other Supplemental Credit Documents and
the transactions contemplated hereby or thereby.
SECTION 5. MISCELLANEOUS. (A) Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect, and each
reference to the Credit Agreement in the Credit Agreement and the other Credit
Documents shall be deemed to be a reference to the Credit
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Agreement as hereby amended and as the same may be further amended,
supplemented or otherwise modified and in effect from time to time hereafter.
(B) This Modification may be executed in a number of several
counterparts, each of which shall be identical and all of which when taken
together shall constitute one and the same instrument, and any of the parties
hereto may execute this Modification by signing one or more of such
counterparts.
(C) This Modification shall be governed by, and construed in
accordance with, the internal laws of the State of Georgia (without giving
effect to its conflicts of law rules).
(D) Should any one or more of the provisions of this Modification be
determined to be illegal or unenforceable as to one or more of the parties
hereto, all other provisions nevertheless shall remain binding on the parties
hereto.
(E) This Modification shall be binding upon and inure to the benefit
of each of the Borrower, the Lenders, the Agent and their respective
successors, assigns and legal representatives; provided, however, that the
Borrower, without the prior consent of the Lenders, may not assign any rights,
powers, duties and obligations hereunder.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Modification
to be executed as of the day and year first above written and Borrower has
caused its seal to be hereunto affixed as of such date.
BORROWER:
(CORPORATE SEAL) MEDAPHIS CORPORATION
ATTEST:
By: /s/ MEDAPHIS CORPORATION
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/s/ Peggy B. Sherman
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Secretary
(Signatures continued on following page)
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AGENT:
SUNTRUST BANK, ATLANTA, as Agent
By: /s/ SUNTRUST BANK, ATLANTA
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(Signatures continued on following page)
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LENDERS:
SUNTRUST BANK, ATLANTA, as a Lender
By: /s/ SUNTRUST BANK, ATLANTA
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(Signatures continued on following page)
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(Signatures continued from preceding page)
NATIONSBANK, N.A. (SOUTH),
SUCCESSOR BY MERGER TO BANK SOUTH,
AS A LENDER
By: /s/ NATIONSBANK, N.A. (SOUTH)
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(Signatures continued on following page)
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(Signatures continued from preceding page)
THE CHASE MANHATTAN BANK,
N.A., AS A LENDER
By: /s/ THE CHASE MANHATTAN BANK, N.A.
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(Signatures continued on following page)
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(Signatures continued from preceding page)
CREDITANSTALT-BANKVEREIN, as a
LENDER
By: /s/ CREDITANSTALT-BANKVEREIN
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(Signatures continued on following page)
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(Signatures continued from preceding page)
NATIONSBANK, N.A. (SOUTH), AS A LENDER
By: /s/ NATIONSBANK, N.A. (SOUTH)
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(Signatures continued on following page)
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(Signatures continued from preceding page)
PNC BANK, N.A., AS A LENDER
By: /s/ PNC BANK, N.A.
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(Signatures continued on following page)
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(Signatures continued from preceding page)
WACHOVIA BANK OF GEORGIA, N.A., AS A
LENDER
By: /s/ WACHOVIA BANK OF GEORGIA, N.A.
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(Signatures continued on following page)
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EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into
as of June 24, 1996, by and between MEDAPHIS CORPORATION, a Delaware
corporation (the "Company"), and MICHAEL L. DOUGLAS, a resident of the State of
Georgia (the "Employee").
I. STATEMENT OF BACKGROUND INFORMATION
The Company renders to hospitals, physicians, and/or other healthcare
organizations and providers: (a) billing services, accounts receivable
management services, collection services, electronic claims services, financial
management services, and practice and facilities management services; (b)
eligibility verification and certification for Medicaid, Medicare and other
healthcare assistance programs; (c) filing and other medical claims
securitization services; (d) medical coverage information services; and (e)
medical and insurance claims monitoring and tracking services (collectively the
"Processing Business").
The Company also provides subrogation and related recovery services
for healthcare payors, including health maintenance organizations, indemnity
insurers, Blue Cross and Blue Shield organizations, third party administrators,
self-funded employee health welfare benefit plans, and provider hospital
organizations (the "Subrogation Business").
The Company also: (a) develops, markets and licenses to hospitals,
integrated healthcare delivery systems, and other healthcare providers and
other end users (collectively "Providers") (i) strategic, operational and
financial information systems and services and decision support tools for
healthcare providers, (ii) software systems which provide claims and
reimbursement services and electronic claims processing, and (iii) software
applications which assist Providers with automated scheduling, resource and
clinical information management (the items discussed in Sections (a)(i),
(a)(ii) and (a)(iii) of this paragraph are hereinafter collectively referred to
as "Systems"), which Systems include, but are not limited to, nurse scheduling
and management information systems, operating room patient scheduling and
surgery information systems, enterprise wide patient scheduling and resource
management systems, enterprise-wide employee scheduling and management
information systems, clinical information management systems and related
software interfaces to other information systems; and (b) provides to Providers
installation and support services related to the Company's Systems (the
"Systems Business").
Additionally, the Company renders professional services with respect
to the development of computer software, algorithms, designs, documentation,
and related materials, and the development, design, deployment, and operation
of local and wide area computer networks, all in conjunction with the sale,
design, deployment, operation and maintenance of custom computer processing
systems
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for improvement of operational efficiency or functionality through the use of
image storage and processing, work flow technology, optical character
recognition or other related technologies (the "Systems Integration Business")
(the Processing Business, the Subrogation Business, the Systems Business, the
Systems Integration Business and any other distinct business segment in which
the Company engages during Employee's employment are hereafter collectively
referred to as the "Business").
The Company desires to obtain the services of Employee and Employee
desires to accept such employment, and the parties wish to set forth in writing
the terms of their agreement for the provision of such services.
As a material inducement to the Company to enter into this Agreement,
the Company desires that Employee enter into the covenants set forth in
Sections 6, 7 and 8 hereof, and Employee agrees to enter into such covenants.
II. STATEMENT OF AGREEMENT
In consideration of the mutual covenants, promises and conditions set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment upon the terms and conditions set forth in this
Agreement. For purposes of Sections 7 and 8 of this Agreement,
"employment" shall mean any period of time during which the Company is
paying the Employee salary, wages, or any other amounts pursuant to this
Agreement (excluding pension benefits and any payments expressly
designated by the Board of Directors of the Company to be excluded from
this definition), whether or not the Employee is currently performing
services for the Company at the time of such payment.
2. Duties of Employee. Employee initially is hired to serve as the Vice
Chairman and Chief Operating Officer of the Company. Employee agrees to
perform and discharge the Business duties which may be assigned to
Employee from time to time by the Company to the reasonable satisfaction
of the Company. Employee also agrees to comply with all of the Company's
policies, standards and regulations and to follow the instructions and
directives of Employee's superiors within the Company, as promulgated by
the Board of Directors of the Company. Employee will devote Employee's
full professional and business-related time, skills and best efforts to
the Business and, will not, during the term of this Agreement, be
engaged (whether or not during normal business hours) in any other
business or professional activity, whether or not such activity is
pursued for gain, profit or other pecuniary advantage, without the prior
written consent of the Chairman, Chief Executive Officer and President
of the Company, which consent will not be unreasonably withheld. This
Section will not be
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construed to prevent Employee from: (a) investing personal assets in
businesses which do not compete with the Company in such form or manner
that will not require any services on the part of Employee in the
operation or the affairs of the companies in which such investments are
made and in which Employee's participation is solely that of an
investor; (b) purchasing securities in any corporation whose securities
are listed on a national securities exchange or regularly traded in the
over-the-counter market, provided that Employee at no time owns,
directly or indirectly, in excess of three percent (3%) of the
outstanding stock of any class of any such corporation engaged in a
business competitive with that of the Company; or (c) participating in
conferences, preparing and publishing papers or books or teaching, so
long as the Chairman, Chief Executive Officer and President of the
Company approves such participation, preparation and publication or
teaching prior to Employee's engaging therein.
