<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 29, 1996
Medaphis Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
000-19480
------------------------
(Commission File Number)
58-1651222
------------------------------------
(IRS Employer Identification Number)
2700 Cumberland Parkway
Suite 300
Atlanta, Georgia 30339
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 444-5300
----------------
Not applicable
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Exhibit Index Located on Page: 5
<PAGE> 2
Item 5. Other Events.
Effective June 29, 1996, Medaphis Corporation, a Delaware corporation
("Medaphis"), acquired Health Data Sciences Corporation, a Delaware corporation
("HDS"), in a merger transaction (the "HDS Merger") pursuant to the terms of
the HDS Merger Agreement (the "HDS Merger Agreement"), dated as of May 23, 1996,
by and among Medaphis, HDS and HDSSub, Inc., a Georgia corporation and a wholly
owned subsidiary of Medaphis ("HDSSub"). In the HDS Merger, HDSSub merged with
and into HDS with HDS surviving such HDS Merger as a wholly owned subsidiary of
Medaphis.
The HDS Merger has been accounted for as a pooling of interests. Generally
accepted accounting principles proscribe giving effect to a consummated
business combination accounted for by the pooling of interests method in
financial statements that do not include the date of consummation. The
supplemental consolidated financial statements for Medaphis have been prepared
to give retroactive effect to the HDS Merger on June 29, 1996 and appear herein
as Exhibit 99.1.
The supplemental consolidated financial statements do not extend through
the date of consummation. However, they will become the historical
consolidated financial statements of Medaphis after financial statements
covering the date of consummation of the business combination are issued.
In addition, the Selected Supplemental Consolidated Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Medaphis and Supplemental Quarterly Consolidated Statements of
Income (Loss) have been prepared to give retroactive effect to the HDS
Merger and appear herein as Exhibits 99.2, 99.3 and 99.4, respectively.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits
23.1 Consent of Deloitte & Touche LLP.
99.1 Supplemental Consolidated Financial Statements of Medaphis
Corporation, as described in Item 5 of this Form 8-K.
-2-
<PAGE> 3
99.2 Selected Supplemental Consolidated Financial Data of Medaphis
Corporation, as described in Item 5 of this Form 8-K.
99.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations of Medaphis Corporation, as
described in Item 5 of this Form 8-K.
99.4 Supplemental Quarterly Consolidated Statements of Income
(Loss), as described in Item 5 of this Form 8-K.
-3-
<PAGE> 4
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 9, 1996 MEDAPHIS CORPORATION
By: /s/ Michael R. Cote
---------------------------------
Michael R. Cote
Senior Vice President -- Finance &
Chief Financial Officer
-4-
<PAGE> 5
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Page No.
- ------- --------
<S> <C> <C>
23.1 Consent of Deloitte & Touche LLP.
99.1 Supplemental Consolidated Financial Statements of Medaphis
Corporation, as described in Item 5 of this Form 8-K.
99.2 Selected Supplemental Consolidated Financial Data of Medaphis
Corporation, as described in Item 5 of this Form 8-K.
99.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations of Medaphis Corporation, as
described in Item 5 of this Form 8-K.
99.4 Supplemental Quarterly Consolidated Statements of Income (Loss), as
described in Item 5 of this Form 8-K.
</TABLE>
-5-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the following appearing in this Current Report on Form 8-K
of Medaphis Corporation dated June 29, 1996:
- To the incorportaion by reference in the Registration Statement No.
333-1800 of Medaphis Corporation on Form S-4 of our report dated June
29, 1996, relating to the supplemental consolidated financial statements
of Medaphis Corporation as of December 31, 1995 and 1994 and for each
of the three years in the period ended December 31, 1995; and
- To the incorporation by reference in Registration Statements Nos.
33-46847, 33-64952, 33-67752, 33-71556, 33-88442, 33-88444, 33-90876,
33-90874, 33-95742, 33-95746, 33-95748, 333-03213, 333-07201, 333-07203
and 333-07627 of Medaphis Corporation on Form S-8 of our report dated
June 29, 1996 relating to the supplemental consolidated financial
statements of Medaphis Corporation as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
July 8, 1996
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Medaphis Corporation:
We have audited the accompanying supplemental consolidated balance
sheets of Medaphis Corporation and subsidiaries as of December 31, 1995 and
1994 and the related supplemental consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. The supplemental financial statements give
retroactive effect to the merger on June 29, 1996 of HDSSub Inc., a wholly
owned subsidiary of Medaphis Corporation, with and into Health Data Sciences
Corporation which has been accounted for using the pooling of interests method
as described in Note 2 to the supplemental consolidated financial statements.
These supplemental consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such supplemental consolidated financial statements
present fairly, in all material respects, the financial position of Medaphis
Corporation and subsidiaries at December 31, 1995 and 1994 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 after giving retroactive effect to the merger on June
29, 1996 HDSSub Inc., a wholly owned subsidiary of Medaphis Corporation, with
and into Health Data Sciences Corporation as described in Note 2 to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
June 29, 1996
Atlanta, Georgia
<PAGE> 2
EXHIBIT 99.1
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Revenue........................................................ $564,303 $398,934 $279,326
-------- -------- --------
Salaries and wages............................................. 323,825 227,109 164,474
Other operating expenses....................................... 138,866 95,195 71,363
Depreciation................................................... 14,487 9,430 7,285
Amortization................................................... 17,407 10,691 7,878
Interest expense, net.......................................... 10,062 5,926 6,573
Restructuring and other charges................................ 54,950 1,905 --
-------- -------- --------
Total expenses....................................... 559,597 350,256 257,573
Income before income taxes..................................... 4,706 48,678 21,753
Income taxes................................................... 5,203 16,155 7,049
-------- -------- --------
Net income (loss).................................... $ (497) $ 32,523 $ 14,704
======== ======== ========
Pro forma adjustments, principally income taxes................ (2,883) (1,817) (1,180)
-------- -------- --------
Pro forma net income (loss).................................. $ (3,380) $ 30,706 $ 13,524
======== ======== ========
Pro forma net income (loss) per common share................... $ (0.06) $ 0.51 $ 0.26
======== ======== ========
Weighted average shares outstanding............................ 56,591 60,245 51,109
======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
<PAGE> 3
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 19,270 $ 17,651
Restricted cash..................................................... 15,340 8,683
Accounts receivable, billed......................................... 87,756 62,507
Accounts receivable, unbilled....................................... 90,355 93,940
Other............................................................... 15,636 11,294
---------- ----------
Total current assets........................................ 228,357 194,075
Property and equipment................................................ 97,895 49,032
Intangible assets..................................................... 456,381 376,827
Other................................................................. 19,236 7,217
---------- ----------
$ 801,869 $ 627,151
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $ 23,220 $ 17,726
Accrued compensation................................................ 23,351 24,900
Accrued expenses.................................................... 68,406 51,435
Current portion of long-term debt................................... 10,681 10,752
---------- ----------
Total current liabilities................................... 125,658 104,813
Long-term debt........................................................ 150,565 148,261
Other obligations..................................................... 18,926 30,433
Deferred income taxes................................................. 16,915 23,172
Convertible subordinated debentures................................... 63,375 63,375
---------- ----------
Total liabilities........................................... 375,439 370,054
---------- ----------
Stockholders' Equity:
Preferred stock..................................................... 382 225
Common stock, voting, $.01 par value, 100,000 authorized in 1995 and
30,000 in 1994; issued and outstanding 58,917 in 1995 and 49,990
in 1994.......................................................... 589 500
Common stock, nonvoting, $.01 par value, 600 authorized; none
issued........................................................... -- --
Paid-in capital..................................................... 426,387 251,534
Retained earnings (deficit)......................................... (928) 4,838
---------- ----------
Total stockholders' equity.................................. 426,430 257,097
---------- ----------
$ 801,869 $ 627,151
========= =========
</TABLE>
See notes to supplemental consolidated financial statements.