3. Term. The term of this Agreement will be for a period of two (2) years
commencing on the date hereof and expiring on the second anniversary of
such date, subject to earlier termination as provided for in Section 4
or renewal as provided herein. Upon expiration of this Agreement, this
Agreement may be renewed for an additional period of one (1) year upon
mutual consent of Employee and the Company.
4. Termination.
(a) Termination by Company for Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate
this Agreement and all of its obligations hereunder immediately
if any of the following events occur:
(i) Employee materially breaches any of the terms or
conditions set forth in this Agreement and fails to cure
such breach within ten (10) days after Employee's receipt
from the Company of written notice of such breach, which
notice shall describe in reasonable detail the Company's
belief that Employee is in breach hereof (notwithstanding
the foregoing, no cure period shall be applicable to
breaches by Employee of Sections 6, 7 or 8 of this
Agreement);
(ii) Employee commits any other act materially detrimental to
the business or reputation of the Company;
(iii) Employee intentionally engages in dishonest or illegal
activities or commits or is convicted of any crime
involving fraud, deceit or moral turpitude; or
(iv) Employee dies or becomes mentally or physically
incapacitated or disabled so as to be unable to perform
Employee's duties under this Agreement. Without limiting
the generality of the foregoing, Employee's inability
adequately to perform services under this Agreement for a
period of sixty (60) consecutive days will be conclusive
evidence of such mental or physical incapacity or
disability,
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unless such inability adequately to perform services
under this Agreement is pursuant to a mental or physical
incapacity or disability covered by the Family and
Medical Leave Act, in which case such sixty (60)-day
period shall be extended to a one hundred and twenty
(120)-day period.
(b) Termination by Company Without Cause. Notwithstanding anything
contained in Section 3 to the contrary, the Company may terminate
Employee's employment pursuant to this Agreement without cause
upon at least thirty (30) days' prior written notice to Employee.
In the event Employee's employment with the Company is terminated
by the Company without cause, the Company shall remain subject to
its payment obligations hereunder as if Employee remained
employed hereunder for the balance of the term hereof, as
provided in Section 3 above.
(c) Diminution in Responsibilities; Termination by Employee. The
Company may not diminish in any material manner or respect
Employee's duties and responsibilities as the Vice Chairman and
Chief Operating Officer of the Company, as such duties and
responsibilities exist as of the date hereof or may hereinafter
be modified or changed with the consent of the Employee and the
Company; provided, however, that the Board of Directors shall
have the right to diminish in any manner or respect Employee's
duties and responsibilities if it determines in good faith that
such diminution is in the best interests of the Company and its
stockholders. Notwithstanding anything contained herein to the
contrary, Employee may terminate this Agreement in the event the
Company shall diminish in any material manner or respect
Employee's duties and responsibilities as the Vice Chairman and
Chief Operating Officer of the Company without obtaining
Employee's prior consent. In the event Employee's employment with
the Company is terminated by Employee pursuant to the provisions
of this Section 4(c), the Company shall remain subject to its
payment obligations hereunder as if Employee remained employed
hereunder for the balance of the term hereof, as provided in
Section 3 above; provided, however, that to the extent Employee
terminates his employment pursuant to the provisions of this
Section 4(c), Employee shall not be entitled to receive any
incentive compensation payments pursuant to Section 5(c) hereof
or any severance payment pursuant to Section 5(f) hereof.
5. Compensation and Benefits.
(a) Annual Salary. For all services rendered by Employee under this
Agreement, the Company will pay Employee a base salary of Two
Hundred Twenty-five Thousand Dollars ($225,000) per annum in
equal bi-weekly installments. Such annual salary will be subject
to adjustments by any increases given in the normal course of
business.
(b) Other Benefits. Employee will be entitled to such fringe benefits
as may be provided from time-to-time by the Company to its
employees, including, but not limited to, group
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health insurance, life and disability insurance, vacations and
any other fringe benefits now or hereafter provided by the
Company to its employees, if and when Employee meets the
eligibility requirements for any such benefit; provided, however,
that Employee shall be eligible for four (4) weeks of vacation on
an annual basis during the term of this Agreement. The Company
reserves the right to change or discontinue any employee benefit
plans or programs now being generally offered to its employees;
provided, however, that all benefits provided for employees of
the same position and status as Employee will be provided to
Employee on an equal basis.
(c) Incentive Compensation Plan. In addition to Employee's base salary
as described above, Employee will be entitled to: (i) receive an
incentive compensation payment (the "Bonus Payment") for the
initial twelve month term of this Agreement in the amount of One
Hundred Twelve Thousand Five Hundred Dollars ($112,500), which
Bonus Payment will be paid to Employee on July 1, 1997; (ii)
participate in the 1997 Incentive Compensation Plan for Medaphis
Corporation and its Subsidiary Corporations in a Participation
Category of one hundred percent (100%) of Employee's base salary
as set forth in Section 5(a) above, provided that the amount of
any incentive compensation due Employee under the 1997 Incentive
Compensation Plan shall be reduced by $56,250; and (iii)
participate in each annual replacement incentive compensation
plan adopted by the Company in a Participation Category of one
hundred percent (100%) of Employee's base salary as set forth in
Section 5(a) above.
(d) Stock Options. As soon as reasonably practicable after the
execution of this Agreement, the Company will cause the issuance
to Employee, effective as of Employee's first date of employment,
or such other date as is approved by the Compensation Committee
of the Board of Directors of the Company, options to purchase One
Hundred Thousand (100,000) shares of Medaphis Corporation Common
Stock pursuant to the terms and conditions of the Amended and
Restated Medaphis Corporation Non-Qualified Stock Option Plan, as
amended. Such grant is subject to approval by the Compensation
Committee of the Board of Directors of the Company.
(e) Restricted Stock. As soon as reasonably practicable after the
execution of this Agreement, the Company will cause the issuance
to Employee, effective as of Employee's first date of employment,
or such other date as is approved by the Board of Directors of
the Company, Fifty Thousand (50,000) restricted shares of
Medaphis Corporation Common Stock (the "Restricted Shares")
pursuant to the terms and conditions of the Medaphis Corporation
Restricted Stock Agreement attached hereto as Exhibit A (the
"Restricted Stock Agreement"). Such grant will be subject to
approval by the Compensation Committee of the Board of Directors
and the Board of Directors of the Company.
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(f) Severance Payment. In the event that the Restricted Shares do not
vest and become nonforfeitable in accordance with the terms of
the Restricted Stock Agreement, then Employee shall be entitled
to receive from the Company a one-time severance payment in the
amount equal to seventy-five (75%) of Employee's then annual base
salary (the "Severance Payment"), which Severance Payment shall
be paid to Employee promptly following the later to occur of: (i)
termination of Employee's employment with the Company; or (ii)
forfeiture of the Restricted Shares to the Company in accordance
with the Restricted Stock Agreement; provided, however, that
Employee shall not receive the Severance Payment in the event the
Company desires to renew the term of this Agreement pursuant to
Section 3 hereof and Employee refuses to agree to such renewal.
(g) Reimbursement of Relocation Expenses. Medaphis will reimburse
Employee for the following expenses:
(i) Reasonable out-of-pocket relocation expenses including,
but not limited to, real estate closing costs associated
with the disposition of Employee's primary residence in
Berwyn, Pennsylvania, moving expenses associated with
Employee's move to Atlanta, Georgia and storage expenses
associated with the temporary storage of Employee's
belongings while Employee searches for a primary
residence in or about Atlanta, Georgia;
(ii) Reasonable out-of-pocket expenses incurred in connection
with searching for a new primary residence in or about
Atlanta, Georgia;
(iii) Reasonable out-of-pocket expenses associated with
securing a temporary apartment while searching for a
primary residence in or about Atlanta, Georgia; and
(iv) Reasonable legal fees and expenses incurred in connection
with obtaining counsel for Employee to review the
provisions of this Agreement and any other agreements
referenced herein.