<PAGE> 4
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ (497) $ 32,523 $ 14,704
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 31,894 20,121 15,163
Impairment loss on property and equipment.................. 5,035 -- --
Deferred income taxes...................................... 4,728 15,239 6,586
Other non-cash charges..................................... 417 1,208 --
Changes in assets and liabilities, excluding effects of
acquisitions:
Increase in restricted cash............................. (3,253) (1,963) (508)
Increase in accounts receivable, billed................. (25,049) (8,038) (9,868)
Increase in accounts receivable, unbilled............... (10,640) (24,279) (16,930)
Increase in accounts payable............................ 4,738 5,341 3,625
Increase (decrease) in accrued compensation............. (1,550) 5,704 3,789
Increase (decrease) in accrued expenses................. 24,602 (3,844) 2,181
Other, net.............................................. (6,908) 2,197 (489)
-------- -------- --------
Net cash provided by operating activities.......... 23,517 44,209 18,253
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired........................... (76,077) (153,385) (68,563)
Purchases of property and equipment.......................... (50,986) (13,063) (7,178)
Software development costs................................... (35,740) (9,519) (3,478)
Other........................................................ 650 (1,969) (559)
-------- -------- --------
Net cash used for investing activities............. (162,153) (177,936) (79,778)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock....................... 151,825 4,933 97,703
Proceeds from borrowings..................................... 140,780 122,100 71,432
Payments of long-term debt................................... (138,244) (6,108) (78,435)
Dividends to shareholders of acquired companies.............. (6,751) (8,528) (3,090)
Other........................................................ (7,355) (675) 157
-------- -------- --------
Net cash provided by financing activities.......... 140,255 111,722 87,767
-------- -------- --------
CASH AND CASH EQUIVALENTS
Net change................................................... 1,619 (22,005) 26,242
Balance at beginning of year................................. 17,651 39,656 14,731
-------- -------- --------
Balance at end of year....................................... $ 19,270 $ 17,651 $ 40,973
======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
<PAGE> 5
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
--------------------------------------------------------------------------------
COMMON PREFERRED RETAINED TOTAL
COMMON STOCK PREFERRED STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ --------- --------- -------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992..................... 40,164 $401 11,420 $ 272 $115,987 $ (28,784) $ 87,876
Issuance of common
stock................. 6,482 64 -- -- 85,443 -- 85,507
Exercise of stock
options............... 476 5 -- -- 1,387 -- 1,392
Issuance and conversion
of preferred stock at
acquired companies.... 38 1 8,032 (50) 3,950 -- 3,901
Pre-merger dividends to
former owners......... -- -- -- -- -- (3,440) (3,440)
Net income............... -- -- -- -- -- 14,704 14,704
Other.................... (9) -- -- -- 451 (541) (90)
------ ------ --------- --------- -------- ----------- -------------
Balance at December 31,
1993..................... 47,151 471 19,452 222 207,218 (18,061) 189,850
Changes in HRI's
stockholders' equity
in the six months
ended June 30, 1994
(see Note 2).......... (9) -- -- -- (76) (554) (630)
Issuance of common
stock................. 19 -- -- -- 14 -- 14
Issuance of common stock
in acquisitions....... 2,108 21 -- -- 38,775 -- 38,796
Exercise of stock
options............... 734 8 -- -- 2,162 -- 2,170
Issuance and conversion
of preferred stock at
acquired companies.... -- -- 2,739 3 3,465 -- 3,468
Pre-merger dividends to
former owners......... -- -- -- -- -- (8,378) (8,378)
Net income............... -- -- -- -- -- 32,523 32,523
Other.................... (13) -- -- -- (24) (692) (716)
------ ------ --------- --------- -------- ----------- -------------
Balance at December 31,
1994..................... 49,990 500 22,191 225 251,534 4,838 257,097
Issuance of common
stock................. 4,239 42 -- -- 121,580 -- 121,622
Issuance of common stock
in acquisitions....... 20 -- -- -- 459 -- 459
Exercise of stock
options............... 555 6 -- -- 12,516 -- 12,522
Issuance and conversion
of preferred stock at
acquired companies.... 3,344 33 (2,737) 157 37,398 -- 37,588
Pre-merger dividends to
former owners......... -- -- -- -- -- (4,517) (4,517)
Net income............... -- -- -- -- -- (497) (497)
Other.................... 769 8 -- -- 2,900 (752) 2,156
------ ------ --------- --------- -------- ----------- -------------
Balance at December 31,
1995..................... 58,917 $589 19,454 $ 382 $426,387 $ (928) $ 426,430
======= ====== ======= ======= ======== ========= ==========
</TABLE>
See notes to supplemental consolidated financial statements.
<PAGE> 6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The supplemental consolidated financial statements
have been prepared to give retroactive effect to the merger of HDSSub, Inc., a
wholly-owned subsidiary of Medaphis Corporation with and into Health Data
Sciences Corporation ("HDS") on June 29, 1996. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. The accompanying supplemental consolidated
financial statements do not extend through the date of consummation, however,
they will become the historical consolidated financial statements of Medaphis
Corporation and its subsidiaries ("Medaphis" or the "Company") after financial
statements covering the date of consummation of the business combinations are
issued.
CONSOLIDATION. All significant intercompany transactions have been
eliminated. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
NATURE OF OPERATIONS. The Company provides business management services
and systems primarily to the healthcare industry throughout the United States.
The Company historically has not experienced any significant losses related to
individual customers or groups of customers in any geographical area.
PERVASIVENESS OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles required management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION. Fees for the Company's business management services
are primarily based on a percentage of net collections on clients' patient
accounts, and revenue is recognized as such business management services are
performed. Accounts receivable, billed, principally represents amounts invoiced
to clients. Accounts receivable, unbilled, represents amounts recognized for
services rendered but not yet invoiced and is based on the Company's estimate of
the fees that will be invoiced when collections on patient accounts are
received.
Revenue from software licenses is generally recognized upon shipment of the
products and when no significant contractual obligations remain outstanding.
When the Company receives payment prior to shipment or fulfillment of
significant vendor obligations, such payments are recorded as deferred revenue
and are recognized as revenue upon shipment or fulfillment of significant vendor
obligations. The license agreements typically provide for partial payments
subsequent to shipment; such terms result in an unbilled receivable at the date
the revenue is recognized. Costs related to insignificant vendor obligations are
accrued upon recognition of the license revenue. Software maintenance revenue is
deferred and recognized ratably over the term of the maintenance agreement,
which is typically one year.
Revenues from systems integration contracts are recorded based on the terms
of the underlying contracts which are primarily time and material or fixed price
contracts. Revenue from time and material type contracts is recognized as
services are rendered and costs are incurred based on contractual rates. Revenue
from fixed price contracts is recorded using the percentage of completion
method. Expected losses are charged to operations in the period such losses are
determined. Revenue for which customers have not yet been invoiced is reflected
as accounts receivable, unbilled in the accompanying consolidated balance
sheets.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all highly
liquid investments with an initial maturity of no more than three months.
RESTRICTED CASH. Restricted cash represents amounts collected on behalf of
certain clients, a portion of which is held in trust until remitted to such
clients.
<PAGE> 7
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT. Property and equipment, including equipment under
capital leases, is stated at cost. Depreciation is computed using the straight
line method over the estimated useful lives of the assets, generally four to ten
years for furniture and fixtures, five to seven years for equipment, and 20
years for buildings.
INTANGIBLE ASSETS. Intangible assets are composed principally of goodwill,
clients lists and software development costs.
Goodwill and Clients Lists. Goodwill represents the excess of the cost of
the businesses acquired over the fair value of net identifiable assets at the
date of the acquisition and is amortized using the straight line method,
generally over 25 to 40 years. Client lists are amortized using the straight
line method over their estimated useful lives, generally seven to 20 years.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through undiscounted expected future
cash flows after related interest charges. If the Company determines that the
carrying values of specific intangible assets are not recoverable, the Company
would record a charge to reduce the carrying value of such assets to their fair
values. It is reasonably possible that those estimates of future cash flows will
be reduced significantly in the future based on the results of the Company's
re-engineering and consolidation plan. As a result, the carrying amount of
intangible assets may be reduced materially in the near future. In 1994, a
charge of approximately $1.9 million associated with the write-off of a
non-compete agreement was recorded by one of the Company's subsidiaries prior to
that subsidiary's merger with the Company because the non-compete agreement was
deemed to have no value. No impairment losses were recorded by the Company in
1995 or 1993.
Software Development Costs. Intangible assets include software development
costs incurred in the development or the enhancement of software utilized in
providing the Company's business management systems and services. Software
development costs are capitalized upon the establishment of technological
feasibility for each product or process and capitalization ceases when the
product or process is available for general release to customers or is put into
service. Capitalized software development costs which were primarily associated
with the Company's re-engineering and consolidation project were approximately
$36.5 million and $9.5 million in 1995 and 1994, respectively. The Company
recorded research and development expenses of approximately $2.8 million, $4.6
million and $3.7 million in 1995, 1994 and 1993, respectively.
Software development costs are amortized using the straight line method
over the remaining estimated economic life of the assets, which is generally
three to seven years. Amortization expense related to the Company's capitalized
software costs totaled $4.5 million, $2.9 million and $2.6 million in 1995, 1994
and 1993, respectively.
INCOME TAXES. Deferred income taxes are recognized for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets and liabilities is predominantly determined by reference to
the tax laws and changes to such laws. Management includes the consideration of
future events to assess the likelihood that tax benefits will be realized in the
future.
PRO FORMA PROVISION FOR INCOME TAXES. The Company has acquired certain
entities in merger transactions accounted for as poolings of interests, which
prior to the mergers had elected "S" corporation status for income tax purposes.
As a result of the mergers, these acquired entities terminated their "S"
corporation elections. Pro forma provision for income taxes, taken together with
reported income tax expense, presents the combined pro forma tax expense of such
entities as if they had been "C" corporations during the periods presented.
<PAGE> 8
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE. Pro forma net income per
common share is based on the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Common stock
equivalents include the dilutive effect of the assumed exercise of certain
outstanding stock options and conversion of convertible preferred stock. Fully
diluted pro forma net income per common share is not presented as it is not
materially different from primary pro forma net income per common share. The
Company's convertible subordinated debentures were not considered common stock
equivalents at issuance and are included in the computation of fully diluted pro
forma net income per common share.
2. BUSINESS COMBINATIONS
From January 1, 1993 through December 31, 1995, the Company acquired either
substantially all of the assets or all of the outstanding capital stock of each
of the following businesses which were accounted for using the purchase method
of accounting:
<TABLE>
<CAPTION>
COMPANY ACQUIRED CONSIDERATION ACQUISITION DATE
--------------------------------------------------------- ------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
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
Decision Support Group................................... * January 1995
Imonics Corporation...................................... 32,200 December 1994
John Rex, Inc. ("Anescor")............................... 6,000 December 1994
AdvaCare, Inc............................................ 101,600 November 1994
Marmac Management, Inc................................... * September 1994
Central Billing Services, Inc............................ 19,700 September 1994
Omni Medical Systems, Inc................................ * August 1994
Physician Billing, Inc................................... 13,000 July 1994
Medical Management Resources, Inc........................ 11,000 July 1994
Consolidated Medical Services, Inc....................... * June 1994
Northwest Creditors Service, Inc......................... 6,600 June 1994
Managed Practice Division of Datamedic Corporation....... 5,000 April 1994
Practice Management Division of CyCare Systems, Inc...... 24,000 November 1993
Gottlieb's Financial Services, Inc....................... 31,000 September 1993
Medical Management of New England, Inc................... 14,200 July 1993
</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 the 1995
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 income from the respective dates of
acquisition.
<PAGE> 9
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the foregoing acquisitions, the Company acquired eight
businesses in 1996 and 1995 which were accounted for using the
pooling-of-interests method of accounting. Following is a list of the businesses
acquired and the shares exchanged:
<TABLE>
<CAPTION>
SHARES
COMPANY ACQUIRED EXCHANGED ACQUISITION DATE
---------------------------------------------------------- --------- ----------------
<S> <C> <C>
Health Data Sciences Corporation ("HDS").................. 6,211,000 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 Companies ("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 adjustment has been made to the historical carrying
amounts of assets acquired and liabilities assumed. The accompanying
consolidated financial statements have been restated to include the financial
position and operating results of 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.
Prior to its merger with the Company, HRI reported on a fiscal period
ending June 30. HRI's financial position and operating results as of and for the
period ended June 30, 1994 were combined with the Company's financial position
and operating results as of and for the year ended December 31, 1993. HRI's
financial position and operating results for 1995 and 1994, which were restated
to a calendar year basis, were combined with the Company's financial position
and operating results as of and for the years ended December 31, 1995 and 1994.
Accordingly, HRI's operating results for the six months ended June 30, 1994 were
duplicated in each of the years ended December 31, 1994 and 1993. HRI's revenues
and net income for that six-month period were $7,822,000 and $755,000,
respectively. Consolidated retained earnings has been reduced by $554,000 which
represents HRI's net income applicable to common stockholders for the six months
ended June 30, 1994 in order to eliminate the duplication of income applicable
to common stockholders for that period in the retained earnings balance.
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 years ended March 31, 1996, 1995 and 1994 were combined with the Company's
financial position and operating results as of and for the years ended December
31, 1995, 1994 and 1993, respectively.
<PAGE> 10
NOTES TO SUPPLEMENTAL 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, Rapid
Systems, BSG, HDS and combined, including the pro forma provision for Rapid
Systems and BSG income taxes, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Revenue:
Medaphis, as previously reported.................... $467,747 $319,138 $228,745
Rapid Systems....................................... 14,722 8,558 4,335
BSG................................................. 69,663 49,174 26,495
HDS................................................. 12,171 22,064 19,751
-------- -------- --------
Combined............................................ $564,303 $398,934 $279,326
======== ======== ========
Pro forma net income (loss):
Medaphis, as previously reported.................... $ 444 $ 22,935 $ 13,069
Rapid Systems....................................... 972 773 647
BSG................................................. (1,045) 1,329 (6,010)
HDS................................................. (3,173) 6,037 6,087
Pro forma provision for Rapid Systems and BSG income
taxes............................................ (578) (368) (269)
-------- -------- --------
Combined............................................ $ (3,380) $ 30,706 $ 13,524
======== ======== ========
Pro forma net income (loss) per common share:
Medaphis, as previously reported.................... $ 0.01 $ 0.50 $ 0.34
======== ======== ========
Combined............................................ $ (0.06) $ 0.51 $ 0.26
======== ======== ========
</TABLE>
A summary of revenue and pro forma net income for each of the three
pooling-of-interests transactions consummated after the first quarter of 1995
for interim year-to-date periods preceding the dates of consummation are as
follows (In thousands):
<TABLE>
<CAPTION>
INTERIM PERIOD
PRECEDING PRO FORMA
COMPANY ACQUIRED CONSUMMATION REVENUE NET INCOME
---------------------------------------------- ------------------ ------- ----------
<S> <C> <C> <C>
HRI........................................... June 30, 1995 $10,183 $1,012
Consort....................................... September 30, 1995 $ 2,805 $ 455
MMS........................................... September 30, 1995 $14,625 $ 185
</TABLE>
The following unaudited pro forma financial information presents the
results of the Company for the years ended December 31, 1995 and 1994, as if the
acquisitions referenced above had occurred on January 1, 1994. The pro forma
information does not purport to be indicative of the results that would have
been obtained if the operations had actually been combined during the period
presented and is not necessarily indicative of operating results to be expected
in future periods.
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Revenue........................................................ $586,982 $529,075
Net income (loss).............................................. (225) 26,497
Net income (loss) per common share............................. $ (0.00) $ 0.42
</TABLE>
<PAGE> 11
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land.............................................................. $ 2,873 $ 2,873
Buildings......................................................... 9,839 7,841
Furniture and fixtures............................................ 19,485 16,038
Equipment......................................................... 100,866 47,599
Other............................................................. 6,055 3,424
-------- -------
139,118 77,775
Less accumulated depreciation..................................... 41,223 28,743
-------- -------
$ 97,895 $49,032
======== =======
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill......................................................... $361,096 $303,057
Client lists..................................................... 51,862 52,146
Software development costs....................................... 82,348 43,558
Other............................................................ 2,159 2,159
-------- --------
497,465 400,920
Less accumulated amortization.................................... 41,084 24,093
-------- --------
$456,381 $376,827
======== ========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued costs of businesses acquired............................... $13,582 $18,305
Funds due clients.................................................. 12,757 6,893
Deferred revenue................................................... 11,590 12,050
Accrued legal costs................................................ 8,115 296
Accrued restructuring and severance costs.......................... 7,801 --
Interest........................................................... 2,917 2,340
Other.............................................................. 11,644 11,551
------- -------
$68,406 $51,435
======= =======
</TABLE>
<PAGE> 12
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under Senior Credit Facility.......................... $128,000 $120,714
Capital lease obligations, weighted average effective interest
rates of
8.4% and 9.1%.................................................. 23,670 14,232
Deferred purchase price relating to acquisitions................. -- 15,672
Other............................................................ 9,576 8,395
-------- --------
161,246 159,013
Less current portion............................................. 10,681 10,752
-------- --------
$150,565 $148,261
======== ========
</TABLE>
At December 31, 1995, the Company had a $250 million revolving credit
agreement ("Senior Credit Facility") which was composed of a $240 million
revolving credit line and a $10 million cash management line with a seven-bank
syndicate to finance future acquisitions, working capital and other general
corporate needs. The Company has the option of making "LIBOR" based loans or
"base rate" loans under the Senior Credit Facility. LIBOR based loans bear
interest at LIBOR for the then current interest period plus amounts varying from
1 1/4% to 1 3/4% based on the Company's financial performance. Base rate loans
bear interest equal to prime. At December 31, 1995, the Company had LIBOR based
loans outstanding at interest rates ranging from 7.1% to 7.2%. The Senior Credit
Facility contains, among other things, financial covenants which require the
Company to maintain certain financial ratios. The Company was in compliance with
all covenants as of December 31, 1995.
The Senior Credit Facility expires in March 1997 and can be extended one
year at each anniversary date through March 2000 with the consent of the banks.
Borrowings under the Senior Credit Facility are secured by the stock of the
Company's subsidiaries.
In April 1995, the Company used the net proceeds of its fourth public
offering to repay indebtedness of approximately $121 million then outstanding
under the Senior Credit Facility.
The Company's capital leases consist principally of leases for equipment.
As of December 31, 1995 and 1994, the net book value of equipment subject to
capital leases totaled $20.3 million and $11.4 million, respectively.
The carrying amounts of long-term debt and capital lease obligations
reflected in the consolidated balance sheets approximate fair value of such
instruments due to the variable rate nature of the long-term debt and the fixed
rates on the capital lease obligations which approximate market rates.
The aggregate maturities of long-term debt and capital lease obligations
are as follows (in thousands):
<TABLE>
<S> <C>
1996...................................................................... $ 10,681
1997...................................................................... 141,669
1998...................................................................... 6,106
1999...................................................................... 1,748
2000...................................................................... 230
Thereafter................................................................ 812
</TABLE>
7. CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $63.4 million of 6 1/2% convertible subordinated
debentures to finance the acquisition of CompMed, Inc. The debentures are due on
January 1, 2000. The debenture holders may convert the debentures into shares of
the Company's common stock at a conversion price of $14.00 per share. In 1995,
the
<PAGE> 13
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company gave notice of its intent to redeem the debentures on January 1, 1996.