(h) Tax Gross-up Payment. Employee will receive a payment from
the Company (the "Tax Gross-up Payment") in an amount equal to
the federal and state income taxes payable by employee as a
result of the amounts reimbursed to Employee under Sections
5(g)(i) through (iv) of this Agreement and the Tax Gross-up
Payment, after taking into consideration any income tax
deductions available to Employee with respect to any such
expenses so reimbursed. Such Tax Gross-up Payment shall be paid
to Employee at such time or times as Employee shall provide the
Company with sufficient documentation to calculate the same.
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(i) Business Expenses. Employee will be reimbursed for all
reasonable expenses incurred in the discharge of Employee's
duties under this Agreement pursuant to the Company's standard
reimbursement policies.
(j) Withholding. The Company will deduct and withhold from the
payments made to Employee under this Agreement, state and federal
income taxes, FICA and other amounts normally withheld from
compensation due employees.
6. Non-Disclosure of Proprietary Information. Employee recognizes and
acknowledges that the Trade Secrets (as defined below) and Confidential
Information (as defined below) of the Company and its affiliates and all
physical embodiments thereof (as they may exist from time-to-time,
collectively, the "Proprietary Information") are valuable, special and
unique assets of the Company's and its affiliates' Business. Employee
further acknowledges that access to such Proprietary Information is
essential to the performance of Employee's duties under this Agreement.
Therefore, in order to obtain access to such Proprietary Information,
Employee agrees that Employee shall hold in confidence all Proprietary
Information and will not reproduce, use, distribute, disclose, publish
or otherwise disseminate any Proprietary Information, in whole or in
part, and will take no action causing, or fail to take any action
necessary to prevent causing, any Proprietary Information to lose its
character as Proprietary Information, nor will Employee make use of any
such information for Employee's own purposes or for the benefit of any
person, firm, corporation, association or other entity (except the
Company) under any circumstances.
For purposes of this Agreement, the term "Trade Secrets" means the whole
or any portion of any scientific or technical or other information,
design, process, procedure, formula, computer software product,
documentation or improvement relating to the Company's or its
affiliates' Business which (1) derives economic value, actual or
potential, from not being generally known to other persons who can
obtain economic value from its disclosure or use; and (2) is the subject
of efforts that are reasonable under the circumstances to maintain its
secrecy or confidentiality. The term "Confidential Information" means
any and all data and information relating to the Company's or its
affiliates' Business, other than Trade Secrets, (1) which has value to
the Company or its affiliates; (2) is not generally known by its
competitors or the public; and (3) is treated as confidential by the
Company or its affiliates. The provisions of this Section 6 will apply
during Employee's employment by the Company and for a two (2) year
period thereafter with respect to Confidential Information, and during
Employee's employment by the Company and at any and all times thereafter
with respect to Trade Secrets. These restrictions will not apply to any
Proprietary Information which is in the public domain, provided that
Employee was not responsible, directly or indirectly, for such
Proprietary Information entering the public domain without the Company's
consent. This Section 6, along with Sections 7, 8, 9, 10, 11 and 13 of
this Agreement, shall survive termination of this Agreement.
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7.A. Non-Competition Covenant. During Employee's employment by the Company
and for a period of two (2) years following any termination of
Employee's employment for whatever reason, Employee will not, directly
or indirectly, on Employee's own behalf or in the service of or on
behalf of any other individual or entity, compete with the Company
within the Geographical Area (as hereinafter defined). The term
"compete" means to engage in, have any equity or profit interest in,
make any loan to or for the benefit of, or render any services of any
kind to, directly or indirectly, on Employee's own behalf or in the
service of or on behalf of any other individual or entity, either as a
proprietor, employee, agent, independent contractor, consultant,
director, officer, partner or stockholder (other than a stockholder of a
corporation listed on a national securities exchange or whose stock is
regularly traded in the over-the-counter market, provided that Employee
at no time owns, directly or indirectly, in excess of three percent (3%)
of the outstanding stock of any class of any such corporation) any
business which provides Business products and/or services ("Business
Products/Services"). For purposes of this Agreement, the term
"Geographical Area" means the territory within a seventy-five (75) mile
radius of each facility of the Company or any of its affiliates, whether
located in the United States or any foreign country, for which Employee
has management responsibility during Employee's employment with the
Company.
B. Non-Interference. During Employee's employment by the Company and for a
period of two (2) years following the termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of or on behalf
of any other individual or entity, interfere with, disrupt, or attempt
to disrupt the past, present or prospective relationships, contractual
or otherwise, between the Company and any supplier, consultant, or
client of the Company with whom Employee had material contact during
Employee's employment by the Company. The term "prospective
relationship" is defined as any relationship where the Company has
actively sought an individual or entity as a prospective supplier,
consultant, or client.
C. Non-Solicitation of Clients Covenant. Employee agrees that during
Employee's employment by the Company and for a period of two (2) years
following the termination of Employee's employment for whatever reason,
Employee will not, directly or indirectly, on Employee's own behalf or
in the service of or on behalf of any other individual or entity,
divert, solicit or attempt to divert or solicit business from any
individual or entity (i) who is a client of the Company at any time
during the six (6)-month period prior to Employee's termination of
employment with the Company ("Client"), or was actively sought by the
Company as a prospective client, and (ii) with whom Employee had
material contact while employed by the Company to provide Business
Products/Services to such Clients or prospects.
D. Construction. The parties hereto agree that any judicial authority
construing all or any portion of this Section 7 or Section 8 below will
be empowered to sever any portion of the Geographical Area, client base,
prospective relationship or prospect list or any prohibited
-8-
<PAGE> 9
business activity from the coverage of such Section and to apply the
provisions of such Section to the remaining portion of the Geographical
Area, the client base or the prospective relationship or prospect list,
or the remaining business activities not so severed by such judicial
authority. In addition, it is the intent of the parties that the
judicial authority replace each such severed provision with a provision
as similar in terms to such severed provision as may be possible and be
legal, valid and enforceable. It is the intent of the parties that
Sections 7 and 8 be enforced to the maximum extent permitted by law. In
the event that any provision of either such Section is determined not to
be specifically enforceable, the Company shall nevertheless be entitled
to bring an action to seek to recover monetary damages as a result of
the breach of such provision by Employee.
8. Non-Solicitation of Employees Covenant. Employee further agrees and
represents that during Employee's employment by the Company and for a
period of two (2) years following any termination of Employee's
employment for whatever reason, Employee will not, directly or
indirectly, on Employee's own behalf or in the service of, or on behalf
of any other individual or entity, divert, solicit or hire away, or
attempt to divert, solicit or hire away, to or for any individual or
entity which is engaged in providing Business Products/Services, any
person employed by the Company, whether or not such employee is a
full-time employee or temporary employee of the Company, whether or not
such employee is employed pursuant to written agreement and whether or
not such employee is employed for a determined period or at-will.
9. Existing Restrictive Covenants. Employee represents and warrants that
Employee's employment with the Company does not and will not breach any
agreement which Employee has with any former employer to keep in
confidence confidential information or not to compete with any such
former employer. Employee will not disclose to the Company or use on its
behalf any confidential information of any other party required to be
kept confidential by Employee.
10. Return of Proprietary Information. Employee acknowledges that as a
result of Employee's employment with the Company, Employee may come into
the possession and control of Proprietary Information, such as
proprietary documents, drawings, specifications, manuals, notes,
computer programs, or other proprietary material. Employee acknowledges,
warrants and agrees that Employee will return to the Company all such
items and any copies or excerpts thereof, and any other properties,
files or documents obtained as a result of Employee's employment with
the Company, immediately upon the termination of Employee's employment
with the Company.
11. Proprietary Rights. During the course of Employee's employment with the
Company, Employee may make, develop or conceive of useful processes,
machines, compositions of matter, computer software, algorithms, works
of authorship expressing such algorithm, or
-9-
<PAGE> 10
any other discovery, idea, concept, document or improvement which
relates to or is useful to the Company's Business (the "Inventions"),
whether or not subject to copyright or patent protection, and which may
or may not be considered Proprietary Information. Employee acknowledges
that all such Inventions will be "works made for hire" under United
States copyright law and will remain the sole and exclusive property of
the Company. Employee also hereby assigns and agrees to assign to the
Company, in perpetuity, all right, title and interest Employee may have
in and to such Inventions, including without limitation, all copyrights,
and the right to apply for any form of patent, utility model, industrial
design or similar proprietary right recognized by any state, country or
jurisdiction. Employee further agrees, at the Company's request and
expense, to do all things and sign all documents or instruments
necessary, in the opinion of the Company, to eliminate any ambiguity as
to the ownership of, and rights of the Company to, such Inventions,
including filing copyright and patent registrations and defending and
enforcing in litigation or otherwise all such rights.