Such notice triggered the conversion right of the debenture holders through the
date of the redemption. All of the debenture holders exercised their conversion
right effective January 1, 1996 and as a result, approximately 4.5 million
shares were issued in the conversion in 1996. The fair value of these
convertible subordinated debentures was approximately $170 million at December
31, 1995, based on the market price of Medaphis common stock into which the
debentures were converted on January 1, 1996. Pro forma net income per common
share, assuming the debentures had been converted on January 1, 1995, and
assuming the repayment of indebtedness outstanding under the Senior Credit
Facility associated with the Company's April 1995 public offering had occurred
on January 1, 1995 (see Note 6) would have been $0.08 per share.
8. LEASE COMMITMENTS
The Company leases office space and equipment under noncancelable operating
leases which expire at various dates through 2008. Rent expense was $22.4
million, $13.3 million and $10.0 million for the years ended December 31, 1995,
1994 and 1993, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
1996...................................................................... $20,809
1997...................................................................... 17,133
1998...................................................................... 14,896
1999...................................................................... 9,445
2000...................................................................... 6,961
Thereafter................................................................ 9,525
</TABLE>
9. INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $ 66 $ 264 $ 59
State................................................... 2,081 439 301
Deferred:
Federal................................................. 3,323 13,977 4,019
State................................................... (708) 1,988 1,023
Valuation allowance....................................... 441 (513) 1,647
------- ------- -------
Income taxes.............................................. 5,203 16,155 7,049
Pro forma provision for income taxes...................... 3,389 1,817 1,180
------- ------- -------
$ 8,592 $17,972 $ 8,229
======= ======= =======
</TABLE>
In 1995 and 1996 the Company acquired Atwork, Consort, MMS and Rapid
Systems and a subsidiary of BSG in merger transactions which were accounted for
under the pooling-of-interests method of accounting. Prior to the mergers, these
entities had elected "S" corporation status for income tax purposes. As a result
of the mergers, the entities terminated their "S" corporation elections. Pro
forma net income and pro forma net income per common share are presented in the
consolidated statements of income as if each of these entities had been a "C"
corporation during the periods presented.
<PAGE> 14
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the amount determined by applying the federal
statutory rate to income before income taxes and income tax expense is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at federal statutory rate.............. $ 1,647 $17,037 $ 7,614
State taxes, net of federal benefit....................... 765 2,475 1,483
Goodwill.................................................. 1,298 380 202
Deal costs................................................ 5,623 -- --
Other items not deductible for tax purposes............... 371 272 73
Research and development tax credits...................... -- (596) (314)
Valuation allowance....................................... 441 (513) (726)
Other..................................................... (1,553) (1,083) (103)
------- ------- -------
$ 8,592 $17,972 $ 8,229
======= ======= =======
</TABLE>
In 1995, the effects of changes in the Company's assessment of the tax
consequences of certain matters comprise substantially all of "other" in the
above rate reconciliation.
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes as of December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards................................. $ 57,241 $ 49,504
Research and development credits................................. 1,078 1,078
Valuation allowance.............................................. (18,310) (13,415)
Accounts receivable, unbilled.................................... (32,205) (28,232)
Depreciation and amortization.................................... (37,976) (17,263)
Accrued expenses................................................. 20,373 1,558
Other deferred tax liabilities................................... (7,116) (16,402)
-------- --------
$(16,915) $(23,172)
======== ========
</TABLE>
The valuation allowance relates primarily to the uncertainty of the
realizability of net operating loss carryforwards assumed in certain business
combinations. The change in the valuation allowance during 1995 relates
primarily to the finalization of the purchase price allocation of an entity
acquired in 1994.
As of December 31, 1995, the Company had federal net operating loss
carryforwards for income tax purposes of approximately $144 million which expire
at various dates between 1999 and 2010. The Internal Revenue Code may impose
substantial limitations on the use of net operating loss carryforwards upon the
occurrence of an "ownership change." The Company has experienced three ownership
changes which have established maximum annual limitations on income against
which net operating losses incurred prior to the ownership changes may be
offset. However, because the limitation operates in a cumulative manner and in
previous years the Company did not utilize net operating losses, the Company has
approximately $85 million in cumulative unutilized net operating losses
available in 1996. In future years, currently unavailable net operating losses
will become available to offset income prior to the date of their expiration.
10. CAPITAL STOCK
On May 3, 1995, the Company's Board of Directors declared a two-for-one
stock split of the outstanding shares of common stock. The stock split was
effected in the form of a stock dividend payable on May 31, 1995 to stockholders
of record as of May 24, 1995. The effect of the stock split has been
retroactively applied to all periods presented in the accompanying consolidated
financial statements.
<PAGE> 15
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 12, 1995, the Company completed a fourth public offering of its
common stock in which 4,244,000 shares were sold at $31.75 per share. The
Company sold 4,000,000 shares of its common stock and 244,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $121 million.
On December 2, 1993, the Company completed a third public offering of its
common stock in which 6,900,000 shares were sold at $14.00 per share. The
Company sold 6,442,000 shares of its common stock and 458,000 shares of common
stock were sold on behalf of certain of the Company's stockholders. The net
proceeds to the Company were approximately $85.5 million.
On March 16, 1994, the stockholders of the Company approved an amendment to
the Company's Amended and Restated Certificate of Incorporation thereby
increasing the number of authorized shares of the Company's voting common stock
from 30 million to 100 million shares.
Prior to the Company's merger with BSG, BSG had two classes of preferred
stock outstanding. Dividends were noncumulative and payable at 8% per year at
the discretion of BSG's board of directors. The preferred shares were
convertible, at the option of the holder on a one-to-one basis into common
shares of BSG, and the preferred shareholders had the right to vote on an as
converted basis. In connection with BSG's merger with the Company on May 6,
1996, all preferred shares were converted into common shares of BSG which were
subsequently exchanged for common shares of the Company.
Prior to the Company's merger with HDS, HDS had three classes of preferred
stock outstanding. The preferred stock carried no guaranteed dividend features
and had no mandatory redemption features. The preferred shares were convertible,
at the option of the holder on a one-to-one basis into common shares of HDS. In
connection with HDS's merger with the Company on June 29, 1996, all preferred
shares were converted into common shares of HDS which were subsequently
exchanged for common shares of the Company.
Prior to the Company's merger with HDS, HDS had a class of mandatorily
redeemable preferred stock (the "HDS Redeemable Preferred Stock") outstanding.
The HDS Redeemable Preferred Stock consisted of 830,000 shares which were
redeemable at $10 per share. In June 1995, HDS redeemed all the remaining shares
of outstanding HDS Redeemable Preferred Stock for $10 per share. As of December
31, 1994, $6.6 million related to the HDS Redeemable Preferred Stock was
classified in other obligations on the accompanying balance sheets.
Prior to the Company's merger with HRI, HRI had a class of redeemable
convertible preferred stock (the "HRI Redeemable Preferred Stock") which was
convertible, at the holder's option into common stock of HRI. The HRI Redeemable
Preferred Stock required certain mandatory redemptions at future dates or upon
liquidation, dissolution or merger of HRI. Pursuant to HRI's merger with the
Company, all outstanding shares of the HRI Redeemable Preferred Stock were
converted into common stock of HRI which were subsequently exchanged in the
merger for common stock of the Company. As of December 31, 1994, $13.3 million
related to the HRI Redeemable Preferred Stock was classified in other
obligations on the accompanying balance sheets.
11. COMMON STOCK OPTIONS AND STOCK AWARDS
The Company has several stock option plans including a Non Qualified Stock
Option Plan, a Non Qualified Stock Option Plan for Employees of Acquired
Companies and several stock option plans assumed as a result of the BSG Merger
(collectively the "Stock Option Plans"). Stock options outstanding at December
31, 1995 under the Stock Option Plans permit employees to purchase up to
9,465,295 shares of the Company's common stock. Granted options expire 10 to 11
years after the date of grant and generally vest over a five year period.
Subsequent to the merger, the Company has offered to issue options under the
Company's Non Qualified Stock Option Plan for Employees of Acquired Companies in
exchange for options outstanding under the BSG option plans. Options outstanding
under the Stock Option Plans at December 31, 1995 were granted at prices ranging
from $0.65 to $59.44 per share, of which 2,605,762 were exercisable at
<PAGE> 16
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that date. Options were exercised during 1995 with grant prices ranging from
$0.22 to $21.36 per share. As of December 31, 1995, 2,084,154 shares were
available for future grants under these plans.
Activity related to the Stock Option Plans is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Options outstanding as of January 1............................ 6,434 5,456 2,405
Granted:
To employees................................................. 1,543 1,028 1,009
Relating to acquisitions..................................... 2,481 914 2,249
Canceled....................................................... (559) (598) (145)
Exercised...................................................... (434) (366) (62)
----- ----- -----
Options outstanding as of December 31.......................... 9,465 6,434 5,456
===== ===== =====
</TABLE>
The Company has a Senior Executive Non Qualified Stock Option Plan which
permits certain of the Company's executive officers to purchase up to an
aggregate of 550,746 shares of the Company's common stock at $2 per share. All
options available for grant under this plan have been granted, expire January
16, 2001 and are currently exercisable. As of December 31, 1995, 230,000 options
issued under this plan have been exercised (none during 1995 or 1994).
In 1994, the disinterested members of the Company's Board of Directors
approved the Medaphis Corporation Restricted Stock Plan (the "Restricted Plan")
for executive officers. The plan was approved by the Company's shareholders at
the annual shareholders' meeting in 1995. The Restricted Plan authorized the
award of 249,000 shares of $0.01 par value of common stock to certain of the
executive officers of the Company. The restricted stock vests ratably over a
four year period from the date of award. Vesting may be accelerated if certain
performance goals are achieved. One of these performance goals was achieved
based on 1995 results of operations, and accordingly, 50% of the awards made
under this plan have vested.
In 1994 the Company adopted a Non-Employee Director Stock Option Plan
("Director Plan") for non-employees who serve on the Company's Board of
Directors. The plan was approved by the Company's shareholders at the annual
shareholders' meeting in 1995. The Director Plan provides for an initial grant
of 10,000 options at a strike price corresponding to the date on which the
non-employee director is elected or appointed to the Board of Directors.
Additionally, each non-employee receives an annual grant of 2,000 options at
each subsequent annual meeting in which the non-employee director is a member of
the Board of Directors. All options granted under the Director Plan vest over a
five year period and expire 11 years from the date of grant. As of December 31,
1995, 48,000 options were outstanding under the Director Plan at strike prices
ranging from $15.74 to $29.83 per share. No exercises occurred in 1995 and as of
December 31, 1995 52,000 shares were available for future grants under this
plan.
On March 4, 1996 the disinterested members of the Company's Board of
Directors approved the Medaphis Corporation Re-engineering, Consolidation and
Business Improvement Cash Incentive Plan ("Re-engineering Incentive Plan") and
the Company granted 155,749 units pursuant to the provisions of the plan to
certain key employees of the Company. The Re-engineering Incentive Plan provides
for the payment of cash bonuses to participants if certain performance goals
related to the Company's re-engineering and consolidation project are achieved
and certain general business improvement milestones are satisfied. Awards under
the plan are based on units awarded to each participant. If the performance
goals specified in the Re-engineering Incentive Plan are achieved and the awards
vest, the value of each unit will equal the average price of the Company's
common stock during the ten trading days immediately preceding such vesting
date. At the point it becomes probable that the performance goals and milestones
will be met, the Company will begin to accrue for the full amount of these
bonuses. All awards made under the plan, to the extent they remain unvested,
terminate on December 31, 1997.
<PAGE> 17
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans, a percentage of which are matched by the Company. The Company's
contribution expense was $3.3 million, $1.9 million and $0.7 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
The Company maintains a noncontributory money purchase pension plan which
covers substantially all employees who are retained by the Company primarily to
service specific physician clients. Contributions are determined annually by the
Company not to exceed the maximum amount deductible for federal income tax
purposes. The Company's contribution to the plan was $1.0 million in 1995, $0.7
million in 1994 and $1.1 million in 1993.
13. RESTRUCTURING AND OTHER CHARGES
During July 1994, the Company began a comprehensive re-engineering and
consolidation project in order to enhance its ability to provide more effective
and efficient business management services to its clients.
In January 1995, Management approved a restructuring plan relating to the
consolidation project. Substantially all of the Company's local business offices
at the commitment date were leased. Business offices will be exited in
accordance with the guidelines established in the Company's restructuring plan.
The Company will negotiate lease buyouts and subleasing arrangements with
lessors, where possible, to mitigate its remaining contractual obligations under
lease agreements. The re-engineering project is expected to be substantially
completed during 1997.
A description of the type and amount of exit costs recorded at the
commitment date and subsequently incurred are as follows:
<TABLE>
<CAPTION>
INCURRED RESERVE
THROUGH BALANCE
INITIAL DECEMBER 31, DECEMBER 31,
RESERVE 1995 1995
------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease termination costs.............................. $ 6,726 $ 736 $ 5,990
Incremental costs associated with discontinued client
contracts.......................................... 5,488 797 4,691
Other................................................ 2,823 1,035 1,788
------- ------------ ------------
$15,037 $2,568 $ 12,469
======= ========== ==========
</TABLE>
In January 1995, Management of the Medaphis Physician Services Corporation
formalized an involuntary severance benefit plan. The Company recorded a charge
of approximately $5.0 million in 1995 in accordance with Statement of Financial
Accounting Standards No. 112, to reflect the expense for employees' rights to
involuntary severance benefits that have accumulated to date. Involuntary
severance costs charged against the liability were approximately $745,000 for
the year ended December 31, 1995.
In January 1995, the Company assessed the recoverability of its long lived
assets and recorded an impairment loss of approximately $5.0 million related to
property and equipment that will be disposed of as a result of the restructuring
plan.
In connection with the Atwork, HRI, Consort and MMS mergers, the Company
incurred transaction fees, costs and expenses of approximately $6.0 million,
$2.0 million, $1.2 million and $2.5 million, respectively. In accordance with
the requirements of pooling of interests accounting, these costs have been
reflected in the operating results for 1995.
The Company recorded a charge of $12 million in 1995 for the administrative
fees, costs and expenses it anticipates incurring in connection with the Federal
Investigation and various putative class action lawsuits
<PAGE> 18
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which have been filed against the Company, certain of its officers and directors
and its lead underwriters from its April 1995 public offering.
In connection with the Halley acquisition, the Company recorded a $1.8
million charge related to the cost of purchased research and development
activities related to acquired technology for which technological feasibility
had not yet been established and which had no alternative future uses.
Prior to the Company's merger with MMS, MMS terminated a merger agreement
with an unrelated third party. In connection with the termination of this
agreement, MMS agreed to pay costs associated with the planned merger and
potential initial public offering of the combined entity. Such costs amounted to
approximately $3.7 million and were recorded as a charge in 1995.
14. CERTAIN 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 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 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 1995 solely for the administrative
fees, costs and expenses it anticipates incurring in connection with the Federal
Investigation and the putative class action lawsuits described below. The charge
is intended to cover only the anticipated administrative expenses of the Federal
Investigation and the lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgements or sanctions that may arise out of
such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its 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 Federal District
Court for the Northern District of Georgia. In general, these lawsuits allege
violations of the federal securities laws in connection with Medaphis' 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 and intends to assert them
vigorously.
<PAGE> 19
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash investing
and financing activities were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Non-cash investing and financing activities:
Liabilities assumed in acquisitions.................... $11,454 $108,781 $23,799
Additions to capital lease obligations................. 17,646 5,356 2,352
Common stock issued in conjunction with acquisitions... 459 38,796 --
Cash paid for:
Interest............................................... 11,129 6,796 4,504
Income taxes........................................... 3,155 517 541
</TABLE>
16. LINES OF BUSINESS
The Company operates in two major lines of business: Services (providing
healthcare business management services to physicians, hospitals and payors) and
Technology Systems (principally systems integration services and computer
software and hardware sales). Total revenue by segment includes only sales to
unaffiliated customers as reported in the Company's consolidated statements of
income. Operating profit is total revenue less operating expenses. Corporate
items include interest income and expense and other general corporate expenses.
Corporate assets consist primarily of cash and cash equivalents, deferred
financing costs, fixed assets, miscellaneous prepaids and receivables and real
estate purchased in an acquisition. Information concerning operations in these
lines of business is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue
Services............................................. $402,592 $291,452 $208,808
Technology systems................................... 163,251 108,203 71,155
Corporate and eliminations........................... (1,540) (721) (637)
-------- -------- --------
$564,303 $398,934 $279,326
======== ======== ========
Operating Profit(1)
Services............................................. $ 55,041 $ 48,339 $ 32,541
Technology systems................................... 25,120 14,720 811
Corporate............................................ (10,443) (6,550) (5,026)
-------- -------- --------
$ 69,718 $ 56,509 $ 28,326
======== ======== ========
Interest expense, net.................................. $ 10,062 $ 5,926 $ 6,573
Restructuring and other charges........................ 54,950 1,905 --
-------- -------- --------
Income before income taxes............................. $ 4,706 $ 48,678 $ 21,753
======== ======== ========
Identifiable Assets
Services............................................. $549,441 $496,074 $281,519
Technology systems................................... 239,179 125,652 55,929
Corporate............................................ 13,249 5,425 29,833
-------- -------- --------
$801,869 $627,151 $367,281
======== ======== ========
</TABLE>
<PAGE> 20
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Depreciation and Amortization
Services............................................. $ 21,089 $ 14,454 $ 10,883
Technology systems................................... 10,246 5,483 4,162
Corporate............................................ 559 184 118
-------- -------- --------
$ 31,894 $ 20,121 $ 15,163
======== ======== ========
Capital Expenditures
Services............................................. $ 28,304 $ 8,724 $ 3,726
Technology systems................................... 21,133 3,613 3,285
Corporate............................................ 1,549 726 167
-------- -------- --------
$ 50,986 $ 13,063 $ 7,178
======== ======== ========
</TABLE>
- ---------------
(1) Does not include any allocation of interest income and expense and general
corporate expenses. Also excludes restructuring and other charges in 1995
and 1994 as follows: Services, $45.2 million and $1.9 million; Technology
Systems, $9.75 million and zero.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Revenue........................................ $133,093 $141,286 $140,752 $ 149,172
Pro forma net income (loss).................... (11,857) 7,226 (2,723) 3,974
Pro forma net income (loss) per common share... $ (0.23) $ 0.10 $ (0.05) $ 0.06
Weighted average shares outstanding............ 50,932 69,053 57,696 70,140
1994
Revenue........................................ $ 85,194 $ 89,829 $ 98,119 $ 125,792
Pro forma net income........................... 7,122 5,088 5,287 13,208
Pro forma net income per common share.......... $ 0.12 $ 0.09 $ 0.09 $ 0.21
Weighted average shares outstanding............ 59,666 59,533 59,921 61,787
</TABLE>
<PAGE> 1
EXHIBIT 99.2
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected supplemental consolidated financial
information for Medaphis for and as of each of the five fiscal years in the
period ended December 31, 1995, for the three months ended March 31, 1996 and
1995, and as of March 31, 1996. The selected supplemental consolidated financial
information of Medaphis for each of the three fiscal years in the period ended
December 31, 1995 and as of December 31, 1995 and 1994 has been derived from the
audited supplemental consolidated financial statements of Medaphis, which give
retroactive effect to the merger on April 3, 1996 with Rapid Systems Solutions,
Inc. ("Rapid Systems") and the merger on May 6, 1996 with BSG Corporation
("BSG") both of which have been accounted for as poolings of interests. The
selected supplemental consolidated financial data of Medaphis for each of the
two fiscal years in the period ended December 31, 1992, as of December 31, 1993,
1992 and 1991, for the three-month periods ended March 31, 1996 and 1995 and as
of March 31, 1996 has been derived from the unaudited supplemental consolidated
financial statements of Medaphis, which give retroactive effect to the mergers
described above. Management believes the unaudited financial statements referred
to above include all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the financial
position and results of operations for such periods. The interim financial
statements are not necessarily reflective of results to be expected for an
entire fiscal period.