Employee will not be obligated to assign to the Company any Invention
made by Employee while in the Company's employ which does not relate to
any business or activity in which the Company is or may reasonably be
expected to become engaged, except that Employee is so obligated if the
same relates to or is based on Proprietary Information to which Employee
will have had access during and by virtue of Employee's employment or
which arises out of work assigned to Employee by the Company. Employee
will not be obligated to assign any Invention which may be wholly
conceived by Employee after Employee leaves the employ of the Company,
except that Employee is so obligated if such Invention involves the
utilization of Proprietary Information obtained while in the employ of
the Company. Employee is not obligated to assign any Invention which
relates to or would be useful in any business or activities in which the
Company is engaged if such Invention was conceived and reduced to
practice by Employee prior to Employee's employment with the Company,
provided that all such Inventions are listed at the time of employment
on the attached Exhibit B.
12. Board of Directors. The Company will use its reasonable efforts to cause
Employee to be elected to a position on the Board of Directors of the
Company during the term of this Agreement.
13. Remedies. Employee agrees and acknowledges that the violation of any of
the covenants or agreements contained in Sections 6, 7, 8, 9, 10 and 11
of this Agreement would cause irreparable injury to the Company, that
the remedy at law for any such violation or threatened violation thereof
would be inadequate, and that the Company will be entitled, in addition
to any other remedy, to temporary and permanent injunctive or other
equitable relief without the necessity of proving actual damages.
-10-
<PAGE> 11
14. Notices. Any notice or communication under this Agreement will be in
writing and sent by registered or certified mail addressed to the
respective parties as follows:
If to the Company: If to Employee:
2700 Cumberland Parkway Michael L. Douglas
Suite 300 5630 Cross Gate Drive
Atlanta, Georgia 30339 Atlanta, GA 30327
Attn: General Counsel
15. Severability. Subject to the application of Section 7(D) to the
interpretation of Sections 7 and 8, in case one or more of the
provisions contained in this Agreement is for any reason held to be
invalid, illegal or unenforceable in any respect, the same will not
affect any other provision in this Agreement, and this Agreement will be
construed as if such invalid or illegal or unenforceable provision had
never been contained herein. It is the intent of the parties that this
Agreement be enforced in accordance with its express terms to the
maximum extent permitted by law.
16. Entire Agreement. This Agreement embodies the entire agreement of the
parties relating to the subject matter of this Agreement and supersedes
all prior agreements, oral or written, regarding the subject matter
hereof. No amendment or modification of this Agreement will be valid or
binding upon the parties unless made in writing and signed by the
parties.
17. Binding Effect. This Agreement will be binding upon the parties and
their respective heirs, representatives, successors, transferees and
permitted assigns.
18. Assignment. This Agreement is one for personal services and will not be
assigned by Employee. The Company may assign this Agreement to any of
its subsidiaries or affiliated companies, including, but not limited to,
a parent corporation; provided that any such subsidiary, affiliate or
parent fulfills the obligations of the Company under this Agreement.
19. Governing Law. This Agreement is entered into and will be interpreted
and enforced pursuant to the laws of the State of Georgia. The parties
hereto hereby agree that the appropriate forum and venue for any
disputes between any of the parties hereto arising out of this Agreement
shall be any federal court in Atlanta, Georgia and each of the parties
hereto hereby submits to the personal jurisdiction of such court. The
foregoing shall not limit the rights of any party to obtain execution of
judgment in any other jurisdiction. The parties further agree, to the
extent permitted by law, that a final and unappealable judgment against
either of them in any action or proceeding contemplated above shall be
conclusive and may be enforced in any other jurisdiction within or
outside the United States by suit on
-11-
<PAGE> 12
the judgment, a certified exemplified copy of which shall be conclusive
evidence of the fact and amount of such judgment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY: EMPLOYEE:
MEDAPHIS CORPORATION
By: /s/ Randolph G. Brown /s/ Michael L. Douglas
-------------------------- -------------------------
Michael L. Douglas
Title: Chairman, CEO and President
------------------------------
-12-
<PAGE> 13
EXHIBIT B
INVENTIONS
Employee represents that there are no Inventions.
/s/ M.L.D.
-----------------
Employee Initials
-13-
<PAGE> 1
EXHIBIT 10.4
MEDAPHIS CORPORATION
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT ("Agreement") is made as of the 26th
day of June, 1996, by and between MEDAPHIS CORPORATION, a corporation organized
and doing business under the laws of the State of Delaware (the "Company"), and
MICHAEL L. DOUGLAS (the "Recipient").
W I T N E S S E T H:
WHEREAS, the Recipient will be the Vice Chairman and Chief Operating
Officer of the Company and, as such, will be responsible for the overall
successful operations of the Company and its subsidiaries;
WHEREAS, in order to advance the interests of the Company by
stimulating the efforts of the Recipient and encouraging the Recipient to
continue his employment with the Company, the Board of Directors of the Company
has awarded to the Recipient a certain number of shares of voting common stock,
par value $.01 per share (the "Common Stock"), of the Company (the "Award"),
subject to the payment by the Recipient to the Company in cash of the aggregate
par value of the shares covered by the Award and to the restrictions contained
in this Agreement; and
WHEREAS, the Company and the Recipient wish to confirm the terms and
conditions of the Award.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, it is hereby agreed between the parties hereto as follows:
1. Grant of Award. Upon and subject to the terms, restrictions,
limitations, and conditions stated herein, the Company hereby grants to the
Recipient an Award of 50,000 shares of Common Stock (the "Shares"), effective
as of the date first written above.
2. Terms and Conditions of Award. The Award shall be subject to the
following terms and conditions:
(a) Restrictions; Vesting. The Shares shall remain restricted
and subject to the transfer and other restrictions set forth in
Section 5 hereof unless and until such Shares vest and become
nonforfeitable hereunder. The Shares shall vest and become
nonforfeitable hereunder upon the occurrence of both of the following
events: (i) reporting by the Company of net income per share of at
least $1.00 for a fiscal year, and (ii) the vesting under the Medaphis
Corporation Re-Engineering, Consolidation and Business Improvement
Cash Incentive Plan dated February 21, 1996 of the awards granted
pursuant to such plan in
<PAGE> 2
accordance with the terms of such plan. The Recipient acknowledges and
agrees that the Compensation Committee of the Board of Directors (the
"Committee") shall have the authority to change, adjust or modify the
vesting provisions of this Section 2(a) subsequent to the date hereof
in any manner deemed equitable by the Committee to reflect changes in
the Company's financial condition, results of operation, capital
structure or other matters which occur subsequent to the date hereof,
and all such changes, adjustments or modifications effected by the
Committee under this Section 2(a) shall be final, conclusive and
binding on the Recipient.
(b) Restricted Shares; Certificates. Upon grant of the Award
evidenced hereby and payment of the applicable purchase price pursuant
to Section 2(e) hereof, a certificate in respect of the Shares shall
be issued to reflect the Shares underlying the Award. Such certificate
shall be registered in the name of the Recipient and shall bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to the Award. The Recipient hereby agrees not to dispose of
the Shares in violation of this Agreement and any attempt to dispose
of Shares in contravention of the terms, conditions and restrictions
of this Agreement shall be ineffective. The certificate for Shares
shall be subject to such transfer orders and other restrictions as the
Committee may deem advisable under this Agreement, the rules,
regulations and other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Common Stock is listed
and any applicable federal or state securities law. The Committee
shall cause a legend to be put on any such certificate substantially
in the following form:
"THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF
COMMON STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS
AND CONDITIONS (INCLUDING FORFEITURE) OF AN AGREEMENT
ENTERED INTO BETWEEN THE REGISTERED OWNER HEREOF AND
MEDAPHIS CORPORATION. A COPY OF SUCH AGREEMENT IS ON FILE
IN THE OFFICES OF MEDAPHIS CORPORATION."