Prior to its merger with Medaphis Corporation, HRI reported on a fiscal
period ending June 30. For purposes of the selected supplemental consolidated
financial data, HRI's financial position and operating results as of and for the
periods ended June 30, 1994, 1993, 1992 and 1991 were combined with the
Company's financial position and operating results as of and for the years ended
December 31, 1993, 1992, 1991 and 1990. HRI's financial position and operating
results for 1994, which were restated to a calendar year basis, were combined
with the Company's financial position and operating results as of and for the
year ended December 31, 1994. Accordingly, HRI's operating results for the six
months ended June 30, 1994, were duplicated in each of the years ended December
31, 1994 and 1993. HRI's revenues and net income for that six-month period were
$7,822,000 and $755,000, respectively. Consolidated retained earnings has been
reduced by $554,000 which represents HRI's net income applicable to common
stockholders for the six months ended June 30, 1994 in order to eliminate the
duplication of income applicable to common stockholders for that period in the
retained earnings balance.
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 years ended March 31, 1996, 1995 and 1994 were combined with the Company's
financial position and operating results as of and for the years ended December
31, 1995, 1994 and 1993, respectively.
<PAGE> 2
The information set forth below should be read in conjunction with (i) the
historical supplemental consolidated financial statements of Medaphis and the
notes thereto which are included herein and (ii) Management's Discussion and
Analysis of Financial Condition and Results of Operations of Medaphis, which is
included herein.
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDING DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -------------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenue.................. $564,303 $398,934 $279,326 $175,424 $109,295 $163,627 $133,093
Salaries and wages....... 323,825 227,109 164,474 106,296 65,528 90,565 76,138
Other operating
expenses............... 138,866 95,195 71,363 51,241 32,255 39,354 30,498
Depreciation............. 14,487 9,430 7,285 4,775 3,556 4,951 3,397
Amortization............. 17,407 10,691 7,878 4,043 1,731 4,909 4,278
Interest expense, net.... 10,062 5,926 6,573 965 2,058 2,105 3,947
Restructuring and other
charges................ 54,950 1,905 -- -- -- 150 31,750
Income (loss) before
extraordinary items and
cumulative effect of
accounting change...... (497) 32,523 14,704 5,534 3,907 12,725 (7,983)
Net income (loss)........ (497) 32,523 14,704 9,010(1) 3,907 12,725 (7,983)
Pro forma net income
(loss)(2).............. $ (3,380) $ 30,706 $ 13,524 $ 9,629 $ 3,859 $ 13,079 $(11,857)
Weighted average shares
outstanding............ 56,591 60,245 51,109 46,843 32,053 75,704 50,932
PRO FORMA PER SHARE
DATA(2)
Pro forma income (loss)
before extraordinary
items and cumulative
effect of accounting
change................. $ (0.06) $ 0.51 $ 0.26 $ 0.13 -- $ 0.17 $ (0.23)
Pro forma net income
(loss)................. $ (0.06) $ 0.51 $ 0.26 $ 0.21 -- $ 0.17 $ (0.23)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1995 1994 1993 1992 1991 1996
-------- -------- -------- -------- -------- -----------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital................... 102,699 89,262 71,278 36,570 46,918 137,706
Intangible assets................. 456,381 376,827 183,190 116,383 27,570 471,046
Total assets...................... 801,869 627,151 367,281 228,305 119,133 865,078
Long-term debt.................... 150,565 148,261 9,803 16,059 22,965 191,823
Convertible subordinated
debentures...................... 63,375 63,375 63,375 60,000 -- --
Stockholders' equity.............. 426,430 257,097 189,850 87,876 56,433 513,101
</TABLE>
- ---------------
(1) Reflects the extraordinary loss of $2.1 million relating to the prepayment
of certain indebtedness net of income tax benefit and the cumulative
benefit for the change in accounting for income taxes arising from the
adoption of Statement of Financial Accounting Standards No. 109 of $5.6
million.
(2) In 1995 and 1996, the Company acquired Atwork, MMS, Rapid Systems and BSG in
merger transactions which were recorded as poolings-of-interests. Prior to
the mergers, Atwork, MMS, Rapid Systems and a company acquired by BSG prior
to the BSG Merger had elected "S" Corporation status for income tax
purposes. As a result of the mergers (or, in the case of the company
acquired by BSG, its acquisition by BSG), such entities terminated their
"S" Corporation elections. Pro forma net income and pro forma net income
per common share are presented as if the entities had been "C" Corporations
during the years ended December 31, 1995, 1994, 1993 and 1992 and the three
months ended March 31, 1996 and 1995. Pro forma net income per common share
is not presented for the year ended December 31, 1991.
<PAGE> 1
EXHIBIT 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Medaphis is a leading provider of business management systems and services
to the healthcare industry. Medaphis' systems and 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 also
provides subrogation and related recovery services primarily to healthcare
payors, scheduling and information management systems to hospitals and emerging
integrated healthcare delivery systems and systems integration and work flow
engineering systems and services. The Company's scheduling and information
systems are designed to improve efficiency by automating certain scheduling and
related management functions within a healthcare facility and its systems
integration and work flow engineering systems and services are designed to
increase flexibility, improve end-user access to information and increase
decision making through the strategic use and development of client/server,
imaging and other advanced technologies. The Company currently provides business
management systems and services to approximately 19,100 physicians and over
2,000 hospitals in all 50 states, subrogation and recovery services to
healthcare plans covering in excess of 23 million people throughout the United
States and systems integration and work flow engineering systems and services in
the United States and abroad.
Medaphis' business is impacted by trends in the U.S. healthcare industry.
As healthcare expenditures have grown as a percentage the of 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 many 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 of the Company believes that the revenue growth rate experienced by
the Company's clients continues to be adversely affected by increased managed
care and other industry factors impacting healthcare providers in the United
States. At the same time, the process of submitting healthcare claims for
reimbursement to third party payors in accordance with applicable industry and
regulatory standards continues to grow in complexity and become more costly.
Management of the Company believes that the decline in revenue growth
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 re-engineering and consolidation
project have placed pressure on the rate of revenue growth and margins in the
Company's physician and hospital billing operations which are the subject of
such re-engineering and consolidation project. Due to these revenue and margin
pressures, Medaphis Physician Services Corporation did not significantly
contribute to the Company's operating profit for the second half of 1995 and
this trend is not expected to improve until further progress is made in the
Company's re-engineering and consolidation project. To date, the Company has
been able to offset such revenue and margin pressures through expanded growth in
its information management and systems integration services operations. To
address the revenue and margin pressures in its billing and accounts receivable
management services operations going forward, the Company has commenced a
comprehensive re-engineering and consolidation project which is intended to
reduce the Company's operating costs, increase the consistency and quality of
services and enhance operating margins. The Company continually monitors events
and changes in circumstances that could indicate carrying amounts of intangible
assets, including those associated with the operations of MPSC, may not be
recoverable. It is reasonably possible that based on the results of the
Company's re-engineering and consolidation plan, the
<PAGE> 2
Company's estimates of undiscounted expected future cash flows after related
interest charges used to assess recoverability of the carrying value of
intangible assets, may be significantly reduced.
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 statements of income to revenue.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Revenue............................................................. 100.0% 100.0% 100.0%
Salaries and wages.................................................. 57.4 56.9 58.9
Other operating expenses............................................ 24.6 23.9 25.5
Depreciation........................................................ 2.6 2.3 2.6
Amortization........................................................ 3.1 2.7 2.8
Interest expense, net............................................... 1.8 1.5 2.4
Restructuring and other charges..................................... 9.7 0.5 0.0
----- ----- -----
Income before income taxes.......................................... 0.8 12.2 7.8
Income taxes........................................................ 0.9 4.0 2.5
----- ----- -----
Net income (loss)................................................... (0.1) 8.2 5.3
Pro forma adjustments............................................... (0.5) (0.5) (0.5)
----- ----- -----
Pro forma net income (loss)......................................... (0.6)% 7.7% 4.8%
===== ===== =====
</TABLE>
REVENUE
Revenue increased 41.5% to $564.3 million in 1995 as compared with $398.9
million in 1994 and increased 42.8% in 1994, as compared with 1993. Revenue
growth results from (i) acquisitions; (ii) increases in the number of business
management services clients; and (iii) increases in sales to information
management and systems integration clients. The Company has consummated 25
business combinations during the period from January 1, 1993 through December
31, 1995.
The Company's selling activities generated new business management services
client relationships with estimated annualized revenue of approximately $54.5
million and $42.9 million in 1995 and 1994, respectively. An increasing
proportion of the Company's revenue growth has resulted from revenues
attributable to information management and systems integration services which
contributed $55.0 million and $37.0 million in revenue growth in 1995 and 1994,
respectively, primarily from sales to new clients.
SALARIES AND WAGES
Salaries and wages represented 57.4% of revenue in 1995 as compared with
56.9% and 58.9% in 1994 and 1993, respectively. The increase in 1995 resulted
from a decrease in the revenue recognized at HDS offset by the changes in
compensation to the former owners of Atwork. The decreases in 1994 resulted
primarily from changes in compensation to the former owners of MMS.
OTHER OPERATING EXPENSES
Other operating expenses increased to 24.6% of revenue in 1995 from 23.9%
in 1994 which had decreased from 25.5% in 1993. The increase in 1995 was a
result of the decrease in the 1995 revenue at HDS primarily associated with the
timing of new sales. The decrease in 1994 from the 1993 level resulted primarily
from the benefits of economies of scale realized as a result of the overall
growth in the Company's business and
<PAGE> 3
continued growth in the Company's information management and systems integration
services, which historically incur less operating expenses as a percentage of
revenue. Other operating expenses are primarily comprised of postage, facility
and equipment rental, telecommunications, travel, outside consulting services
and office supplies.
DEPRECIATION
Depreciation expense was $14.5 million in 1995, $9.4 million in 1994 and
$7.3 million in 1993. These increases reflect the Company's investment in
property and equipment to support growth in its business, including
acquisitions.
In 1994, the Company began a comprehensive re-engineering and consolidation
project. As part of this project, management anticipates consolidating the
processing function currently being performed in approximately 300 local
business offices into approximately 10 regional processing centers. In addition,
new computer equipment and proprietary software will be installed in the
Company's transaction processing operations. The project did not result in
significant increases in depreciation expense and amortization expense in 1995.
Management anticipates increases in depreciation expense in 1996 and thereafter
in anticipation of the scheduled completion of the project during 1997.
AMORTIZATION
Amortization of intangible assets, which are primarily associated with the
Company's acquisitions, was $17.4 million in 1995, $10.7 million in 1994 and
$7.9 million in 1993. The increases are primarily due to increased amortization
of goodwill and client lists resulting from acquisitions. Management estimates
that intangible assets acquired in connection with 1995 acquisitions accounted
for under the purchase method of accounting will increase amortization expense
by approximately $1.3 million in 1996. As noted above, Management anticipates
that amortization expense in 1996 and thereafter will increase upon the
completion of its re-engineering and consolidation project. The Company intends
to amortize the software developed in connection with this project over its
estimated useful life of seven years.
INTEREST
Net interest expense was $10.1 million in 1995, $5.9 million in 1994 and
$6.6 million in 1993. The increase in 1995 is primarily due to increased
borrowings under the Senior Credit Facility to finance acquisitions and the
Company's investment in its re-engineering and consolidation project. Management
anticipates interest expense will be impacted by interest rate fluctuations,
increased borrowings under the Senior Credit Facility to finance future
acquisitions and continued investment in the Company's re-engineering and
consolidation project.
RESTRUCTURING AND OTHER CHARGES
During 1994, the Company began a comprehensive re-engineering and
consolidation project in order to enhance its ability to provide more effective
and efficient business management services to its physician and hospital
clients. This project is designed to further enhance the Company's long-term
operating efficiency and client service capability. The Company will consolidate
its billing and accounts receivable processing function, which is currently
operated out of approximately 300 local business offices, into approximately ten
regional processing centers. It is currently anticipated that the project will
be substantially completed during 1997. As a result of this project, the Company
recorded restructuring and other charges of approximately $25 million during
1995, consisting primarily of exit costs ($15.0 million), involuntary severance
benefits ($5.0 million) and impairment losses associated with the disposition of
property and equipment ($5.0 million).
In connection with the Atwork, HRI, Consort and MMS mergers, the Company
incurred transaction fees, costs and expenses of approximately $6.0 million,
$2.0 million, $1.2 million and $2.5 million, respectively. In accordance with
the requirements of pooling of interests accounting, the costs associated with
these mergers have been reflected in the operating results of the Company for
1995.
<PAGE> 4
The Company recorded a charge of $12 million in 1995, for the
administrative fees, costs and expenses it anticipates incurring in connection
with the Federal Investigation (see Other Matters) and various putative class
action lawsuits which have been filed against the Company, certain of its
officers and directors and its lead underwriters from its April 1995 public
offering.
In connection with the Halley acquisition, the Company recorded a $1.8
million charge during 1995 related to the cost of purchased research and
development activities related to acquired technology for which technological
feasibility had not yet been established and which had no alternative future
uses.
Prior to the Company's merger with MMS, MMS terminated a merger agreement
with an unrelated third party. In connection with the termination of this
agreement, MMS agreed to pay costs associated with the terminated merger and
potential initial public offering of the combined entity. Such costs amounted to
approximately $3.7 million and were recorded as a charge in 1995.
INCOME BEFORE INCOME TAXES
The Company's income before income taxes was 0.8% of revenues in 1995 as
compared with 12.2% in 1994 and 7.8% in 1993. The primary reasons for the
decrease in 1995 were the restructuring and other charges recorded in 1995
associated with (i) the Company's re-engineering and consolidation project; (ii)
four pooling-of-interests transactions consummated in 1995; (iii) the Federal
Investigation; and (iv) purchased research and development activities. The
increase in 1994 as compared with 1993 was attributable to operating leverage
and changes in compensation paid to the former owners of Atwork, interest
expense as a percentage of revenue and the Company's information management and
systems integration operations reflecting the higher margin nature of these
operations when compared with the Company's existing billing and accounts
receivable management services operations. Excluding restructuring and other
charges from all years presented, income before income taxes as a percentage of
revenue would have been 10.6%, 12.7% and 7.8%, respectively for 1995, 1994 and
1993.
INCOME TAXES
The Company's historical effective income tax rates were 110.6%, 33.2% and
32.4% for 1995, 1994 and 1993, respectively. The increase in the effective tax
rate for 1995 was primarily attributable to non-deductible merger costs incurred
in connection with pooling-of-interest transactions consummated in 1995. On a
pro forma basis, assuming Atwork and MMS were "C" corporations for all periods
presented, the Company's pro forma effective tax rates were 182.6%, 36.9% and
37.8%, respectively, for 1995, 1994 and 1993. The increase in the Company's pro
forma effective tax rate in 1995 resulted primarily from the previously noted
non-deductible merger costs.
PRO FORMA NET INCOME (LOSS)
The Company's pro forma net loss was $3.4 million in 1995 as compared with
pro forma net income of $30.7 million and $13.5 million, respectively, in 1994
and 1993. As a percentage of revenue, pro forma net income (loss) was (0.6)% in
1995 as compared with 7.7% and 4.8% in 1994 and 1993, respectively. The decrease
in 1995 was primarily attributable to the restructuring and other charges
previously discussed. The increase in 1994 as compared with 1993 resulted
primarily from economies of scale realized in other operating expenses, changes
in compensation paid to the former owners of Atwork as compared to revenue and
lower interest expense as a percentage of revenue.
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
The weighted average shares outstanding were 56,591,000 in 1995, 60,245,000
in 1994 and 51,109,000 in 1993. The decrease in 1995 was primarily caused by the
exclusion of common stock equivalents in 1995 during which the Company
experienced a pro forma net loss offset by the public offering of 4.0 million
shares in April 1995. The increase in 1994 as compared with 1993 was primarily
the result of the public offering of approximately 6.4 million shares in
December 1993. Pro forma net income (loss) per common share was $(0.06) in 1995
as compared with $0.51 and $0.26 in 1994 and 1993, respectively.
<PAGE> 5
COMPLETED ACQUISITIONS
On January 23, 1995, the Company acquired substantially all of the assets
and assumed certain of the related liabilities of Decision Support Group, a
healthcare decisions support company located in Burlington, Vermont. Decision
Support Group is involved primarily in the development of healthcare decision
support systems.