(c) Vested Shares; Reissued Certificates. Upon the vesting of
the Shares pursuant to the terms of this Agreement, the Recipient may
present, or request the presentation of, the restricted certificate to
the Company for reissuance of a certificate which reflects that number
of Shares held free and clear of the restrictions set forth in this
Agreement other than those imposed by law.
(d) Custody. The Recipient acknowledges and agrees that the
certificate evidencing Shares which are restricted may be held in
custody by a bank or other institution or that the Company may itself
hold such certificate in custody until such Shares shall vest and
become nonforfeitable hereunder, and the Recipient agrees, upon the
request of the Company, to deliver a stock power endorsed in blank
relating to the Shares.
- 2 -
<PAGE> 3
(e) Payment. The Recipient shall pay to the Company in cash
the sum of $500.00 as consideration for the Shares.
3. Termination of Employment. In the event of the termination of the
Recipient's employment by the Company or any parent or subsidiary corporation
of the Company or termination of the Employee's Employment Agreement with the
Company dated the date hereof (the "Employment Agreement"), the Shares which
have not yet become vested and nonforfeitable hereunder shall be forfeited to
the Company and the consideration paid by the Recipient with respect to such
forfeited Shares pursuant to Section 2(e) hereof shall be repaid by the Company
to the Recipient without any interest being paid thereon; provided, however,
that in the event of termination of the Recipient's employment by the Company
or any parent or subsidiary corporation of the Company by reason of total and
permanent disability (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended (the "Code")) or death, all Shares shall
thereupon vest and become nonforfeitable, so that such Recipient or his assigns
or beneficiaries shall be entitled to retain the number of Shares subject to
the Award; and provided, further, however, that in the event of termination of
the Recipient's Employment Agreement solely because the Recipient desired to
renew such Employment Agreement pursuant to the terms thereof but the Company
did not so desire, and in the event the Company reported net income per share
of at least $.83 for any fiscal year ending prior to the date of such
termination of the Employment Agreement, then the Shares which have not yet
become vested and nonforfeitable hereunder shall not be forfeited to the
Company until June 26, 1999, unless such Shares otherwise become vested and
nonforfeitable prior to such date pursuant to the terms of Section 2(a) hereof.
4. Shares Subject to Agreement.
(a) Change in Control Events. For purposes of this Agreement,
"Change in Control" shall be defined as: (1) the adoption of a plan of
merger or consolidation of the Company with any other corporation as a
result of which the holders of the outstanding voting stock of the
Company as a group would receive less than fifty percent (50%) of the
voting stock of the surviving or resulting corporation; (2) the
adoption of a plan of liquidation or the approval of the dissolution
of the Company; or (3) the sale or transfer of substantially all of
the assets of the Company.
(b) The Company. In the event of a Change in Control event
described in Section 4(a)(1), (2), or (3) hereof, all Shares
underlying the Award shall become fully vested and nonforfeitable on
the date immediately preceding the effective date of the transaction
contemplated by Section 4(a)(1), (2) or (3), as applicable.
(c) Liquidation of Shares After Change of Control. Upon the
occurrence of any event described in Section 4(b) hereof, the
Recipient shall have the right in connection with the closing or other
consummation of such event either to (i) sell to the Company, or the
surviving or resulting corporation, the Shares received under the
Award at a cash price per
- 3 -
<PAGE> 4
Share equal to the then Fair Market Value (as hereinafter defined) of
the Common Stock, or (ii) receive the number and class of shares of
stock or other securities or any other property to which the terms of
the agreement of merger, consolidation, reorganization or other
corporate transaction would entitle the Recipient to receive as the
holder of record of the number of Shares underlying the Award;
provided, however, that in the event the transaction contemplated by
Section 4(b) involves a merger to be accounted for under the "pooling
of interests" accounting method, then the Committee shall have the
authority hereunder to modify the rights of Recipient under this
Section 4(c) to the extent necessary in order to preserve the "pooling
of interests" accounting treatment for such merger. For purposes of
this Agreement, "Fair Market Value" shall mean (1) the closing price
on a specified date for a share of Common Stock as reported by The
Wall Street Journal under the Nasdaq National Market quotation system
(or under any successor quotation system) or, if the Common Stock is
not traded on the Nasdaq National Market, under the stock exchange or
quotation system under which such closing price is reported or, (2) if
The Wall Street Journal does not report such closing price, such
closing price as reported by a newspaper or trade journal selected by
the Committee or, (3) if no such closing price is available on such
date, such closing price as so reported or so quoted in accordance
with Section 4(c)(i) for the immediately preceding business day, or
(4) if no newspaper or trade journal reports such closing price or if
no such price quotation is available, the price at which the Committee
acting in good faith determines through any reasonable valuation
method that a share of Common Stock might change hands between a
willing buyer and a willing seller, neither being under any compulsion
to buy or to sell and both having reasonable knowledge of the relevant
facts.
5. Restrictions on Transfer. The Recipient agrees that the Shares
shall be restricted and nontransferable and shall not be sold, exchanged,
transferred, hypothecated or otherwise disposed of at any time prior to their
vesting in accordance with Sections 2(a), 3, or 4(b) hereof.
6. Rights as a Stockholder. Upon payment for the Shares pursuant to
Section 2(e) hereof and issuance of a certificate pursuant to Section 2(b)
hereof, the Recipient shall have rights as a stockholder of the Company with
respect to the Shares covered by the Award (regardless of whether such Shares
have become vested and nonforfeitable hereunder) to: (a) receive dividends in
cash or other property or other distributions or rights in respect of the
Shares (except that shares of Common Stock issued in order to effect a stock
split or any other securities issued in respect of Shares which have not yet
vested and become nonforfeitable hereunder shall be restricted on the same
terms underlying the Shares); and (b) vote the Shares as the record owner
thereof.
7. No Contract of Employment. The grant of the Award to the Recipient
under this Agreement shall not constitute a contract of employment and shall
not confer on the Recipient any rights upon the Recipient's termination of
employment in addition to those, if any, expressly set forth herein.
- 4 -
<PAGE> 5
8. Tax Matters; Withholding. The Recipient understands and
acknowledges that unless the Recipient makes a timely election under Section
83(b) of the Code (a "Section 83(b) Election"), the fair market value of the
Shares will be treated as compensation income, subject to applicable
withholding and employment taxes, upon the vesting of such Shares. The
Recipient further acknowledges and understands that taxation of his
compensation income resulting from an Award (including the imposition of
applicable withholding and employment taxes) may be accelerated by the filing
of a Section 83(b) Election, but that filing such an election may be
undesirable if the Shares subsequently are forfeited under the vesting
restrictions set forth herein. The Recipient agrees that he will obtain
independent tax advice concerning the desirability of filing a Section 83(b)
Election with respect to the Award evidenced hereby. The Recipient may elect
(if he is not subject to the provisions of Section 16 of the Securities
Exchange Act of 1934, as amended, at the time of such election) to have
withheld from the Shares issuable in respect of an Award such number of Shares
equal to the amount necessary to satisfy any federal and state tax withholding
requirements which the Company, acting in its discretion, deems applicable to
such Award. If the Recipient does not so elect to have Shares withheld to
satisfy such tax withholding requirements, funds required to pay applicable
withholding taxes shall be obtained from other cash payments due to the
Recipient from the Company or from cash funds provided by the Recipient to the
Company; and the Company shall be authorized to retain custody (or to cause any
other custodian to retain custody) of the Shares until sufficient funds are
provided by the Recipient to the Company to pay all such withholding taxes.
9. The Committee. The Committee acting in its absolute discretion
shall exercise such powers and take such actions as are expressly called for
under this Agreement. Further, the Committee shall have the power to interpret
this Agreement and to take such other actions as the Committee deems equitable
under the circumstances, which action shall be binding upon the Company, the
Recipient and each other person directly or indirectly affected by such action.