On March 6, 1995, the Company acquired the outstanding capital stock of
Medical Management, Inc. ("MMI") for $8.0 million in cash. MMI provides billing
and accounts receivable management services to anesthesiologists.
On April 28, 1995, the Company acquired the outstanding capital stock of
Medical Billing Service ("MBS") and purchased certain assets and assumed the
related liabilities of Computers Diversified, Inc. ("CDI") for approximately
$15.5 million in cash. MBS and CDI provide integrated claims data processing
systems and services to physicians, hospitals and clinics, and had revenue of
approximately $12.1 million in 1994.
On May 19, 1995, the Company acquired the outstanding capital stock of
Medical Office Consultants, Inc. ("MOC"). MOC provides billing and accounts
receivable management services primarily to urologists.
On October 23, 1995, the Company acquired the outstanding capital stock of
Billing and Professional Services, Inc. ("BAPS"). BAPS provides billing and
accounts receivable management services to pathologists.
On December 20, 1995, the Company acquired the outstanding capital stock of
the Halley Exchange, Inc. ("Halley"). Halley is an electronic medical claims
clearing house.
On December 31, 1995, the Company acquired the Receivables Management
Division and related consulting services of MedQuist, Inc. ("RMD") for
approximately $17.3 million in cash. RMD provides bad debt collection and
patient entitlement services to healthcare providers.
Each of the foregoing acquisitions was 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 market
value at the date of the acquisitions. The allocations are preliminary and will
be adjusted when the necessary information is available.
On March 17, 1995, the Company acquired Atwork by exchanging eight million
shares of common stock for all of the outstanding common stock of Atwork. Atwork
provides scheduling and management systems and services to hospitals and
emerging integrated healthcare delivery systems and had revenues of
approximately $28.3 million in 1994. 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 Atwork.
On August 28, 1995, the Company exchanged approximately 3.3 million shares
of its common stock for all of the outstanding shares of common stock of
Healthcare Recoveries, Inc. ("HRI"). HRI is a leading provider of subrogation
and related recovery services primarily for healthcare payors. Its clients
include health maintenance organizations, indemnity insurers, Blue Cross and
Blue Shield organizations, third party administrators, self-funded employee
health welfare benefit plans, and a multi-specialty physicians group. This
transaction has been accounted for as a pooling-of-interests and, accordingly,
the financial statements of the Company have been restated to include the
operations of HRI.
On November 22, 1995, the Company exchanged approximately 825,000 shares of
its common stock for all of the capital stock of Consort. Consort provides
comprehensive radiology information and scheduling systems for hospitals and
imaging centers. This transaction has been accounted for as a
pooling-of-interests. However, due to the immateriality of Consort's operations,
no restatement of historical financial statements has been made.
On December 29, 1995 the Company acquired MMS by exchanging four million
shares of common stock for all of the outstanding common stock of MMS. MMS
provides business management services to
<PAGE> 6
approximately 1,700 radiologists and radiation oncologists. In addition, MMS
owns Managed Imaging, Inc., a management services organization specializing in
network formation, administration, marketing, contracting, management and
information services to physicians and physician networks in connection with
managed care and alternative reimbursement systems. This transaction has been
accounted for as a pooling-of-interests and, accordingly, the financial
statements of the Company have been restated to include the operations of MMS.
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 Solutions, Inc. ("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
Corporation ("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 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 Health
Data Sciences Corporation ("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 information needs through the
integrated monitoring, scheduling, documentation and control of patient care
activities. 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 $102.7 million at December 31, 1995,
including $19.3 million of cash and cash equivalents.
Management believes additional working capital is not required to meet its
current liquidity needs before acquisitions, internal growth of the business and
investments in the Company's re-engineering and consolidation project. The
Company produced $23.5 million of operating cash flow ($45.1 million before
restructuring and other charges) in 1995. If current operating levels are
maintained, management believes that the Company should produce cash flow from
operations adequate to meet its liquidity requirements before acquisitions,
internal growth of the business and investments in the Company's re-engineering
and consolidation project. Any excess will be available to help fund the working
capital requirements of internal growth and the Company's re-engineering and
consolidation project.
At December 31, 1995, $128 million of borrowings were outstanding under the
$250 million Senior Credit Facility. Borrowings under the Senior Credit Facility
bear interest at rates ranging from 7.1% to 7.2% and are due in March 1997, and
can be extended under certain circumstances with the approval of the banks.
Amounts available for borrowing under the Senior Credit Facility may be used for
future acquisitions, expansion of the Company's business, and general corporate
purposes.
The Company estimates that each one million dollars of internal revenue
growth requires no more than $500,000 of additional capital. The increase in
this estimate from prior periods reflects the evolution of the Company's
business and operations. If the current rate of internal growth continues at
historical operating margins, the Company estimates that its cash flow from
operations will be adequate to meet its capital
<PAGE> 7
requirements for internal growth. Internal growth may also be funded by the
Company's Senior Credit Facility. Management estimates that, at historical
operating margins, any borrowings that are incurred for internal growth purposes
can be repaid within two years by operating cash flow. Management also believes
the Senior Credit Facility will be sufficient to meet any seasonal cash
requirements.
During 1994, the Company began a comprehensive re-engineering and
consolidation project. As part of this project, the Company anticipates
consolidating the processing function currently being performed in approximately
300 local business offices into approximately ten regional processing centers.
The Company purchased computer equipment related to this project for
approximately $23.5 million in 1995, the majority of which was obtained through
a capital lease arrangement, and anticipates purchasing approximately $16
million of additional computer equipment in 1996 and 1997. The Company also
incurred software development costs of approximately $29 million in 1995 related
to this project and anticipates incurring an additional $17 million in 1996.
Additionally, the Company anticipates incurring lease buyout and termination
payments, involuntary severance benefits and other cash expenditures of
approximately $12 to $17 million during 1996 and 1997 relating to this project.
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 1995, the Company capitalized approximately $36.5
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 of the Company's capital expenditures have related either
to acquisitions of healthcare business management service companies and
technology companies 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.
Management believes anticipated cash flow from operations and borrowing capacity
under the Senior Credit Facility will provide adequate capital resources to
support the Company's anticipated long-term financing needs.
OTHER 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 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
the Federal Investigation will be resolved promptly, that additional subpoenas
or warrants will not be received by Medaphis or that the Federal Investigation
will not have a material adverse effect upon Medaphis. The Company recorded a
charge of $12 million in 1995 solely for the administrative fees, costs and
expenses it anticipates incurring in connection with the Federal Investigation
and the putative class action lawsuits described below. The charge is intended
to cover only the anticipated administrative expenses of the Federal
Investigation and the lawsuits and does not include any provision for fines,
penalties, damages, assessments, judgements or sanctions that may arise out of
such matters.
Following the announcement of the Federal Investigation, Medaphis, various
of its 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 Federal District
Court for the Northern District of Georgia. In general, these lawsuits allege
violations of the federal securities laws in connection with Medaphis' 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
<PAGE> 8
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 and intends to assert
them vigorously.
<PAGE> 1
MEDAPHIS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL QUARTERLY CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenue................................. $ 133,093 $141,286 $ 140,752 $149,172 $ 163,627
--------- -------- ------------- ------------ ---------
Salaries and wages...................... 76,138 79,349 82,625 85,713 90,565
Other operating expenses................ 30,498 37,585 36,673 34,110 39,354
Depreciation............................ 3,397 3,718 3,548 3,824 4,951
Amortization............................ 4,278 4,484 4,606 4,039 4,909
Interest expense, net................... 3,947 2,222 2,318 1,575 2,105
Restructuring and other charges......... 31,750 -- 14,000 9,200 150
--------- -------- ------------- ------------ ---------
Total expenses................ 150,008 127,358 143,770 138,461 142,034
--------- -------- ------------- ------------ ---------
Income (loss) before income taxes....... (16,915) 13,928 (3,018) 10,711 21,593
Income taxes............................ (8,932) 6,362 70 7,703 8,868
--------- -------- ------------- ------------ ---------
Net income (loss)............. (7,983) 7,566 (3,088) 3,008 12,725
Pro forma adjustments, principally
income taxes.......................... (3,874) (340) 365 966 354
--------- -------- ------------- ------------ ---------
Pro forma net income (loss)............. $ (11,857) $ 7,226 $ (2,723) $ 3,974 $ 13,079
======== ======== ========== ========== ========
Pro forma income (loss) per common
share................................. $ (0.23) $ 0.10 $ (0.05) $ 0.06 $ 0.17
======== ======== ========== ========== ========
Weighted average shares outstanding..... 50,932 69,053 57,696 70,140 75,704
======== ======== ========== ========== ========
</TABLE>
- ---------------
Note: The accompanying unaudited supplemental statements of income (loss) are
included for informational purposes only. Accordingly, for further
information, the reader of this exhibit may wish to refer to the audited
supplemental consolidated financial statements of the Company for the
three years in the period ended December 31, 1995 which are incorporated
herein by reference and the unaudited consolidated financial statements of
the Company for the three month period ended March 31, 1996 included in
the Company's Quarterly Report on form 10-Q for the quarter ended March
31, 1996 which is incorporated herein by reference.