No member of the Committee shall be liable for any action or determination made
in good faith with respect to this Agreement.
10. General Restrictions. If there is no registration statement
covering the Shares in effect under the Securities Act of 1933, as amended,
then notwithstanding anything contained herein to the contrary, no purported
transfer of such Shares shall be effective without the written opinion of
counsel to the Company that the Common Stock is being transferred in accordance
with the terms of an applicable exemption from the registration requirements of
applicable federal and state securities laws.
11. Governing Laws. This Agreement shall be construed, administered
and enforced according to the laws of the State of Georgia.
12. Successors. This Agreement shall be binding upon and inure to the
benefit of the heirs, legal representatives, successors and permitted assigns
of the parties.
- 5 -
<PAGE> 6
13. Amendment. This Agreement may be amended by the Committee from
time to time to the extent that the Committee deems necessary or appropriate;
provided, however, the Committee may not effect any amendment to this Agreement
which would materially impair the rights of the Recipient hereunder without the
prior written consent of Recipient.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first set forth above.
MEDAPHIS CORPORATION
By: /s/ Randolph G. Brown
----------------------
ATTEST:
/s/ William R. Spalding
- ---------------------------------
Secretary
[CORPORATE SEAL]
RECIPIENT
/s/ Michael L. Douglas(SEAL)
---------------------
Michael L. Douglas
- 6 -
<PAGE> 1
EXHIBIT 11
MEDAPHIS CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED
PRO FORMA EARNINGS PER SHARE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
DESCRIPTION 1996 1995 1996 1995
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding during the period 71,665 57,696 71,123 55,962
.....................................................
Shares issuable upon assumed exercise of stock options,
less amounts assumed repurchased under the treasury
stock method....................................... -- -- -- --
--------- ------- -------- -------
Total weighted average common stock and common
stock equivalents outstanding during the period..... 71,665 57,696 71,123 55,962
========= ======= ======== =======
Pro forma net income (loss).......................... $ (36,370) $(2,723) $(19,954) $(7,354)
========= ======= ======== =======
Pro forma net income (loss) per common share......... $ (0.51) $(0.05) $(0.28) $(0.13)
========= ======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 7,016
<SECURITIES> 0
<RECEIVABLES> 199,503
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 234,343
<PP&E> 131,809
<DEPRECIATION> 0
<TOTAL-ASSETS> 866,039
<CURRENT-LIABILITIES> 128,847
<BONDS> 0
0
0
<COMMON> 717
<OTHER-SE> 472,796
<TOTAL-LIABILITY-AND-EQUITY> 866,039
<SALES> 465,551
<TOTAL-REVENUES> 465,551
<CGS> 0
<TOTAL-COSTS> 292,843
<OTHER-EXPENSES> 158,769
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,019
<INCOME-PRETAX> (25,248)
<INCOME-TAX> (4,315)
<INCOME-CONTINUING> (20,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,933)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
<PAGE> 1
EXHIBIT 99
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" (1) by creating a safe harbor to protect companies from securities
law liability in connection with forward-looking statements. Medaphis
Corporation ("Medaphis" or the "Company") intends to qualify both its written
and oral forward-looking statements for protection under the Reform Act and any
other similar safe harbor provisions.
Forward-looking statements express expectations of future events. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Medaphis. In
addition, Medaphis 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.
Medaphis provides the following risk factor disclosure in connection with
its continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the following:
Future Operating Results. Although Medaphis has for the past five years
expanded its operations through acquisitions and internal growth, there can be
no assurance that Medaphis will be able to achieve or sustain profitability or
revenue growth on an annual or quarterly basis in the future, that fluctuations
in quarter-to-quarter or year-to-year operating results will not occur or that
any such quarter-to-quarter or year-to-year fluctuations will not be material.
Future operating results of Medaphis will be dependent upon, among other things,
(i) successful integration of recently acquired businesses, (ii) successful
reorganization and integration of certain of the Company's
- -------------------------
(1) Forward-looking statements"can be identified by use of words such as
"forecast," "anticipate," "expect," "plan" and similar expressions.
<PAGE> 2
client/server information technology operations, (iii) improvements in
operations of the Company's physician billing business, (iv) effectiveness of
the Company's reengineering program, (v) successful implementation of various
management initiatives designed to reduce costs and overhead within the
Company's various divisions and (vi) successful growth in sales of the Company's
healthcare information technology ("HIT") products.
During the past twelve months, the Company has consummated a number of
acquisitions, including, but not limited to, the acquisition of Medical
Management Sciences, Inc., Rapid Systems Solutions, Inc., BSG Corporation
("BSG") and Health Data Sciences Corporation (the "Significant Acquisitions").
There can be no assurance that the Company will be able to successfully
integrate any of the Significant Acquisitions, that Medaphis will be able to
continue to operate the Significant Acquisitions in a profitable manner or that
any of the Significant Acquisitions will not have an adverse effect upon
Medaphis' results of operations, particularly while such acquisitions are being
integrated into the Company.
As of September 30, 1996, management is in the process of reorganizing
the business of Imonics Corporation ("Imonics") and integrating its operations
with and into BSG. This reorganization has included, among other things, a
significant downsizing of Imonics' employee workforce, other cost-reduction
initiatives and restructuring and renegotiation of Imonics' significant client
contracts. The Company's results of operations for the three months ended
September 30, 1996 included a charge against revenue of $16.8 million and a
restructuring charge of $24.3 million relating primarily to the reorganization
of Imonics and its integration into BSG. There can be no assurance (i) that
such reorganization and integration will be successful, (ii) that such
initiatives will not have a material adverse effect upon the Company's
reputation and standing in the client/server information technology
marketplace, (iii) that BSG has the management expertise and capacity to manage
such reorganization and integration while at the same time running the business
and operations of BSG and the other client/server information technology
operations of the Company or (iv) that such reorganization will not have an
adverse effect upon the software development and technology projects being
pursued in connection with the Company's reengineering program. See
"Reengineering Program."
The Company's expansion strategy in the past has involved both acquisitions
and internal growth. The Company intends to focus its efforts primarily on
refining and growing its various businesses in the near term and does not
anticipate significant acquisitions during such period. There can be no
assurance that such shift in focus will not have an adverse effect upon the
rate of growth in the Company's revenue and operations.
The Company is experiencing margin pressure in the billing and accounts
receivable management services operations of Medaphis Physician Services
Corporation ("MPSC"). MPSC did not significantly contribute to the Company's
overall results of operations during the second half of 1995 or the nine-month
period ended September 30, 1996. Management does not expect this trend to
improve significantly until further progress is made with, among other things,
on-going management initiatives designed to reduce costs and improve
operational efficiencies and the Company's reengineering program. See
"Reengineering Program."
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During the nine months ending September 30, 1996, management has implemented
various initiatives within the Company's Services Division (which includes
MPSC) designed to reduce costs and improve operational efficiency. These
initiatives have included, among other things, downsizing of management
ranks and improvements in operational processes. There can be no assurance
that such management initiatives will be successful, that MPSC's margins will
improve or that MPSC will contribute meaningfully to the Company's overall
results of operations in future periods.
The Company's future operations are dependent upon, among other things,
continued growth in sales of its HIT products, including, but not limited to,
sales of its clinical information management system in both domestic and
international markets. The markets for these products are characterized by
rapidly changing technology, evolving industry standards and frequent new
products and product enhancements. The Company's success in its HIT business
will depend upon its continued ability (i) to enhance its existing products,
(ii) to effect conversions of existing products into foreign languages, (iii)
to introduce new products on a timely and cost effective basis to meet evolving
customer requirements, (iv) to achieve market acceptance for new product
offerings and (v) to respond to emerging industry standards and other
technological changes. As of September 30, 1996, the Company is experiencing
slower than expected sales of certain of its enterprise-wide scheduling
products. There can be no assurance that sales of such enterprise-wide
scheduling products will improve, that Medaphis will be able to effectively
enhance existing products, create new products or respond to technological
changes or new industry standards. Moreover, there can be no assurance that
competitors of Medaphis will not develop competitive products, or that any such
competitive products will not have an adverse effect upon Medaphis' operating
results.
Reengineering Program. The Company initiated a reengineering program
focused upon its billing and accounts receivable management operations in early
1995. The reengineering program involves office consolidation, workflow,
process and operational improvements and new technology development. The
overall goals of the reengineering program are to increase the operating
efficiency and enhance the quality and productivity of the Company's billing
and accounts receivable management services operations. To date, the Company
has spent approximately $62.0 million on the development of software
applications and technology and approximately $42.0 million on hardware and
equipment for the reengineering program. The Company has encountered
difficulties with the program. These difficulties have included, among others,
delays in achieving the targeted consolidation of offices, delays in the
development and implementation of software applications and technology which
achieve efficiencies and enhance productivity in a scaled operating environment
and delays in the implementation of improved operational processes. As a
result, management has commenced a comprehensive assessment of the
reengineering program designed to ensure that the individual projects making
up the program are properly aligned with the overall goals and objectives of
the program. It is anticipated that this assessment will include review of the
total number, size and geographic location of the Company's information
processing centers ("IPCs") and a comprehensive assessment of the various
software development and technology projects forming a part of the program.
While this assessment is underway, management has significantly reduced the
level of expenditures on the reengineering program. As part of this
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assessment, the Company has adopted a plan to downsize certain of its existing
IPCs and to charge the exit costs incurred in future periods in connection with
such downsizing against the restructuring reserve established by the Company
in the first quarter of 1995. In terms of the on-going assessment of the
software development and technology projects, management anticipates that such
assessment may result in reaffirmation and continuation of certain projects,
revisions to certain projects to better align such projects with the overall
goals of the program and/or abandonment of certain projects. To the extent a
software development or technology project is abandoned in the future, the
Company would incur a charge relating to the abandonment and disposition of
such project. To the extent the Company incurs such a charge, there can be no
assurance that such charge will not be material. Although management of the
Company remains committed to moving forward to reengineer its billing and
accounts receivable management operations and believes that such reengineering
is important to the long-term success of such operations, there can be no
assurance that the Company's on-going assessment of its reengineering program
will be completed on or prior to December 31, 1996, that the funds expended to
date on such program will produce results in future periods or that the
reengineering program will be successful or achieve any cost or labor
efficiencies or will not have a material adverse effect upon Medaphis'
operations.
Cash Flow From Operations; Senior Credit Facility. During the nine months
ended September 30, 1996, the Company used approximately $7.5 million in cash
for operating activities. At September 30, 1996, approximately $224 million in
borrowings were outstanding under the Company's $250 million Senior Credit
Facility which expires on March 17, 1998. Although management has implemented
various initiatives designed to reduce headcount and cut costs, there can be no
assurance that cash flow from operations will be sufficient to fund anticipated
operating and capital expenditures and that the Company will not be required in
future periods to seek additional borrowings under its Senior Credit Facility,
equipment lease lines or seek alternative sources of borrowing capacity.
Management is engaged in discussions with the Company's senior lenders. These
discussions have focused on modifications to the Company's Senior Credit
Facility to address, among other things, certain charges taken by Medaphis in
the quarter ended September 30, 1996 and to expand the size of the credit
facility. There can be no assurance that the Company will be able to secure
such modification or an expanded facility, that the Company will be able to
refinance borrowings under its existing Senior Credit Facility in March 1998 or
that any such refinancing can be obtained on terms and conditions satisfactory
to the Company.
Pending Federal Investigation; Putative Class Action Lawsuits. The United
States Attorney's Office for the Central District of California is conducting an
investigation (the "Federal Investigation") of Medaphis' billing and collection
practices in its offices located in Calabasas and Cypress, California (the
"Designated Offices"). Medaphis first became aware of the Federal Investigation
when it received search warrants and grand jury subpoenas on June 13, 1995.
Although the precise scope of the Federal Investigation is not known to the
Company at this time, Medaphis believes that the U.S. Attorney's Office is
investigating allegations of billing fraud and that the inquiry is focused upon
Medaphis' billing and collection practices in the Designated Offices. Numerous
federal and state civil and criminal laws govern medical billing and collection
activities.
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In general, these laws provide for various fines, penalties, multiple
damages, assessments and sanctions for violations, including possible exclusion
from Medicare, Medicaid and certain other federal and state healthcare programs.
Although the Designated Offices represent less than 2% of Medaphis' annual
revenue, there can be no assurance that the Federal Investigation will be
resolved promptly, that additional subpoenas or search warrants will not be
received by Medaphis or that the Federal Investigation will not have a material
adverse effect upon the Company. The Company recorded a charge of $12 million
in the third quarter of 1995 solely for the administrative fees, costs and
expenses it anticipates incurring in connection with the Federal Investigation
and the putative class action lawsuits which are based on the Federal
Investigation. The charge is intended to cover only the anticipated
administrative expenses of the Federal Investigation and the related lawsuits
and does not include any provision for fines, penalties, damages, assessments,
judgments or sanctions that may arise out of such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its then-current officers and directors and the lead underwriters associated
with Medaphis' public offering of common stock in April 1995 were named as
defendants in putative shareholder class action lawsuits filed in the United
Stated District Court for the Northern District of Georgia. In general, these
lawsuits allege violations of the federal securities laws in connection with
Medaphis' public statements and filings under the federal securities acts,
including the registration statement filed in connection with Medaphis' public
offering of common stock in April 1995. On October 13, 1995, the named
plaintiffs in these lawsuits filed a consolidated class action complaint (the
"Consolidated Complaint"). On January 3, 1996, the court denied defendants'
motion to dismiss the Consolidated Complaint, which argued that the complaint
failed to state a claim upon which relief may be granted. On April 11, 1996,
certain of the named plaintiffs to the Consolidated Complaint voluntarily
dismissed with prejudice all of their claims. As a result of these dismissals,
the Consolidated Complaint no longer contains any claims based on the Securities
Act of 1933, and the Company's underwriters and outside directors are no longer
named as defendants. On June 26, 1996, the court denied the plaintiffs' motion
to certify a plaintiffs' class. The Company believes that it has meritorious
defenses to this action. Additionally, on November 5, 1996 Medaphis, Randolph
G. Brown, Michael R. Cote and James S. Douglass were named as defendants in a
putative shareholder class action lawsuit filed in Superior Court of Cobb
County, State of Georgia. This lawsuit alleges violations of federal and
Georgia securities laws based on the same public statements and filings
generally described above. The lawsuit is brought on behalf of a putative class
of purchasers of Medaphis stock during the period March 29, 1995 through June
15, 1995. Plaintiffs seek compensatory damages and costs. The Company believes
that it has meritorious defenses to this action.
Following the Company's August 14, 1996 announcement regarding earnings
expectations and certain charges, Medaphis, and one or more of Randolph G.
Brown, former Chairman, Chief Executive Officer and President and a former
director of Medaphis, Michael R. Cote, Senior Vice President--Finance, Chief
Financial Officer and Assistant Secretary of Medaphis, and James S. Douglass,
former Vice President, Corporate Controller and Chief Accounting Officer of
Medaphis were named as defendants in nineteen putative shareholder class action
lawsuits filed in the United States District Court for the Northern District of
Georgia, Atlanta Division. Generally, these lawsuits allege violations of the
federal securities laws in connection with Medaphis' filings under the federal
securities acts and public disclosures concerning various subjects, including
Medaphis' reengineering project, management and operations of certain Medaphis
subsidiaries, and Medaphis' reported and projected revenues and earnings. The
lawsuits are each brought on behalf of putative classes of persons who acquired
Medaphis common stock, including persons who acquired stock either in the public
market or in connection with three of Medaphis' recent business acquisitions.
Eighteen of the actions have been consolidated, and the Company anticipates that
the nineteenth also will be consolidated. Plaintiffs seek rescissory and
compensatory damages and costs. The Company believes that it has meritorious
defenses to this action.
On November 7, 1996, Health Systems International, Inc. filed suit in the
Superior Court for the State of California, County of Los Angeles against
Medaphis, Randolph G. Brown, and "Does 1-50," who are alleged to be unnamed
Medaphis directors, officers and employees. Generally, this lawsuit alleges
that the defendants violated federal and California securities laws and common
law by, among other things more fully described in the complaint, making
material misstatements and omissions in public and private disclosures in
connection with the acquisition of Health Data Sciences Corporation. Plaintiff
seeks rescissory, compensatory and punitive damages, injunctive relief and
costs. The Company believes that it has meritorious defenses to this action.
The Company also has received written demands from various stockholders,
including stockholders of recently acquired companies. To date, these
stockholders have not filed lawsuits.
Although the Company believes that it has meritorious defenses to 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,
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that the lawsuits and the written demands will not have a disruptive effect
upon the operations of the business, that the written demands and the defense
of the lawsuits will not consume the time and attention of the senior
management of the Company or that the lawsuits will not have a material
adverse effect upon the Company.
Healthcare Fraud Initiatives; Healthcare Reform Measures. The federal
government in recent years has placed increased scrutiny on the billing and
collection practices of healthcare providers and related entities. This
scrutiny has been directed at, among other things, fraudulent billing practices.
The Department of Health and Human Services in recent years has increased the
resources of the Office of the Inspector General ("OIG") specifically to
enforce both false claims and fraud and abuse violations of the Medicare
program. This heightened examination has resulted in a number of high profile
investigations, lawsuits and settlements.
Recently, Congress enacted the Health Insurance Portability and Accounting
Act of 1996 (the "Health Insurance Act"), which includes an expansion of certain
fraud and abuse provisions, such as expanding the application of Medicare and
Medicaid fraud penalties to other federal healthcare programs, and creating
additional criminal offenses relating to "healthcare benefit programs," which
are defined to include both public and private payor programs. The Health
Insurance Act also provides for forfeitures and asset freezing orders in
connection with such healthcare offenses. Civil monetary penalties and program
exclusion authority available to the OIG also have been expanded. The Health
Insurance Act contains provisions for instituting greater coordination of
federal, state and local enforcement agency resources and actions through the
OIG. There also have been several recent healthcare reform proposals which have
included an expansion of the anti-kickback laws to include referrals of any
patients regardless of payor source.
In addition, submission of claims for services or procedures that are not
provided as claimed may lead to civil damages, civil monetary penalties,
criminal fines, imprisonment and/or exclusion from participation in Medicare,
Medicaid and other federally funded healthcare programs. Specifically, the
Federal False Claims Act allows a private person to bring suit alleging false
or fraudulent Medicare or Medicaid claims or other violations of the statute
and for such person to share in any amounts paid to the government in damages
and civil penalties. Successful plaintiffs can receive up to 25-30% of the
total recovery from the defendant. Such qui tam actions or "whistleblower
lawsuits" have increased significantly in recent years and have increased the
risk that a company engaged in the healthcare industry such as Medaphis and
many of its customers may become the subject of a federal or state
investigation or may ultimately be required to defend a false claims action,
will be subjected to government investigation and possible criminal fines, will
be sued by private payors, and will be excluded from the Medicare and/or
Medicaid programs as a result of such an action. The government on its own
may also institute a Civil False Claims Act case, either in conjunction with a
criminal prosecution or as a stand alone civil case. Whether instituted by a
qui tam plaintiff or by the government, the government can recover triple its
damages together with civil penalties of $5,000 - $10,000 per false claim.
Under applicable case law, a party successfully sued under the False Claims
Act may be jointly and severally liable for the damages and penalties. Some
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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 "Pending Federal Investigation;
Putative Class Action Lawsuits." Any such proceeding or investigation could
have a material adverse effect upon the Company.
In the 1995 and 1996 sessions of the United States Congress, the focus of
healthcare legislation (in addition to the Health Insurance Act) was on
budgetary and related funding mechanism issues. A number of reports, including
the 1995 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Program (Medicare), have projected that the Medicare "trust fund" is
likely to become insolvent by the year 2002 if the current growth rate in
Medicare expenditures continues. Similarly, federal and state expenditures
under the Medicaid program are projected to increase significantly during the
same period. In response to these projected expenditure increases, and as part
of an effort to balance the federal budget, both the Congress and the Clinton
Administration in 1995 and 1996 made proposals to reduce the rate of increase
in projected Medicare and Medicaid expenditures and to change funding
mechanisms and other aspects of both programs. Congress in late 1995 passed
legislation that would reduce projected expenditure increases substantially and
would make significant changes in the Medicare and the Medicaid programs. The
Clinton Administration proposed alternate measures to reduce, to a lesser
extent, projected increases in Medicare and Medicaid expenditures. Neither
proposal became law prior to Congress' 1996 adjournment.
Medaphis anticipates that both the Clinton Administration and the
Republican majorities in Congress will introduce in 1997 legislation designed to
reduce projected increases in Medicare and Medicaid expenditures and to make
other changes in the Medicare and Medicaid programs. Medaphis anticipates that
such proposed legislation would, if adopted, change aspects of the present
methods of paying physicians under such programs and provide incentives for
Medicare and Medicaid beneficiaries to enroll in health maintenance
organizations and other managed care plans. Medaphis cannot predict the effect
of any such legislation, if adopted, on its operations.
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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.
These state reform laws have, in many cases, not been fully implemented.
Medaphis cannot predict the effect of proposed state healthcare reform laws on
its operations. Additionally, certain reforms are occurring in the healthcare
market which may continue regardless of whether comprehensive federal or state
healthcare reform legislation is adopted and implemented. These market reforms
include certain employer initiatives such as creating purchasing cooperatives
and contracting for healthcare services for employees through managed care
companies (including health maintenance organizations), and certain provider
initiatives such as risk-sharing among healthcare providers and managed care
companies through capitated contracts and integration among hospitals and
physicians into comprehensive delivery systems. Consolidation of management and
billing services by integrated delivery systems may result in a decrease in
demand for Medaphis' billing and collection services for particular physician
practices, but this decrease may be offset by an increase in demand for
Medaphis' consulting and comprehensive business management services for the new
provider systems.
Client/Server Information Technology Projects. Medaphis' client/server
information technology business involves, among other things, large scale
projects designed to reengineer significant client operations through the
strategic use of imaging, client/server and other advanced technologies. Failure
to meet expectations with respect to a major project could damage the Company's
reputation and standing in the client/server information technology marketplace,
affect its ability to attract new client/server information technology business,
result in the payment of damages to the client and jeopardize the Company's
ability to collect for services already performed on the project.
Possible Volatility of Stock Price. Medaphis believes factors such as
announcements with respect to the Federal Investigation, the Reengineering
Program, putative class action lawsuits, healthcare reform measures and
quarter-to-quarter and year-to-year variations in financial results could cause
the market price of Medaphis common stock to fluctuate substantially. Any
adverse announcement with respect to the Federal Investigation, the
Reengineering Program, putative class action lawsuits, healthcare reform
measures or any shortfall in revenue or earnings from levels expected by
securities analysts could have an immediate and material adverse effect on the
trading price of Medaphis common stock in any given period. As a result, the
market for Medaphis common stock may experience material adverse price and
volume fluctuations.
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Competition. Medaphis faces intense competition in each of the areas in
which it does business. In providing business management systems and services
to physicians and hospitals, Medaphis competes with certain national information
management systems and transaction processing organizations, certain regional
companies which provide such systems or services and certain physician groups
and hospitals which provide their own business management services. In
providing subrogation and recovery services, Medaphis competes primarily with
the internal recovery operations of potential customers and with certain
regional subrogation recovery vendors. In terms of providing client/server
information technology services, Medaphis competes with national, regional and
local companies specializing in information technology and systems integration
consulting services, national and regional application development companies and
the software development and systems integration units of national computer
equipment manufacturers, large information systems facilities management and
outsourcing organizations, national "Big Six" accounting firms and the
information systems groups of large general management consulting firms. Certain
of Medaphis' competitors have longer operating histories and greater financial,
technical and marketing resources than Medaphis. There can be no assurance that
competition from current or potential competitors will not have a material
adverse effect upon Medaphis.
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